A funny thing happened on the way to Sprint’s much-anticipated $32 billion acquisition of T-Mobile US: Sprint suddenly pulled the plug on the merger earlier this month. News reports said it backed off because of concerns about resistance to the deal by invigorated antitrust watchdogs.
Those enforcers at the Justice Department and the Federal Trade Commission, which share jurisdiction over antitrust matters, are more skeptical than ever of claims by aggressive executives that their proposed deal would create a more efficient enterprise. In addition to their heightened scrutiny, the Federal Communications Commission also weighs in to determine whether proposed telecommunications mergers are in the public interest.
The shift to more searching reviews of merger proposals has been building gradually in recent years. “Over a period of time, they [the agencies] are way better at taking apart efficiency claims,” John E. Kwoka, an economics professor at Northeastern University, said in an interview. “There was a much greater deference to claimed efficiencies and benefits generally some years ago than there is now.”
At a time in which a wave of proposed mergers is making headlines, the increasing scrutiny by antitrust watchdogs is likely to make proponents of deals sit up and take notice and develop proposals designed to allay concerns in the agencies.
Advocates for mergers typically cite efficiencies, such as those gained by achieving greater scale, that enable the merged firm to make investments and pursue innovation that would not be possible as a stand-alone firm. They also might point to lower labor costs through the elimination of duplicative jobs and greater ability to offer higher-quality products to consumers at reduced costs.
The key for merger proponents is to show that those efficiencies outweigh concerns that the newly merged company will gain too much market power and engage in anti-competitive behavior.
But in reviewing those claims, agencies are requiring more than generalities or vague assertions. “The bigger the deal, the more will be expected from an efficiencies claim,” Diana Moss, vice president and director at the American Antitrust Institute, said in an interview. “They had better be verifiable.”
Currently several mega-deals are pending, including Comcast Corporation’s $45 billion bid to acquire Time Warner Cable, and AT&T’s $48 billion proposal to buy DirecTV. Some media are reporting this week that the AT&T-DirecTV merger has won regulatory approval conditioned upon the firms’ agreement to accept certain conditions that have not yet been made public.
Meanwhile, Moss, on behalf of the AAI, an independent group that advocates for increased competition in the market, takes exception to Comcast’s claims that its deal with Time Warner Cable would result in cost efficiencies and consumer benefits as well as enhanced investment and innovation. She worries that the mega-firm that would be created by the merger would make the marketplace less competitive.
Critics of growing consolidation in the airline, food and telecommunications industries also point to a report by McKinsey & Co., the management consulting firm, that found that “most companies routinely overestimate the value of synergies they can capture from acquisitions.” Those synergies include such elements as economies of scale and scope that would not exist without the merger.
Based on an analysis of 160 mergers, the study, published in 2004, continues to be cited as authoritative; there have been no similar subsequent analyses that have reviewed so many mergers to examine whether efficiency claims were borne out.
“Managers are human beings and they have limited capabilities to manage these big integration plans, to realize the cost savings,” Moss said. “We know all of that from the McKinsey study — that a lot of the cost savings and the revenue synergies are not being realized.”
The watchdogs are not just targeting the mega-deals. The FTC recently challenged a proposed $1.7 billion merger between Ardagh Group S.A. and Saint-Gobain Containers — a combination of the second and third largest U.S. manufacturers of glass containers.
The Commission charged the merger would have created a duopoly that would have harmed competition in the market for glass containers. The FTC dismissed Ardagh’s claims that the merger would reduce overhead within the Saint-Gobain organization because, it found, such reductions could have been achieved without the merger. The Commission also found that the parties’ claims of operational efficiencies were not supported by enough evidence.
A settlement ultimately was reached earlier this year in which Ardagh agreed to divest six of its nine U.S. glass container manufacturing plants to an acquirer approved by the Commission.
This heightened focus on efficiency claims was the subject of a conference in June sponsored by the AAI. It underscored how much things have changed in the wheeling and dealing world of mergers, where efficiency claims alone can no longer win approval for a proposed deal.
It is a change welcomed by Albert A. Foer, AAI’s president. “Efficiency is not a scientific concept in the antitrust context — in fact it is somewhat squishy,” he said. “It should not be the sole driving force behind antitrust policy.”
Top Reads from The Fiscal Times: