The new President has vowed to "reinvigorate antitrust enforcement." But how much tougher can he get when the recession is forcing widespread consolidation?
With the Jan. 22 appointment of Washington lawyer Christine Varney to head the Justice Dept.'s antitrust division, President Barack Obama has put in place the first of his two top cops to monitor corporate competition. Obama is expected to name someone to chair the Federal Trade Commission shortly. The appointments come amid a debate about how much tougher the Obama team can afford to be on corporate dealmaking when the economic crisis is forcing consolidation across a wide swath of industries.
Varney, 53, was a member of the Federal Trade Commission under President Bill Clinton from 1994 to 1997. However, she is no fire-breathing trust-buster. In recent years, as a lawyer at Hogan & Hartson, a leading law firm representing big corporations, Varney has headed the Internet practice group. Clients for that group included eBay (EBAY), AOL (TWX), and Fox Interactive Media (NWS). While at the FTC, according to Bloomberg News, she voted to charge Toys 'R' Us with pressuring manufacturers to keep popular toys out of rival stores, and to bring consumer-protection claims against R.J. Reynolds Tobacco for advertisements that featured Joe Camel.
Obama's Antitrust Promise
During his campaign, Obama promised he would "reinvigorate antitrust enforcement." In particular, he said his Administration would "step up review of merger activity and take effective action to stop or restructure those mergers that are likely to harm consumer welfare." But, as it has in so many other areas, the economic crisis may require a recalibration of those plans. With so many businesses financially hobbled, regulators may feel pressure to approve deals they would ordinarily oppose.
Antitrust attorneys predict that as economic conditions force industry consolidation, more companies will make what is known as the "failing firm" argument to get mergers approved by either the Justice Dept. or the FTC.
The bar is high for such a claim. The parties to the merger have to demonstrate that the company being acquired is in imminent danger of failure. And it must have no prospect of a successful reorganization in bankruptcy or of being bought by another company that presents less of a competitive risk. Still, says Anthony W. Swisher, an antitrust specialist at Akin Gump Strauss Hauer & Feld in Washington, in the current environment "there are a lot of opportunities to make that case."
In 1995, Hearst, which operated the Houston Chronicle newspaper, won approval to buy its competitor the Houston Post, after the Justice Dept. determined the Post was a failing firm. With their bleak business prospects in 2009, newspapers may once again be making such claims as they try to merge their way out of trouble, predicts George L. Paul, an antitrust attorney at White & Case in Washington.
Retail supermarket chains, pharmacies, and hospitals are also likely to invoke the failing firm argument, Paul says. U.S. automakers would clearly be candidates as well, though Fiat's plans to take a 35% stake in Chrysler, announced Jan. 20, complicates the picture.
Not Failing? Try Flailing
When the failing company test won't fly, there's always the "flailing company" argument. Under that, merger candidates contend that even if the ailing company isn't on the verge of going out of business, it is so weakened that it is on a path to competitive insignificance.
This, too, is a hard sell to regulators, but as Swisher's firm noted in a posting on its Web site, now may be an opportune time for such a claim: "The economic crisis is not something the agencies are likely to question, and its very real impact on the financial viability of U.S. businesses is not open to debate."
Certainly a lighter regulatory touch has already been evident in the rapid-fire combinations among financial-services firms at the end of 2008. Many of the mergers might not have raised antitrust concerns anyway, lawyers say. But any attempt to oppose or even delay the deals would have ignited a political storm.
"When the Treasury Dept. orchestrates something like that on a rush, emergency basis, one would not expect the Justice Dept. to get in the way," says Brian Byrne, a Brussels-based antitrust lawyer for Cleary Gottlieb Steen & Hamilton. One such deal his firm worked on, notes Byrne, was approved in just a day.