Analysis: Dealmakers grapple with unprecedented U.S. challenge to mergers

Aerojet Rocketdyne Holdings

27/12/2022 16:03

(Adds DOJ response)
    By Anirban Sen and Diane Bartz
       NEW YORK/WASHINGTON, Dec 27 (Reuters) - Investment
bankers and deal lawyers accustomed to regulatory hurdles to
their mergers face an unprecedented challenge under U.S.
President Joe Biden - antitrust watchdogs who are undaunted when
they lose such battles in court.
    The U.S. Justice Department and Federal Trade Commission
(FTC) have attempted to thwart 22 mergers since Biden came into
office in January 2021, according to a Reuters review of
announcements from the agencies.
    That outnumbers the antitrust challenges during the first
two years of former President Barack Obama's first term in
office and is twice as many as in Donald Trump's first two
years, the Reuters analysis shows.
    While comprehensive data going back decades is unavailable,
Joel Grosberg, an antitrust lawyer at McDermott, Will & Emery
LLP, said more mergers are entangled in U.S. antitrust
litigation now than at any point in his 25-year career.
    "It's a combination of the FTC and (Justice Department)
being willing to litigate and the fact that companies are
fighting back," Grosberg said.
    The DOJ and the FTC managed to stop 15 out of the 22 deals,
many without a court fight as companies gave up and walked away
from their agreement. More recently, they have lost four
attempts to block mergers in court, though they are appealing
two of the cases.
    These losses have not soured regulators' appetite for
challenging mergers. Biden's appointees - FTC Chair Lina Khan
and DoJ antitrust chief Jonathan Kanter - are pressing on,
arguing that corporate consolidation has gone too far, harming
consumers and workers at a time of rampant inflation.
    "Without question, what is clear about this team compared to
their predecessors is that they are not haunted by the
possibility that they might lose these cases," said former FTC
chair and George Washington University Law School antitrust
professor William Kovacic.
    Kanter told U.S. lawmakers in September his department would
not "back down from bringing meritorious cases." In a letter in
August, Khan told Senator Elizabeth Warren she believed asset
sales to remedy competition issues with mergers frequently fell
short.
    In response to a request for comment, an FTC spokesperson
referred Reuters to recent comments that Khan made in her
congressional testimony in September about the effects of past
consolidation and the need for stronger enforcement. 
    The Justice Department declined to comment further,
referring Reuters to recent public comments from Kanter on the
subject. 
    The biggest deal currently at stake is Microsoft Corp's
 MSFT.O  $69 billion bid for "Call of Duty" maker Activision
Blizzard Inc  ATVI.O . The FTC has sued to stop it, arguing it
would allow Microsoft's Xbox to get exclusive access to
Activision games and put it in a position to dominate the gaming
market. Microsoft is fighting back and last week told a judge
the deal would benefit gamers and gaming companies alike.
    Cary Kochman, global co-head of M&A at Citigroup  C.N , said
deals are taking longer to be approved, forcing companies to
"dribble the ball" and "delay engagement on potential
transactions" until the regulatory landscape becomes clearer."
Citigroup was not an advisor on the Microsoft-Activision deal.
    BRACING FOR BATTLE
    Bankers and lawyers are advising merger partners to prepare
for long battles with regulators. They are pushing for contracts
with more time to complete a deal, to account for the
possibility of antitrust lawsuits.
    "As you're negotiating things like interim operating
covenants that govern what you can and cannot do between signing
and closing, you should view them through the lens of having to
live with them for 12 to 18 months in some cases," said Melissa
Sawyer, global head of the M&A group at law firm Sullivan &
Cromwell.
    Break-up fees that acquirers agree to pay their targets if
their deal gets shot down by antitrust regulators are also on
the rise. This year's U.S. total of $22.6 billion accounts for
4.6% of deal value, according to Refinitiv, the highest level
since the first eight months of 2013, when dealmakers worried
about Obama's antitrust crackdown.
    Many companies facing merger challenges say they will fight
on, emboldened by the four court losses of the Justice
Department and FTC. These include lawsuits to thwart health
insurer UnitedHealth Group Inc's  UNH.N  $8 billion bid to buy
health-technology firm Change Healthcare and life sciences
company Illumina Inc 's  ILMN.O  $7.1 billion acquisition of
cancer test developer Grail.
    "For the vast majority of deals, when we assess them from an
antitrust perspective, we as advisors believe those deals can
get done," said Edward Lee, corporate partner at law firm
Kirkland & Ellis.
 (Reporting by Anirban Sen in New York and Diane Bartz in
Washington DC
Editing by Greg Roumeliotis and Richard Chang)
 ((Anirban.Sen@thomsonreuters.com; Twitter: @asenjourno; Reuters
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