U.S. MERGER ENFORCEMENT

1. U.S. MERGER ENFORCEMENT Presented by Andy Strenio Vienna , Austria October 13, 2000

2. U.S. MERGER ENFORCEMENT • Legal Framework and Enforcement Agencies • Antitrust Analysis of Horizontal Combinations • Pre-merger Notification Requirements • Settlement and Litigation Options • Application of U.S. Merger Law to Foreign-Based Corporations • Case Study

3. U.S. MERGER ENFORCEMENT • Overview • Dual Federal Enforcement Agencies (DOJ and FTC) • Key Statutes: Section 7 of the Clayton Act; Section 5 of the FTC Act; and, Sections 1 and 2 of the Sherman Act • 1997 Merger Guidelines • “The Third Man”: Additional Federal “Antitrust” Police • Role of the States and Private Litigants

4. U.S. MERGER ENFORCEMENT • Antitrust Analysis Market Definitions • Defining the Relevant Product Market • Demand and Supply Side Substitutability • Defining the Relevant Geographic Market • World Markets Quite Common

5. U.S. MERGER ENFORCEMENT • Market Definition Trends • “Product Markets Sliced Smaller Even As the Geographic Markets Tend to Expand” • Staples/Office Depot • Not All Office Supplies • But Instead Consumable Office Supplies Distributed Through Superstores

6. U.S. MERGER ENFORCEMENT • Increasingly Heavy Reliance Upon Internal Documents “In document after document, the parties refer to, discuss, and make business decisions based upon the assumption that ‘competition’ refers to other office superstores only.” --Judge Hogan in FTC v. Staples, Inc.

7. U.S. MERGER ENFORCEMENT • Analysis of Competitive Effects • Unilateral Effects: Increased Market Power • Unilateral Effects: Predatory/Exclusionary Risks • Coordinated Effects: Likelihood of Collusion • Coordinated Effects: Heightened Barriers to Entry

8. U.S. MERGER ENFORCEMENT • Measuring Concentration and Deltas • Herfindahl-Hirschman Index (“HHI” or “Herfs”) • Sum the Squares of Each Firm’s Market Share • Before: 502 + 402 + 102 = 4,200 • After: 502 + 502 = 5,000 • Delta = 5,000 - 4,200 = 800

9. U.S. MERGER ENFORCEMENT • Post-Merger Concentration Yardsticks • HHI < 1,800 and Delta < 100 = green light • HHI > 1,800 and Delta < 50 = yellow light • HHI > 1,800 and Delta > 50 = red light

10. U.S. MERGER ENFORCEMENT • Exculpatory Factors in Highly Concentrated Markets • Changing Market Conditions • The Presence of Next-Best Substitutes • Ease of Entry Into the Market • The Nature of the Product • Other Information About Market Conditions, Transactions, Competitors, or Buyer-Seller Characteristics

11. U.S. MERGER ENFORCEMENT • Two Affirmative Defenses • First: Failing Firm Defense • Hard Tests to Meet, Including: • Impending Bankruptcy • Inability to Reorganize Effectively • No Preferable Buyer Interested • Assets Would Exit the Market

12. U.S. MERGER ENFORCEMENT • Second: Merger-Generated Efficiencies • Must Dramatically Reduce the Likelihood of Competitive Harm • Must Be “Merger-Specific” • Sliding-Scale Approach Utilized • Only “Cognizable Efficiencies” Count

13. U.S. MERGER ENFORCEMENT • Pre-merger Notification Requirements • Hart-Scott-Rodino Improvements Act of 1976 (“HSR”) • Size-of-Party and Size-of-Transaction Tests • Acquiring Parties Must Pay A $45,000 Filing Fee • Filed with the FTC and DOJ

14. U.S. MERGER ENFORCEMENT HSR Basics • Mandatory Waiting Period • Second Requests and Less Formal Inquiries • Confidentiality • Closing Notice • Severe Penalties for Failure to File • Severe Penalties for Exerting Premature Control

15. U.S. MERGER ENFORCEMENT • Settlement Alternatives • Consent Decrees • Structural or Conduct Remedies • Prior Notice or Prior Approval Requirements • Trend Toward Harsher Terms

16. U.S. MERGER ENFORCEMENT • Litigation • Preliminary Injunction (“PI”) Decision Critical • PI Request Filed by the DOJ or FTC in Federal District Court • “Roll of the Dice” But the Feds Usually Win • Hospital Mergers Have Proven to be the Exceptions

17. U.S. MERGER ENFORCEMENT • Application of U.S. Antitrust Law to Foreign-Based Corporations • Mergers Abroad Are Covered Provided They Are Likely To Have an Anti-Competitive Effect in the U.S. • Even if Neither Firm Has Production Facilities in the U.S. • Oerlikon-Burle’s Purchase of Leybold (1994)

18. U.S. MERGER ENFORCEMENT • Case Study • Lafarge’s Purchase of Holnam Cement Production Assets (1998) • FTC Challenge in Puget Sound Market • HHI Rose from 2,260 to 2,589 (+ 329 Points) • Entry Unlikely, Plus Penalty Clause Concerns • Result: Consent Agreement That Struck the Penalty Clause or Any Comparable Terms and Permitted the Parties to Consummate the Transaction