M&A Issues: Governmental Approvals
Continuing our discussion of M&A Issues, this week we'll talk about governmental approvals. When two companies combine, the government can sometimes get involved. It mostly happens when two large businesses combine and the most common reason for governmental review is antitrust considerations. It is also possible that foriegn governments can take interest in a business combination.
The most common governmental review process for an M&A transaction is a review by the DOJ/FTC of anti-trust considerations. These reviews are done under provisions laid out in the Hart-Scott-Rodino Act. Wikipedia has a decent description of the provisions of that act. If a transaction is for more than a certain amount of value, the government will review it. From that same Wikipedia article:
The rules are somewhat overlapping to some degree, but the basic requirements are that all transactions of $252.3 million or more require a filing. All transactions worth more than $63.1 million require a filing if one of the parties is worth at least $12.6 million, the other is worth at least $126.3 million and the total amount of assets now owned by the acquirer reaches $252.3 million.
The DOJ and the FTC will look at every transaction over these amounts and try to determine if there are antitrust considerations. If they are concerned, they can negotiate provisions to the deal to remedy the concerns or they could simply not approve the transaction.
A similar process can happen in the EU. The Google Doubleclick transaction, for example, received very close scrutiny in europe.
There are other government agencies that can also be interested in an M&A transaction. They include the SEC, the FCC, and other agencies with specific oversight over certain businesses (EPA for example).
These governmental approvals are important for a bunch of reasons. First and foremost, they can prevent a transaction from happening. And they can also require significant changes be made to the transaction which may not be acceptable to the buyer. Bottom line, the government can mess with your deal.
For transactions that are large enough to merit review, governmental approvals represent risks to the transaction that need to be considered upfront. From the buyer's perspective, they will want to be confident they can get the deal approved in a reasonable time frame without significant concessions. From the seller's perspective, they do not want to be tied up in a long governmental review process, be in limbo business wise, and risk not getting the transaction closed.
The way that most letters of intent deal with these risks is they establish a breakup fee that the buyer pays the seller if the transaction does not close on substantially similar terms. The breakup fees can be considerable.
From the seller's perspective, a long review followed by a failed transaction is a horrible outcome. And a large breakup fee may be suitable compensation for that kind of damage. But it may not. Imagine having your entire team thinking they are going to be working for someone else, being in limbo for a long time, and then hearing that it is back to business. It is hard to get back the operating mojo once your team has adopted a different mindset.
If your M&A transaction is small, you don't need to worry about this stuff. But if it is a large transaction, you need to focus on the government approvals you will need and you need to consider what should happen if the approvals are not forthcoming. This stuff matters a lot.
I read your posts inside Google Reader (unless I am mobile), and get a real kick out of the ads that come along with it. Today’s had an ad from http://www.sec-edgar-filing.com for software for SEC filers. At least today’s was somewhat relevant, although based on their vintage 1990 Web site, I don’t think they work much with our industry. 🙂
contextual targeting can be pretty amusing
I know governments mess with everything because politicians are smarter than everybody else and we need their protection. And they are taking care of M&A because the evil market would turn into a set of monopolies if not for them… But sometimes I wonder if it wouldn’t it be possible to just pay them in exchange of doing nothing? (I’d prefer to fire most of them, but I’d settle with inactivity because someone has to appear in the news).I’m in favour of antitrust laws, but most of the times governments can’t know what’s gonna happen with the new business up front. Not even the buyers can be sure about that! And, as you said, the harm that governments can cause is huge. I think it would be much better to let close every deal and then, if the new business behaves in a punishable way, act. Penalizing before is so Minority Report that I can’t understand how we accept it.
it is interesting that the government’s case against microsoft was not asuseful in eliminating the windows monopoly as the internet and linux was
Exactly, but it costed MS hundreds of millions and distracted them a lot. Market knows better than governments.Although in this case it can be argued that without the distraction of it, MS would not have been so off guard when the internet exploded. But I still think that the outcome without it would have been the same because their problem was more complacency than distraction.
What do you think of the FTC’s case against Microsoft? Was it fair to bundle IE with Windows? Force PC manufacturers to pay for Windows for each unit sold?
I think it was very fair to force PC manufacturers to pay for Windows. After all, Windows is what was making their boxes full of electronics actually do something.What, should Windows have been free?
Of course they have to pay for Windows. The issue was the deal they cut with the manufacturers was for each PC sold regardless of the OS installed. In other words, Dell paid for Windows whether the customer wanted it or not.
