Recent antitrust challenges to mergers, including the FTC’s recent federal court victory, have forced parties to abandon at least three deals in the past few months. This string of antitrust scrutiny serves as a useful reminder of how important it is to undertake a thorough antitrust risk assessment of proposed deals in advance of signing in order to minimize chances of an extended and expensive government review and maximize the chances for a successful, efficient outcome.
While many transactions do not present substantial antitrust risk, for those that do, the merging parties face sizable costs and significant risks, including uncertainty of, or delay in, closing, steep financing commitment costs mounting over time while a deal is pending, the burden and expense of defending the transaction before the government, management distraction from day-to-day business, and in some cases daunting contractual monetary penalties in the form of a reverse break-up fee and/or ticking fees if the matter is pending for a prolonged period of time or never closes at all. Consulting with antitrust counsel well before the agreement is inked allows the parties to determine a best path forward, build in appropriate protective provisions, and allocate risk between the parties in an informed way.
Rolling the dice in court and losing with nearly $1 billion in expenditures on the line
Imagine this nightmare scenario: the FTC filed a complaint to block your $3.5 billion deal, a federal judge sided with the government, issuing a preliminary injunction, and you have been forced to abandon the transaction, leaving the company with almost $1 billion in total costs related to a deal that will never close. Sysco is facing that scenario. By the time a federal judge issued an injunction on June 23, 2015 to block Sysco’s proposed acquisition of US Foods, first announced in December 2013, the company had already been saddled with delay, costs, and distraction related to the Second Request and litigation defense. If it decided to abandon the merger, it was also looking at a $300 million termination fee to US Foods. Even with so much at stake, Sysco announced it was terminating the merger. Sysco’s president and CEO, Bill DeLaney, explained that the company “review[ed] whether to appeal the Court’s decision [but] concluded that it’s in the best interests of all our stakeholders to move on.”
According to Sysco’s SEC filings, Sysco spent $355 million through March 2015 in costs associated with the merger, including integration planning, financing, and legal costs to defend the transaction. After deciding to terminate the merger, Sysco added on top of that the payment of the $300 million termination fee to US Foods, as well as another $12.5 million termination fee to Performance Food Group, the divestiture buyer Sysco presented to the FTC in a failed attempt to assuage the FTC’s concerns. Sysco will also incur additional expenses as the company begins redeeming $5 billion worth of bonds related to the deal. All told, Sysco will have spent approximately $1 billion and ended up right where it started.
One, two, three—you’re out!
Sysco-US Foods is not the only recent merger to come under fire and ultimately fail to close. The now-terminated merger represents the third transaction that was recently abandoned by the parties in the face of questions from the antitrust agencies. Since April of this year, the DOJ Antitrust Division has forced the parties to abandon numerous other transactions, including another deal that required payment of a reverse break-up fee and a major deal that offered significant divestitures that nevertheless failed to assuage DOJ concerns:
- the National CineMedia and Screenvision $375 million transaction was abandoned just prior to going to trial with the DOJ; and
- the Applied Materials and Tokyo Electron $9.39 billion merger was abandoned, in part, due to DOJ opposition, despite the fact that the parties offered divestitures.
In both cases, the deals were pending for over a year and the parties incurred substantial expenses. The Applied Materials-Tokyo Electron deal, for example, was pending for 580 days and the parties spent approximately $140 million before terminating the deal. National CineMedia paid a $26.8 million reverse breakup fee to Screenvision, as well as approximately $14.1 million in legal and other merger-related costs.
Commenting on recent deals, agency officials have been skeptical of the prudence of the parties even attempting some of these proposed transactions. DOJ Deputy Assistant General for Litigation David Gelfand said companies “are trying to push the envelope a little too far.” Bill Baer, the head of the DOJ’s Antitrust Division was blunter when he said: “There are some ideas that should never get out of corporate headquarters. It wastes the time of my people. Basically at the end of the day it’s an embarrassment for companies to get out there and invest in something, get its shareholders all excited and then have to pull out at the last minute.”
While these mergers may be extreme examples, they are emblematic of what can go wrong in a merger review and the fact that closing is not assured to any deal facing substantive antitrust hurdles. Parties should undertake a thorough antitrust risk assessment of their proposed deal on the frontend to avoid or minimize the costs of a merger closing being delayed due to regulatory review. Where appropriate, antitrust counsel can work with the corporate transaction team to build provisions into the definitive agreement that ensure that you are as protected as possible, subject to deal negotiation dynamics, should you end up in the nightmare scenario.
For example, when considering whether to enter into a potentially antitrust-sensitive deal, parties should consider several risk-shifting contractual provisions, like reverse breakup fees, divestiture limitations, termination provisions, and obligations to litigate.
Other provisions in the definitive agreement can also turn out to be important during the pendency of an investigation, such as cooperation provisions and efforts clauses. Cooperation provisions can ensure that both parties have access to documents and consult with each other before communicating with the government. Alternatively, one of the merging parties may be given the authority to lead the antitrust defense. Whatever the scenario for your deal, antitrust counsel will work with the corporate M&A team to develop the appropriate medley of risk-shifting and other provisions for your deal.