Dealtalk: U.S. antitrust bodies flex muscle as firms test limit

NEW YORK (Reuters) - U.S. antitrust regulators are sending a clear message to companies contemplating gobbling up their rivals - don't push it.

Companies have been testing the limits of U.S. antitrust scrutiny under the current administration, encouraged by little apparent change in enforcement policy despite initial expectations that President Barack Obama would take a much stricter view on competition issues than his predecessor, George W. Bush.

Turns out, that quietly changed. The Justice Department has indeed become more aggressive about antitrust enforcement than it was earlier, a source familiar with the regulator's thinking said.

"Nobody wants to say it is based on politics, but I think there has been much greater willingness to be rigorous and thorough in the enforcement process and certainly no fear in going to court," the person said. "We will see more severe remedies, more extensive remedies."

The Justice Department had no immediate comment for this story. The Federal Trade Commission declined to comment.

As any large federal agency, change in the approach at the Justice Department is more nuanced than dramatic and is most apparent in borderline cases.

The vast majority of deals in any given year still go through without a review, but data shows a slight uptick in enforcement actions under the Obama administration as well as an acceleration of the review process that some attribute to a flattening of the bureaucracy at the regulatory agency.

The number of deals that received second requests for more information from the Justice Department and Federal Trade Commission regulators rose to around 4 percent from fiscal 2009 to 2011, up from around 3 percent of deals from 2001 to 2008.

While that may not be statistically conclusive, regulators have magnified that change in approach in recent months by moving swiftly and decisively against some of the year's largest deals, surprising seasoned antitrust lawyers and investment bankers who had bet they could persuade officials to let them have their way.

Telecommunications company AT&T Inc (T.N), for example, was so confident that it offered Deutsche Telekom (DTEGn.DE) a breakup fee of around $4 billion if regulators blocked its deal to buy T-Mobile USA for $39 billion.

That deal -- which would have been the biggest merger of the year -- collapsed on December 19 under scrutiny of the Justice Department and the Federal Communications Commission, which rejected offers of divestitures as not good enough to remedy the impact of merging two of the top four U.S. wireless carriers.

William Kovacic, a former Federal Trade Commission chairman who left the commission earlier this year, said AT&T would never have signed a deal that included such a large break-up fee had it believed it would not be able to obtain approval.

"One way to make that calculation is to notice that the DOJ was not in court killing deals, nor was the FCC. They were taking solutions," said Kovacic, now a professor at George Washington University's School of Law.

Other significant deals hindered by Justice Department scrutiny include Nasdaq OMX Group Inc's (NDAQ.O) $11 billion bid to take over the parent of the New York Stock Exchange (NYX.N), and H&R Block Inc's (HRB.N) $287.5 million deal to buy the maker of TaxACT software.

In November, the Justice Department won its litigation against the H&R Block deal. Among its arguments, the agency said that removing TaxACT would create a "virtual duopoly" between the two surviving post-merger firms, H&R Block and TurboTax-maker Intuit.

Another large transaction expected to come under intense scrutiny is Express Scripts Inc's (ESRX.O) plan to buy Medco Health Solutions Inc MHS.N for about $29 billion -- a deal that would merge two of the top three pharmacy benefit managers in the country.

Some dealmakers said they suspect the enforcement of deals such as AT&T's bid has heightened because of the approaching U.S. elections, when the president wants to be seen as tough on protecting consumer interests.

To be sure, many of the deals that have come under fire now would have been scrutinized under any administration.

"Generally, in those kinds of transactions, we have seen big overlaps and market shares that would have been tough cases under any administration. Those deals were gambles that were bound to come under great scrutiny," said Steve Baronoff, chairman of global M&A at Bank of America Merrill Lynch.

This hasn't stopped companies from attempting to buy their competitors. Martin Marietta Materials Inc (MLM.N) has launched a nearly $5 billion hostile bid for Vulcan Materials Co (VMC.N) despite the fact that they are the nation's two largest producers of construction aggregates like sand, gravel and crushed rock.

Martin Marietta CEO Ward Nye has said the company and its lawyers believe there won't be any significant regulatory impediment to its bid.

But the source familiar with the department's thinking said the difference is some of the deals that pushed the envelope under the Bush administration and succeeded would not get past regulators now.

That includes the approval of Whirlpool Corp's (WHR.N) $1.7 billion purchase of Maytag in 2006 despite estimates the two companies made about 70 percent of U.S. washers and dryers, and the merger of the only two U.S. satellite radio companies, XM and Sirius (SIRI.O) in 2008.

"I do think today those deals would be blocked," the source said.

FASTER RESPONSE

The Justice Department has also become faster in making up its mind about applications for antitrust clearance.

When Nasdaq, for example, launched a hostile bid to buy NYSE Euronext earlier this year, the department came back with its decision not to allow that bid to go forward a month and a half after the bid was made, surprising deal experts with the speed.

That is also showing in the time it takes for a deal to close after announcement. According to FactSet Mergers, deals that were completed this year on average took 105 days to close, 30 days less than the average in 2007.

"If you look at the AT&T deal, people were surprised how rapid the DOJ decision to challenge the deal was. It even took the parties by surprise," said Beau Buffier, co-head of the global antitrust practice at law firm Shearman & Sterling.

"They are flexing their muscle more at the DOJ than they have in the past."

A former Justice Department official said the quicker review was thanks to a flattening of the structure and a more efficient review process at the antitrust division of the agency.

The antitrust division's staff members, for example, send earlier notifications to the higher levels of the department on transactions, enabling more communication and quicker decisions.

"So everybody knows which way the case is going," the former department official said. "When the staff has concluded their investigation, there is a unified recommendation."

These changes, however, took time and the effects are beginning to become apparent only now. The flattening of the structure at the Justice Department's antitrust division took 18 months to complete, the former official said.

"Clearly the pendulum has swung a little bit to where they're being much more activist and quicker to attempt to block deals," a senior M&A lawyer said.

"This is going to be something people have to take into account," he said, noting that companies would have to leave more time for reviews and prepare for bigger concessions going forward.

(Reporting By Michael Erman and Nadia Damouni; Editing by Paritosh Bansal and Dale Hudson)