Posts from Competition law

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.

#MBA Mondays

Public Policy and Venture Capital

I did a "Room For Debate" on the New York Times yesterday with Ken Auletta and John Markoff. Here's the first part and here's the second part. The topic was Google; are they too powerful and if so, what the government should do about it.

I said this about anti-trust efforts in technology:

I am not big fan of governmental intervention in technology markets.
Technology moves very rapidly and one decade’s dominant monopoly is the
next decade’s fading giant.

I would prefer our government focus on creating the right
environment for innovation and new technology development so that the
next Google can come along and change the game again. Things like
immigration reform (the start-up visa movement), patent reform
(elimination of software patents), net neutrality and open spectrum are
all much more important than filing an antitrust case against Google.

No sooner than when I wrote those words I found out about another public policy issue that impacts the technology startup world.

William Carleton pointed out to me yesterday on this blog, in the comments, that Senator Dodd's financial system reform bill contains two provisions that will be very harmful to startups. If passed as currently drafted, the bill calls for:

(1) increasing the threshold for accredited investors

(2) ending the federal preemption of "all accredited" offerings, so
that states would be permitted to regulate such offerings, even if they
meet federal requirements under Rule 506 of Reg D.

I'm not a security lawyer and I hope we get some discussion of these two points from security lawyers in the comments, but both of these seem wrong headed to me.

The angel funding mechanism is potentially the single most important funding mechanism in startup land. Most entrepreneurs get their first real investments from angels, not VCs. If you lower the amount of angel capital in startup land, you'll end up lowering the number of entrepreneurs who can get their projects off the ground.

So now there's one more thing we all have to start calling Washington about. I'm going to call my representatives about this. You might want to do the same. And while you have them on the phone, tell them we also want their support on the startup visa movement, elimination of software patents, net neutrality, and open spectrum. That seems like a lot to ask, but this stuff is important and getting more so.

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#VC & Technology