Last week the Federal Trade Commission and the Justice Department’s Antitrust Division issued their annual report on the Hart-Scott-Rodino Act (HSR Act), which requires companies to pre-report mergers over a certain value to antitrust regulators so they can preemptively determine if a deal is “likely to have an anticompetitive impact.” (It’s amazing that people with such amazing economic forecasting abilities are employed as mere government lawyers.)
Despite the occasional high-profile merger challenge, like the FTC’s recent lawsuit to stop Whole Foods from acquiring Wild Oats, very few deals face antitrust roadblocks. In the fiscal year 2006, the FTC and DOJ issued second requests for information—the first step towards a formal challenge—in only 2.6% of reported mergers. This is slightly below the ten-year average of 3.01%.
That doesn’t mean there are no regulatory costs imposed upon the 97% or more of deals that don’t get to the second request stage. All parties subject to HSR requirements must pay a “filing fee” of up to $280,000. These fees directly pay for most of the FTC and Antitrust Division budgets. Even antitrust supporters have questioned this practice. The government’s own Antitrust Modernization Commission (AMC) said in its recent final report, “merging parties should not have to shoulder the burden of paying a large portion of the cost of antitrust enforcement generally. Indeed, the fees Congress has imposed effectively tax mergers, the vast majority of which are procompetitive or competitively neutral.”
As for the 3% of deals subject to a second request, the AMC found:
The burdens of second requests are high and increasing. The cost of responding to a typical second request includes outside counsel fees, payments for processing electronic documents and photocopying, and economists’ fees. Indirect costs, such as employee time and opportunity cost, are difficult to quantify but are nonetheless very significant. The ABA Antitrust Section cited reports that compliance with a second request typically takes six months and costs $5 million, while the reviews in more complex investigations can take eighteen months and cost the merging parties up to $20 million.
The primary reason second requests are so expensive is that there are no judicial or due process restraints on pre-merger investigations. Whole Foods CEO John Mackey, writing about the FTC’s lawsuit against his company, provided valuable insight into the second request process:
From the first day the FTC began their investigation they were very hostile and adversarial towards Whole Foods. Instead of conducting a dispassionate, impartial, and fair investigation into this merger the FTC consistently behaved in a biased, adversarial, and arrogant manner, while engaging in “bullying tactics” again and again and again. Whole Foods was always presumed to be “guilty” and had to try to prove our “innocence” to the satisfaction of the FTC. However, the FTC seemed to us to be completely uninterested in Whole Foods explanations for why we were doing the deal. From the very beginning the FTC staff began to build their case against the deal. It is Whole Foods’ opinion that the FTC had already decided to try to prevent this merger before they even began their investigation!
To give one example of FTC bullying tactics, let’s look at how they behaved toward us in order to gain multiple time extensions beyond the original deadline. Whole Foods has spent thousands and thousands of hours trying to comply with the enormously burdensome requests that the FTC placed upon us and which have cost us millions of dollars in staff time, lawyers’ fees, consultants’ fees, supplies, and other expenses. We have produced over 20 million documents for them to “study” (which is of course impossible for them to effectively do since this amount of information is simply too large to be digested, no matter how many tax-payer funded lawyers are working on it), but the FTC could still always claim that we left something valuable out of the documentation and could then force us to start the entire process over again. On more than one occasion we came up against the time deadlines and the FTC “asked” for Whole Foods to agree to extensions. If we expressed any reluctance then the FTC brought up the threat of starting over. Needless to say, we didn’t want to start over again so we agreed to the extensions. The entire process was inherently coercive.
My second objection to this entire FTC process is that I personally consider the way the FTC gathered its information on the deal to be unethical (even if it is “legal”) and a complete invasion of privacy. The FTC has the legal power to look at absolutely anything about our company that they want to. They can look at all of our financial information, all of our strategic documents, all of our e-mails-absolutely anything and everything that they want to. Think about that for a moment and imagine how you would personally feel if every single e-mail you had ever written was to be read by governmental bureaucrats you didn’t know, and then could be selectively revealed publicly to the entire world if those governmental bureaucrats decide that it is “relevant to their legal argument”. Whole Foods is powerless to prove that a particular e-mail isn’t relevant or that it contains competitively sensitive information.
While the FTC can look at absolutely anything and everything it wants to about our company does Whole Foods have the same reciprocal rights with the FTC? Of course not! We can’t go look at all the FTC e-mails concerning Whole Foods and Wild Oats (which no doubt say some pretty interesting things about how the FTC really operates!). We can’t download all the various minutes of their meetings or get a look at the FTC “strategy” concerning Whole Foods. It is totally one-sided. It is unfair. It should not be legal for the FTC to do this in my opinion. There is obviously no evidence that Whole Foods or Wild Oats are “terrorists” or pose some kind of threat to national security. The FTC should not have the legal right to look at sensitive and private corporate documents simply because they want to.
Since Whole Foods now has a first hand understanding of how the FTC really operates in the United States today and the power that they legally wield, one of the consequences to our company going forward is that we are very unlikely to ever again attempt to buy a company that requires FTC approval. We don’t need permission from the FTC (yet) to open new stores. However, we do need their approval to buy stores from another company in many instances—consequently we’ll simply open stores in the future and not try to buy any that require FTC “permission”.
In addition, since the United States government has the right to look at all of our e-mails, all of our strategic documents, all of our company memorandums, and all of our financial information we will likely reduce the creation of these in the future. I would suggest that any company operating in the United States take to heart our experience and beware of its digital exposure. As far as we know the United States government is not yet recording all of our phone conversations and isn’t yet bugging our meeting rooms (we hope) so most of our most important discussion and decisions in the future won’t have a “digital trail” that can be involuntarily taken from us and then very selectively used against us to attempt to publicly embarrass us.
(As an aside, the recent Patriot Act reauthorization does allow the Antitrust Division to seek wiretaps in criminal antitrust investigations. While this doesn’t apply to merger review, it wouldn’t be difficult for a committed prosecutor to raise price-fixing allegations to get a judge to sign off on wiretaps.)
The AMC report echoes some of Mackey’s objections to the second request process:
Unfortunately, agencies may face internal pressures that discourage staff from limiting the scope of second requests and may restrict the systematic reforms they adopt. The agencies are generally reluctant to forgo the possibility of obtaining relevant information, even where it may not improve their ability to assess the competitive impact of the merger. As one witness observed, from the agency staff perspective, “[i]t is easy to take the view that more is better when it comes to obtaining information,” since limitations “pose risks . . . without, from the government’s perspective, much apparent downside.” For example, a large percentage of email that is responsive to a second request typically comes from lower-level employees, and arguably is not likely to produce insights regarding competitive effects beyond information also stored centrally or available in management files. Moreover, such evidence may provide relatively little useful information on the market and economic characteristics most relevant to merger assessment.
Again, it’s notable that few mergers ever reach this point. In FY 2006, the FTC and DOJ only brought formal action against 32 mergers. Only nine of those 32 deals were killed outright because the parties abandoned their plans. The rest were “restructured,” in the agencies’ words, to address regulatory objections. (Some deals were abandoned after the government imposed conditions.) Still, the DOJ and FTC spend more than $350 million annually which, added to the hundreds of millions spent to comply with the HSR Act, seem like an awful waste of capital to stop less than a dozen mergers based on pure speculation that consumers will be “injured”—i.e., face short-term price increases—by certain deals.