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Slide 1

Merger Enforcement:
A Quest for Efficiency

New York State Bar Association
Antitrust Section Annual Meeting

Thomas O. Barnett
Assistant Attorney General
Antitrust Division
U.S. Department of Justice

January 25, 2007

U.S. Department of Justice Seal UNITED STATES DEPARTMENT OF JUSTICE
ANTITRUST DIVISION

Slide 2

Cartoon of man walking into a bank full of customers. Caption - Don't anybody move: this is a merger. Copyright Cartoonbank.com

Slide 3

Overview

  • Merger Review Process Efficiency

    • HSR process

    • Burdens/Trends

    • Merger Review Process Initiative (2001 Initiative & 2006 amendments)

  • Merger Enforcement Efficiency

    • Transparency

    • Mergers 2006 Highlights

Slide 4

Merger Review Process Efficiency

  • HSR premerger review process

    • Since 1976, investigate most potentially anticompetitive transactions before merger is consummated

    • More effective relief and greater certainty to merging parties

  • Enforcement Goals:

    • Identify potentially anticompetitive transactions quickly so that remainder can close

    • Reach the right enforcement decision quickly and with minimal burdens necessary

Slide 5

Process Efficiency

Transactions Cleared Without Additional Agency Review (FY 2002-2006)

Pie chart showing percent of transactions

[D]

  • 5,927 of 7,210 transactions proceeded without the Agencies requesting information beyond the initial HSR filing

Slide 6

Process Efficiency

Transactions Cleared Without Agency Second Requests (FY 2002-2006)

Pie chart showing percent of transactions

[D]

  • Agencies issued 2ndrequests in 214 (3%) of 7,210 transactions

Slide 7

Process Efficiency

Antitrust Division Investigations Resulting in 2nd Requests (FY 2002-2006)

Pie chart showing percent of investigations

[D]

  • 2ndrequests issued in 99 out of of 398 Division investigations

Slide 8

Process Efficiency

  • Volume of information produced

    • Ten years ago: Few hundred boxes a “large” production

    • Now: Terabytes, millions of pages common

    • Verizon/MCI and SBC/AT&T: 25 million pages

  • Concern for agencies as well as parties

Slide 9

Process Efficiency

  • Explanatory Trends:

    • Technological change – electronic documents/data

      • E.g., emails

    • Complex products, specialized services, rapid change

      • E.g., TVs

    • Merger analysis is increasingly sophisticated and data-intensive

      • E.g., merger simulations and critical loss analysis

Slide 10

The Shape of Things to Come

Cartoon of handing judge a disk. Caption - As precedent your Honor I offer the entire legal history of western civilization on CD ROM. Copyright Cartoonbank.com

Slide 11

Process Efficiency

  • Conclusions:

    • The volume of information will continue to increase

    • Identify transactions that do not threaten harm to competition before issuing second requests wherever possible

    • Improve ability to identify and process relevant information

Slide 12

Merger Review Process Initiative

  • 2001 Merger Review Process Initiative

    • Aggressive & efficient use of initial waiting period

    • Tailor 2ndrequest investigations

    • Focus investigations on dispositive issues (e.g.exchange mergers)

    • Encourage open communication/dialogue

    • Scheduling agreements

Slide 13

Merger Review Process Initiative

Antitrust Division Investigations Resulting in Second Requests (FY 2000-2006)

Bar chart showing percent of investigations

[D]

  • More effective use of the initial waiting period has enabled the Division to conclude more investigations without issuing 2ndrequests.

Slide 14

Merger Review Process Initiative

Bar charts showing merger review process initiative

[D]

Slide 15

Merger Review Process Initiative

  • 2006 Amendments

    • Announced in December ‘06

    • Internal review of merger investigations

  • “Process & Timing Agreement” merger review option

    • Limit number of custodians/provide post-complaint discovery

    • Contested litigation rare

  • Revised Model 2ndRequest

Slide 16

Better Information Collection

Cartoon of 3 men in library full of books, one talking, one looking in a book, one sitting with his hands on his face. Caption - What burns me up is that the answer is here somewhere, starring us in the face. Copyright Cartoonbank.com

Slide 17

Merger Enforcement Efficiency

Transparency

Slide 18

Merger Enforcement Transparency

  • Parties: Encourage open dialogue during investigation

  • Public: Enforcement actions

  • Public: Decisions to close

    • Closing statements (e.g., AT&T/Bellsouth and Whirlpool/Maytag)

    • 2006 DOJ/FTC Commentary on the Horizontal Merger Guidelines

    • NY State Bar Association Annual Meeting Dinner

Slide 19

Mergers 2006 – Highlights

  • 1860 transactions notified to the agencies (8.9% increase over FY 2005)

    • Over 580 transactions filed so far in FY 2007

  • Antitrust Division:

