Keywords: non-reportable mergers, HSR Act, antitrust review, DOJ, Bazaarvoice
Two recent cases involving the US Department of Justice, Antitrust Division (the DOJ) demonstrate that the DOJ and the US Federal Trade Commission (the FTC) will review mergers that otherwise escape the agencies' scrutiny by falling below the Hart-Scott-Rodino Act (HSR Act) merger filing thresholds. In each of these cases, Bazaarvoice and Heraeus, the DOJ challenged non-reportable consummated transactions, forcing a divestiture in one case and likely forcing a divestiture in another.
In U.S. v. Bazaarvoice, Inc., the DOJ opened an investigation two days after Bazaarvoice closed its June 2012 acquisition of PowerReviews. The transaction was not reportable under the HSR Act. Both Bazaarvoice and PowerReviews provide ratings and review platforms to companies involved in online commerce.
The DOJ sued to challenge the transaction on January 10, 2013, alleging that Bazaarvoice, already a market leader in providing ratings platforms, was eliminating its closest competitor. After a 3-week bench trial, on January 8, 2014, Judge William H. Orrick of the US District Court for the Northern District of California found in favor of the DOJ, holding that that the acquisition substantially lessened competition in violation Section 7 of the Clayton Act. Bad documents indicating how Bazaarvoice viewed PowerReviews and the market were a major factor in the litigation. Indeed, Judge Orrick spent nearly 20 pages of his opinion addressing the documents that the DOJ used to buttress its case. Examples of these documents include ordinary course business materials authored by Bazaarvoice executives that identified PowerReviews as Bazaarvoice's "fiercest competitor" and "an ankle-biter that cause[d] price pressure in deals[.]"
In U.S. v. Heraeus Electro-Nite Co., LLC, the DOJ challenged the non-HSR reportable consummated acquisition of Midwest Instrument Company Inc. (Minco) by Heraeus Electro-Nite LLC. Heraeus completed the acquisition on September 7, 2012. On January 2, 2014, the DOJ announced that Heraeus agreed to divest all of the acquired Minco assets to resolve concerns that the transaction substantially lessened competition in the US market for single-use sensors and instruments used to measure and monitor the temperature and chemical composition of molten steel. The DOJ alleged that the Minco acquisition gave Heraeus a 95 percent market share, making it presumptively unlawful. The DOJ also alleged that the acquisition eliminated beneficial head-to-head competition in the single-use sensor market and that it would lead to lower levels of customer service.
These two recent examples make clear that the US antitrust agencies will investigate and challenge non-reportable consummated mergers that may have anticompetitive effects. The agencies learn about potentially troublesome non-reportable transactions in several ways. One way is via a customer or competitor complaint directly to a US antitrust agency or member of Congress. The complaint in Heraeus specifically notes that the DOJ learned about the merger and its potential impact from customers. Another way that the government learns about potentially anticompetitive non-reportable mergers is through public reports. DOJ and FTC staff routinely monitor industry press to learn about industry trends and non-reportable transactions.
Once antitrust enforcers learn about a transaction, there are several factors that will encourage them to investigate non-reported consummated mergers. Customer complaints, particularly about a price increase or a reduction in service, will motivate an agency to investigate. For example, in Heraeus, the DOJ alleged that the company cut its marketing and service staff post-acquisition, likely leading to the deterioration of service, longer delivery times and less certain delivery. Additionally, a transaction occurring in an already concentrated industry likely will attract agency attention. In Bazaarvoice, the acquisition combined two major competitors to create a near monopoly. Finally, if the agencies view a consummated transaction to be anticompetitive, the small dollar value of the transaction likely will not to stand in the way of an enforcement action. In 2012, the FTC challenged Magnesium Elektron's $15 million acquisition of Revere Graphics Worldwide (magnesium plates used for photoengraving), and in 2011, the Canadian Competition Bureau challenged CCS Corporation's $6.1 million acquisition of Complete Environmental Inc. (secure landfills).
There are many issues to consider when considering whether to consummate a non-reportable transaction that may involve a concentrated industry or product. Closing the transaction without review may ease the burden initially, but if the DOJ or FTC were to challenge the transaction and win, unwinding the transaction can be difficult and expensive. Further, as the Bazaarvoice and Heraeus cases show, the agencies' standards for challenging a non-reported consummated merger appear to be higher than for a reportable unconsummated transaction—requiring high market shares and/or evidence of actual anticompetitive effects. Thus, transactions in unconcentrated industries involving low market shares and no post-merger price increases or decrease in customer service or output are less likely to face post-consummation scrutiny. Companies should assess carefully the facts specific to their transaction and industry and how likely it is that customers or rivals (or customers prodded by rivals) will complain when weighing whether to notify an otherwise non-reportable transaction to the antitrust agencies.
Originally published January 14, 2014
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