BRINGING RESTRUCTURING OUT OF THE CLOSET
Albert A. FoerAmerican Antitrust Institute
In what may prove to be one of the most influential speeches of his chairmanship, the FTC's Robert Pitofsky told a New York audience recently that "[T]here is no more important set of policy questions facing the antitrust community than defining the nature and limits of appropriate restructuring in merger review."
Saying his intent was not to describe a new or revised policy, but only to describe what the FTC is and has been doing, Pitofsky threw a spotlight on the changing nature of merger enforcement. To go beyond his words, it has gradually become apparent that passage of the Hart-Scott-Rodino Act in 1976 had the largely unanticipated effect of moving the merger process from a regime of post hoc judicial review to informal ad hoc regulation and pre hoc administrative negotiation. Relatively few merger cases are litigated and a new body of administrative law is emerging outside of the judiciary's sight.
To a large extent, merger practice has emerged as a step-by-step application of the principles in the Federal Horizontal Merger Guidelines. (I don't say there is strict adherence to the Guidelines, because it is apparent that substantial discretion is exercised in their application.) But in the vast areas not covered by the Guidelines, administrative discretion is exercised on a day-to-day basis without formal structure. Nowhere is this more substantively important than in the handling of deal restructuring, because the standard is to fix anticompetitive components rather than litigate. This is a negotiated process, with the agencies exercising the powerful lever of the threat of litigation and delay.
Administrative discretion can be a good thing, especially early in a program when the best patterns of practice have not yet become manifest. But, sooner or later, it becomes prudent to narrow administrative discretion, to assure (in the words of Kenneth Culp Davis) "discretionary justice" through a structured framework. In the case of merger enforcement, this should take the form of (1) studying patterns of enforcement, (2) deriving the best practices, (3) formalizing rules or guidelines, (4) providing transparency so that the public can understand and evaluate the exercise of administrative discretion, and (5) conducting regular post hoc evaluations to determine how well the process is working.
Pitofsky is inviting the antitrust community to begin the process of structuring the enforcement agencies' discretion. A first step actually came last summer with the FTC staff's Study of the Commission's Divestiture Process. A tremendously suggestive study, it focused attention on the fact that all divestitures are not equally successful and began the process of identifying best practices, e.g., insisting upon up-front designation of a buyer and reviewing the buyer's business plans and capabilities with respect to the assets being divested.
A second step has been the Commission's adoption on an informal and ad hoc basis of many of the staff's recommendations. This may in part be a matter of self-protection. As Commission resources become increasingly burdened by the merger wave and as restructuring proposals become more frequent and more complicated, the need grows greater for streamlining the negotiating process and even declaring that certain restructurings are too taxing for the Commission to consider. Sometimes (when?) the Commission should just say, "No!"
The third step was the Chairman's speech, in which he points out many of the factors he personally takes into account in analyzing restructuring issues. Since the Chairman doesn't suggest what, if anything, comes next, let me make two suggestions.
First, there is a strong need for more and better analysis of past restructurings. The staff's Study was undermined somewhat by its definition of a successful divestiture: "whether the buyer of the divested assets was able to enter the market and maintain operations." While there are many methodological problems involved, it would seem to be critically important to know how well the divested assets performed over time, compared to how they were performing prior to divestiture, and whether the buyer supplied real competition or merely cooperated in coordinated interaction or sat under the price-setting umbrella of the merged firm.
In the recent proposed acquisition of Pathmark by Royal Ahold, the AAI provided the FTC data based on a study by economist Ron Cotterill in which he examined the effectiveness of divestitures by Royal Ahold in prior mergers. His data showed that in some markets, the divested supermarkets were performing 25% below stores that were not divested. This would not seem to reflect a successful restructuring, even though divested supermarkets were maintaining operations. Thus, additional empirical work would be useful for shaping future restructurings.
Second, the question hangs in the air: do we need Restructuring Guidelines, a formal document, similar to and perhaps amending the Merger Guidelines? The logical next step would be for the Commission to initiate one or more workshops for the public to comment on the Chairman's outline of decisional factors, on whether or not there is a need to go a step further, and (if so) what types of provisions would be appropriate.
Here are eleven thematic points deserving address in this process. (1) Is it clearly the obligation of the agencies to assure that a merger will not result in the reduction of competition? (2) Who should bear the risk of a failed divestiture, the parties seeking to merge or consumers? (3) Should the standard be to approve any reasonably acceptable buyer or to select the strongest buyer most likely to restore competition? (4) Should an up-front buyer always be required? (5) Should there be a presumption in favor of spinning off an entire business unit (e.g. with intellectual property, manufacturing expertise, goodwill, and marketing network included) rather than partial divestments? (6) When, if ever, should the agencies use some form of behavioral relief? (7) When, if ever, should they permit an entangling arrangement between the merged firm and the acquirer of the divested assets? (8) Should there ever be informal relief, based on private promises? (9) When firms want to make a deal that plainly will require massive divestitures, should there be a presumption that the purpose is to acquire market power by taking apart a rival? (10) What procedural and institutional modifications in the agencies, in terms of resources and expertise, are necessary in order to make sure remedy issues are given adequate attention? And (11) how can the public be provided adequate information (including, possibly, a statement of whether a consent order was entered because of uncertainty of prevailing) so that it can more effectively evaluate and react to negotiated settlements?
At the recent budget reauthorization hearings in the Senate Commerce Committee, Sen. Ted Stevens of Alaska angrily accused the FTC of inventing its power to approve specific buyers in a restructuring. (The FTC had not approved a proposal by BP and ARCO.) Stevens was clearly wrong, but his error may reflect the fact that restructuring has itself remained so unstructured. Without participating in restructuring, the enforcement agencies cannot carry out the Clayton Act. But the time has come to bring restructuring fully out of the closet, to state openly why it is important and how it is to be handled, with as much clarity as the situation permits. Chairman Pitofsky is to be congratulated for bringing the process this far along.