Aha. I hadn’t heard of that, but that makes a lot more sense. I thought you were referring to each unit of Windows sold… 🙂
no it was not, but the market fixed that
MS was pretty damn shrewd and one could make the argument that either the PC manufacturers were paying for Windows and getting IE for free or the other way around.Remember the original plaintiff was an internet access software manufacturer.In any event, they were getting two of the most popular pieces of software available.MS was even shrewder in the settlement donating $1B of software to schools thereby making an entire new generation of MS junkies.
You can pay them to do nothing. It’s called a bribe. In the US, you’ll want to hire a lobbyist to do it.
Agreed in all respects Fernando, particularly in reference to the Minority Report context of enforcement: However, is it not perhaps also ironic that government inserts itself here with such great vigour while things like Madoff ponzi schemes run under their very noses, and in spite of warnings and alerts, without constraint or investigation until well after the damage has been done?
Some governments run the biggest ponzi –sorry, I mean social security– schemes, so it’s even more surprising.
Why are the feds so cranky about the ITA acquisition? Now if Kayak and Hotwire et al had built their own search engines and Google was going to buy them all up I could see a problem. But I do not see a big difference between all those entities being powered by something owned by google or those entities being powered by something owned by ITA.
ITA provides underlying frameworks to all of these vendors. By google buying ITA – They own the plumbing of the entire sector no?
But ITA already owns the plumbing for the sector. If google already had a flight search engine that had big market share and they were acquiring ITA and the resulting entity owned 100% then there would be a problem.If Google buys ITA the number of players does not change, only the ownership of the players changes.
Because Google could create a flight search engine and then not renew ITA contracts with the likes of kayak/hotwire (or just increase prices) giving them a monopoly in flight search which then does reduce the number of players.This is one of the main reasons vertical mergers attract competition authorities attention; and I don’t think that Google not (yet) having a dedicated flight search is material given the relative ease that they could create one.
There are a lot of “coulds” there.ITA could create a consumer site and do the same thing.The airlines could decide (like SWA and some others have done) to only sell tix on their own sitesKayak, orbitz, hotwire et al could do deals with the airlines for data and cut out ITA.Lots of things could happen.Personally I think Google wants to deal with the customer service hassle of retail airline reservations like they want a hole in the head.This stinks of governmental interference in private business.
I think it’s because everyone thinks Google will build such a search engine, vertically integrate it with the plumbing and then use a hacksaw on the pieces of plumbing that go over to the other search engines. :)You’d think the Feds would simply say “as a condition of this deal, you can’t use the hacksaw” and Google would sign it and the deal would be done.The fact that they haven’t done that already lends some level of credence to the hacksaw theory.
because the feds can be toothless once the deal is done. over time, you can do a slow absorption.
ok – but surely the path to marketshare on the search engine side is vastly different if they own ITA?
It’s not antitrust unless others do not have access to the data from the airlines.
Google is data powered. I think there is a fear of bigdata.
ITA buys or licenses the data from the airlines. Unless the ITA agreements with the airlines are exclusive, then Kayak, Orbitz, Hotwire and anyone else can buy the same access to the data.As long as they can do that, there is no monopoly here.If you look at historic antitrust cases this is not similar. Take the Paramount decree. Paramount had exclusive agreements with artists, to make films at Paramount facilities, to be distributed by Paramount, exclusively to Paramount’s theaters. This is the classic vertical integration case.Unless Google makes the data unavailable to others AND starts buying airlines or demanding exclusive access to fare data then there’s no legitimate case here.
And see how well the old hollywood model worked.I think also one of the big issues is data is kind of useless unlesscombined with other data. The fact that I don’t like swedish fish is nothelpful unless you have a set of what candy I do like, what I like to eat,that I am feamle of a certain age.Same thing with flights- one flight by itself is sort of useless. Only whenyou shoot an engine’s worth of data into the engine does it become useful.ITA is an engine full of bigdata
But as long as anyone with the cash has access to the same data there’s not an antitrust issue.You and I could go raise $100MM and build an ITA competitor. As long as we can do that who owns ITA is none of the feds business.
if you ever want to do that 😉
The breakup fee is key and should be large enough to actually do damage to the suitor.Believe it or not, there are waskely wabbits out there in the business world that will pretend to be interested in buying you….quite often. Their goal could be to learn vital intel, to get in bed with top talent, or simply to distract and dismantle a competitor.As always when dealing with a new suitor….he picks up the tab, always wear your makeup, redirect his frisky hands, don’t go exclusive until he puts a ring on it….and even then get a prenup.