    • Opened 77 HSR + 20 non-HSR merger investigations

    • Issued 17 2ndrequests

    • 16 Transactions Modified

      • 10 merger challenges filed

      • 6 transactions restructured in response to Division investigations

Slide 20

Mittal/Arcelor

  • $33 billion steel merger, hostile transaction

  • Anticompetitive effects in the $2.3 U.S. tin mill products market

  • Consent decree requires sale of Dofasco (Arcelor subsidiary) or alternative tin mill product assets (Sparrows Point, MD or Weirton, WVa) if Dofasco sale not possible

Slide 21

Mittal/Arcelor

“Pocket” decrees

  • Used by Division for some time, but rare

    • Insurance policy on a fix-it-first remedy

    • Insurance policy on regulatory fixes (e.g., FCC/radio station mergers)

    • May be used in rare cases where antitrust review interferes with market by operation of law (e.g., foreign tender offer regulations)

Slide 22

Cartoon of man talking to judge. Caption - Can we, just for a moment, Your Honor, ignore the facts? Copyright Cartoonbank.com

Slide 23

Maytag/Whirlpool

  • Residential washers and dryers

  • High market shares creates initial presumption

  • Initial Presumption Rebutted

    • Well-established rival brands (GE/Frigidaire/Kenmore)

    • Recent entrants with growing share (LG/Samsung)

    • Large retailers (2/3rds of sales) can shift shares

    • Excess capacity (U.S./Mexico/Korea)

    • Customers/Internal Documents

Slide 24

Mergers 2006 – Year in Review

Line chart showing mergers in 2006

[D]

Slide 25

Exelon/PSEG

  • $16 billion electricity generation merger

  • Focus on mid-Atlantic region (NJ and PA)

  • Complex merger analysis:

    • Electricity generating plants not the same (hydro/nuclear/coal/gas turbine)

    • “Fuel curve”

    • Auction process

Slide 26

Exemplar Cost Curve

Chart showing plotting points of simple fuel cost curve

[D]

Note: For illustrative purposes only – not an actual representation of market conditions.

Slide 27

Exemplar Cost Curve

Chart of a simple fuel cost curve showing how the price (P1) per megawatt hour is determined by the intersection of demand and the fuel curve

[D]

Note: For illustrative purposes only – not an actual representation of market conditions.

Slide 28

Exemplar Cost Curve

Chart of a simple fuel cost curve illustrating how the price per megawatt hour rises to P2 as demand increases along the fuel curve

[D]

Note: For illustrative purposes only – not an actual representation of market conditions.

Slide 29

Exelon/PSEG

  • Likelihood of substantial anticompetitive effects in the $19.8b mid-Atlantic wholesale electricity market

  • Consent decree: Divest 6 electricity plants (5,600 megawatts of generating capacity) in PA and NJ

  • Transaction ultimately abandoned

Slide 30

Telecommunications Mergers

  • Verizon/MCI

  • SBC/AT&T

  • AT&T/BellSouth

  • Sprint/Nextel

  • Cingular/AT&T Wireless

Slide 31

Wireless Telecommunications

  DynaTAX 8000X RAZR
Introduced 1983 2004
Weight 2 pounds 3 ounces
Cost $4,000 $200-400
Talk time 30 minutes 7 hours

Slide 32

Wireless Telecommunications

  1985 2006
subscribers 203,000 219 million
revenues $354 million $118 billion
Avg. monthly bill $95 (1988) $49.30
Avg. minutes of use 140 (1993) 740 (2005)
Effective price 44 cents/minute (1993) 7 cents/minute (2005)
Penetration <1% in 1985 over 71% (2005)
Cell sites 599 over 197,000
Direct employees 1,697 238,236

(from CTIA & FCC reports)

Slide 33

Tunney Act Proceeding

Metro Area in Verizon Territory: CLEC Fiber

Image showing Verizon CLEC fiber lines in metro area

[D]

Slide 34

Tunney Act Proceeding

Other Competitive Fiber

Bar chart showing percentage of known CLEC fiber route miles in divested markets

[D]

Slide 35

DFA/Southern Belle

  • Dairy processing: anticompetitive effects in school milk contracts in 100 school districts in Kentucky & Tennessee

  • Case history

  • Pre-trial settlement

Slide 36

Benefits of Greater Transparency

  • Predicting Enforcement Actions

    • Finding Violation

    • Remedy

  • More efficient planning by business

  • More efficient review and resolution

    • Fewer contested challenges

    • Faster resolution through consent decrees

Slide 37

Greater Process Efficiency and Enforcement Transparency

WIN-WIN-WIN

Division-Business-Consumer Welfare

Slide 38

Merger Review:
A Quest for Efficiency

New York State Bar Association
Antitrust Section Annual Meeting

Thomas O. Barnett
Assistant Attorney General
Antitrust Division
U.S. Department of Justice

January 25, 2007

U.S. Department of Justice Seal UNITED STATES DEPARTMENT OF JUSTICE
ANTITRUST DIVISION