Fair Play: The Deal of the Year Will Be Vertical

The merger wave that started in 2015 and spilled into following years mostly involved blockbuster deals of direct competitors. We saw rapid consolidation in agriculture, pharmaceuticals, and retail.

But that appears to be changing. This year promises to bring tough legal questions about the bounds of antitrust enforcement and what types of arrangements can harm competition as companies in varying industries absorb one another in more creative combinations.

Executive boardrooms and companies are experimenting with unusual pairings, especially in health care. CVS Corp. wants to buy insurer Aetna Inc., and UnitedHealth Group Inc., the biggest U.S. health insurer, will acquire doctors group DaVita Medical Group. These deals could test how antitrust officials evaluate adjoining markets with little overlap, and companies might be asked to prove that their proposed tie-ups don’t give them the ability to exercise inappropriate leverage over health services.

Then there’s the media. The biggest antitrust event this year is the Justice Department’s court trial, beginning in March, to stop AT&T Inc. from merging with Time Warner Inc. It is widely considered the most high-profile antitrust case in decades. The outcome could determine whether antitrust cops can stop future “vertical” transactions that don’t involve direct competitors.

If the judge believes the government’s case is weak, it could be a virtual green light for any creative deal between companies in adjacent markets. If the judge accepts the DOJ’s argument that the merged company would hold too much sway over must-have content like HBO, attorneys putting together other unpredictable transactions (Amazon-Target, anyone?) probably need to take a hard look at their plans.

FTC leadership, meanwhile, is defending its own grit in challenging vertical deals. Acting FTC Director of Competition Bruce Hoffman said last week that the DOJ and FTC are in sync in their thinking on investigating vertical arrangements. Without naming names, he said the FTC earlier this month opened an investigation into a proposed vertical transaction. But he also acknowledged that most mergers between noncompetitors are good for the economy, a nod to the delicate balancing act for enforcers as deals and the accompanying market analysis gets more complex.

Sometimes vertical mergers threaten to change the market so much that they warrant either a lawsuit or structural fix like a divestiture, he said. Promises to behave in a fair way to competitors, so-called behavioral fixes, aren’t good enough. That goes for vertical mergers as well as traditional horizontal deals between direct competitors.

What’s Happening

Attorneys at Hogan Lovells on Wednesday are holding a roundtable discussion on 2018 M&A outlook and potential regulatory hurdles.

The Senate Banking, Housing and Urban Affairs Committee will hear from members of the business community about possible changes to the Committee on Foreign Investment in the U.S., a hot topic on the Hill lately. A House subcommittee hosted its own hearing on pending legislation changing CFIUS’ mandate last week.

Antitrust officials Makan Delrahim and acting FTC chairman Maureen Ohlhausen, along with others in the antitrust community, will speak at a Friday conference hosted by the Antitrust Research Foundation.

Lawyers for AT&T, Time Warner and the government will gather for another pre-trial hearing on Friday afternoon.

Also happening Friday: Congress faces a deadline for providing the money necessary to keep federal agencies like the FTC and DOJ open.

Quote of the Week

“The government is forced to rely on hearings and public shaming to induce corporations to lower monopoly pricing, a strategy that often fails,” reads this Harvard Business Review article on what the future of antitrust should look like.

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