Ha! Well put.I still point back to the reported breakup fee between Google and AdMob.$750MM to buy the company, $700MM breakup fee.If true (and no one has denied the reports), AdMob was smart enough to know that if they jilted Steve Jobs at the altar, there was no going back.They were going to need every penny of that $700MM to stay independent if the feds didn’t allow Google to buy them.Fortunately for Google, Apple’s existence let the deal happen.
do you think that money would have gone to the company or the shareholdersif the deal fell apart?
Interesting question. I can’t speak to that deal in particular, but I would think that more generally, it would depend on whether you feel the loss of value is a recoverable setback or a more permanent destruction of value. If it’s recoverable, the breakup fee should logically go to the company as a non-dilutive source of capital to help ramp things back up. The money could be used to make a couple of key hires, get marketing moving again and hopefully spur growth to and beyond the value of the broken deal. If the value is “lost and gone forever”, you might as well distribute most of the money to shareholders as compensation. That said, these things are rarely black and white, so the “right” answer is probably somewhere in the middle.
That’s a great question.I’d like to think they would have built a strong, sustainable and independent company with $700MM.That’s what I would have tried to do.But I’m sure there would have been a lot of temptation to “take the money and run.”
do we have any egyptians in fredland? i’m curious as to how business has changed in light of the regime change, and if there are any governmental approval issues they face.the story in egypt is far from over. regime change is spreading and depending on who you believe algeria may be having some internet disruptions (any fredlanders from algeria?).anyway, as virtual economies grow, we’ll have an opportunity to price M&A transactions in virtual currencies. if the nation-state system is still around trying to con people into thinking it has the moral authority needed to boss people around (since 9/11 was an inside job, it clearly has no moral authority), companies can agree to exchange virtual currency, temporarily reprice the exchange rate between virtual currency and US dollar so it is an insignificant amount, and then reprice the virtual currency/US dollar exchange rate after the transaction is complete. this requires new trust and a new government to enforce this. obviously all of this is going to take some time, so hopefully we can get started on it soon. ignoring 9/11, thinking regime change cannot happen in the western world, is a recipe for failure.ignorance is futile. only the truth can set us free.9/11 was an inside job,kid mercury
M&A transactions are priced in virtual currencies every day already. It’s actually a minority of the time that a merger or buyout is contracted in dollars.
you talking about stock shares? i think the problem seems to be in getting people to agree to price them at a meaningless price and then reprice them afterwards. but, i think we will see more various forms of civil disobedience and more nation-state collapse, which in turn will enable the birth of a new world order.
“i think the problem seems to be in getting people to agree to price them ata meaningless price and then reprice them afterwards.” That’s because thatmakes no sense at all. Why would you price anything at a meaningless price? Ever?The NWO is going to need to get more specific and action-oriented before anyof us have any clue how to participate.
the fake new world order (i.e. bush, soetoro, federal reserve, etc) don’t want any of what i speak of. all they want is for everyone to continue ignoring 9/11 being an inside job, continue using federal reserve dollars, and just be ignorant all day.the finer points of the new world order i speak of depends largely on choices humanity makes in the coming months. as for how best to proceed, the path is simple: obey the truth, reject ignorance. the rest will fall into place in due time. if one requires greater details, or a less mystical view of things, ron paul’s comments on the need for competing currencies point the way. social gaming companies are in a clear position to facilitate this role. as social gaming progresses the opportunity for them to profit from doing so will become greater as well. facebook could easily save the world using facebook credits if it was really determined to. of course, hitler will be celebrating black history month before that happens, so perhaps other alternatives will need to be considered.
The FTC will examine superficially as to whether end user pricing and market issues will be tilted, and if the impact goes further into interconnected issues, common carrier, private equity of ill intent, etc., DOJ antitrust SF puts their capes on and springs into action.Most of the time, they just let it go through HSR and who cares? Hey its not AT&T!Other times the agencies here and abroad, have to painfully, like a rectal exam in reverse, re-examine the mergers they have approved, and it is very hard to unscrew a lightbulb.
“it is very hard to unscrew a lightbulb”Especially hard if it is broken and the electric power is still on! :-)!You mean put the striped toothpaste back in the tube or get the cream out of the coffee? :-)!
Another government approval that should be considered is CIFIUS – that is an inter-agency committee, chaired by the Secretary of Treasury. Pursuant to the Exon-Florio legislation, reviews proposed foreign acquisitions of U.S. companies. The concern is loss of control of strategic technologies. For instance when Check Point acquired Zone Labs and attempted to acquire SourceFire CIFIUS approval was required. This is particularly an issue for security technology.
yes, great pointwe will see more of this
I had no idea governments could get involved in deals like this, though I see the logic. Thanks Fred!
This post brought to you by Twitter?
antitrust issues seem like an awfully rare problem for an exit. only reason i can think that you might have thought of this topic for a post is the possibility of antitrust issues with twitter being bought by FB. but maybe not — and it certainly wouldn’t be smart to admit it if you were.
wow. i had not even thought of that. why would FB buy Twitter? they’vecopied every feature already.
i can think of some reasons i’d be considering it if i were zuck.
I guess we are not in startup territory today.
Do we have a case of the government forcing a breakup with details rather than talking theory?
I believe Office Depot and Staples tried to merge back in the day and the FTC successfully blocked it under antitrust law.
Good post. As a business lawyer/entrepreneur, I can tell you that these types of approvals are often overlooked. I think a far greater soft spot for many sellers – and probably a good M&A topic by itself – is the issue of obtaining consent to assign customer contracts (and other agreements) to the purchasing entity where it is required by the terms of a contract. I cannot tell you how many times customer consents have hung up deal closings where the seller did not “lay the foundation” for the sale transaction with a critical customer, the customer refuses to consent timely, and things get delayed.
Dear Fred, Love your blog, are there other blogs that you would recommended? (sorry the question is off topic)
yes, but it depends on what you are interested in
One of the important things in large M&A deals and government approvals is the Dominant Position concept. While a deal may allow a single player to get into a Dominant Position within a market it will not be denied by the officials unless there is a danger of abuse. Indeed the potential abuse of a dominant position is usually what triggers investigation into these deals in addition to deal size.
Fred- we are in exacly this situation with a large exit from our portfolio. The good news is we were A round investors in a company that is being acquired for a large enough number that the FTC is interested and thats the bad news as well as its delaying the close. Agree completely with you on a break up fee as the anti trust scrutiny is due to the buyer not the acquiree usually. FTC is now struggling with defining “Online vs offline” markets for the purposes of the HHI index. They regret not having done some of the groundwork on the Amazon Zappos deal.Break up fee is a good example of why you might want to use investment bankers on a deal as they will negotiate this to make sure they get paid if the buyer pulls out or it fails to get goverment approval.
Kill switches, net neutrality….all of this is just government instituting control and putting itself in the position to pick winners and losers. After all, how do you fundraise and get kickbacks on “the market will take care of it”?Watching people fall for it because the current crop of politicians will supposedly pick them as a winner in the short-term is like watching Hemmingway with a pen in real-time.
It’s pretty damn hard to play the victim with $10B in your pocket.
Well said from comment start to finish Charlie. Particularly agree that government has no business at all in controlling the flow of information: Isn’t there even a First Amendment context here?I’m tempted to add that perhaps we really do need the likes of the Assange’s of this world to ehlp keep the flow of information going while governments do their best to keep us unaware of reality.
I’m gonna need a drink if we keep agreeing.
i second charlie’s beef with disqus’ forced conversation ending. i think collapsing larger back and forth dialogues could solve the readability problem while enabling dialogues to run their natural course.
Totally agree with your observation about plutocracy and corporate influence being out of control – also add, actually completely out of proportion in influence in the context of our individual constitutional rights to representation of the people by the people but not clear on how this situation can no be solved.We certainly do not want the Egyptian solution yet it seems it could be interesting to observe that the “disparity” there between those in power and money versus the masses is looking ominously similar to the situation we’ve unwittingly been encouraging and condoning here as disproportionately big bonuses and huge salaries continue to be “afforded” to certain upper echelon management and executives and the withholding of cash, dividend payments and salary increases at the expense of those who are the producers of that wealth. I’m no socialist: always believed in conservative principles but oft reminded of George Orwell’s predictions when I look at where we seem to be headed today.ps: Charlie; I thought that the level of “Replies” allowed in a thread was a settable function in WordPress, not of DISQUS but I could be wrong. Just going by memory of when I made those adjustment to our own blog setup.Aside from that, I agree with you about limits on replies but this looks like recent a change because Dave Pinsen and I kept a previous A VC thread (last week?) open for more replies than show up here now.
a drink of pappy?
that was a full breakup, not stopping an M&A (and AT&T essentially re-formedeven with that breakup in the cellular world, so some good that did)