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Merger mania linked to lame-duck Bush regulators

June 4, 2007 Financial Week,

By Stephen Barlas

Corporate mergers have exploded over the past few years as George W. Bush’s popularity has imploded, and the Republicans’ chances of retaining the White House have diminished. That may be why so many companies are rushing to complete acquisitions while a compliant, Republican-run Federal Trade Commission and Justice Department are still in the reviewer’s seat.

David Scheffman, director of consultancy LECG and a former director of the FTC bureau of enforcement, said there is a perception that a Democratic administration would not look as kindly on some of the recent mergers as a Republican administration has.

The FTC, for example, received 1,768 pre-merger filings in fiscal 2006, a 28% increase over fiscal 2004. In fiscal 2007 so far, filings are up 17% from a year ago. Under the Hart-Scott-Rodino Act, either the FTC or the Justice Department’s antitrust division reviews a merger to ensure it is not anti-competitive, meaning it does not hurt consumers. The FTC and Justice have an informal agreement, worked out over time, on which industry sectors each one reviews.

Three months ago, Herbert Kohl (D-Wis.) didn’t mince words when he voiced Democrats’ views of antitrust policy under the Bush administration.

“We are very concerned with the direction that the antitrust division has taken under this administration,” he said at a hearing in March on competition policy and consumer rights. “With the exception of criminal enforcement, there is an alarming decline in the division’s antitrust enforcement efforts across the board, particularly with respect to mergers.”

But Thomas Barnett, assistant attorney general for the Justice Department’s antitrust division, told Mr. Kohl that merger enforcement continues to be one of his top priorities. “The division filed 10 merger enforcement actions in fiscal year 2006, and an additional six transactions were restructured by the parties in response to a division investigation,” he explained at the hearing. “This marks the highest level of merger enforcement activity since the end of 2001—a time when the department was reviewing twice as many mergers during the merger wave of that era.”

Mr. Barnett’s numbers aside, Steven Bernard, director of M&A market analysis at Robert W. Baird & Co., said he agrees that some of the current crop of mergers are being pushed now out of a concern that Democrats might control both Congress and the White House in 2008 and make deal-making harder. Still, he said the majority of the mergers are progressing mostly because conditions are right: Record private equity capital is available, corporate earnings are climbing, stock prices are strong and interest rates remain low.

Moreover, he contrasts the mergers taking place today with those during the last period of merger mania, from 1999 to 2000. The earlier deals, such as AOL-Time-Warner, were done for the sake of empire building. This new generation of mergers is based on sound strategy, for example to create efficiencies.

One such deal is AirTran’s attempt to acquire Milwaukee-based Midwest Air.

Perhaps not surprisingly, Wisconsin’s Mr. Kohl was apoplectic that the Justice Department gave quick approval to that deal. “Should AirTran acquire Midwest Airlines and decide in the future to reduce service from Milwaukee, the negative consequences for the Wisconsin economy would be enormous,” he stated.

Supermarket mergers, arguably, are more politically sensitive than AirTran’s hostile bid for Midwest Air, Google’s acquisition of DoubleClick or Sirius Satellite Radio’s bid for XM Satellite Radio, just to name a few of the recently proposed deals. That’s because someone from every family in every congressional district visits a grocery store, so changes in prices, offerings and service can cause an uproar considerably more explosive—and potentially politically damaging—than any adverse change in Internet advertising rates or satellite radio service.

The FTC, which reviews supermarket mergers, seemed to be signaling their political ramifications when it held a supermarket industry merger workshop in late May. The FTC has sought more information in both A& P’s proposed acquisition of Pathmark and Whole Foods Market’s tender offer for Wild Oats Markets.

The last and only enforcement action filed in conjunction with a supermarket merger by the Bush administration was when the commission challenged Wal-Mart’s acquisition of the largest supermarket chain in Puerto Rico, Supermercados Amigo. In a consent agreement in November 2002, Wal-Mart agreed to divest four stores. However, Puerto Rico went to court to force additional divestitures, and Wal-Mart agreed.

The FTC forced no concessions from Supervalu when it bought 1,100 Albertson’s stores in June 2006.

At the supermarket industry workshop on May 24, Debbie Feinstein, a partner at the law firm of Arnold & Porter, who spoke on behalf of Kroger Co., urged officials at the FTC’s bureau of economics, which also plays a role in antitrust investigations, to be even more lenient toward mergers and give greater weight to their potential “efficiencies” and to the competition posed by Wal-Mart Super Centers and traditional mass merchandisers such as Target, both of which have been expanding into the grocery market.

Over its two terms, the Bush FTC has become increasingly open to arguments that mergers, even when they result in the disappearance of a neighborhood supermarket, can be pro-competitive through their efficiencies, where the remaining supermarket benefits from corporate savings on administration, advertising, warehousing and other services. Those savings theoretically translate into benefits for consumers, such as lower prices, better service and more offerings.

Referring to FTC chairwoman Debra Platt Majoras, LECG’s Mr. Scheffman explained: “This chairman has spoken about taking efficiencies more seriously.”

He added that his firm had been involved on behalf of Rite Aid in its acquisition of both Brooks and Eckerd drugstores, a deal that the FTC is still looking at. Going into that merger, Mr. Scheffman had thought Rite Aid would have to divest 125 Brooks stores for the deal to win FTC approval. But by underlining the efficiencies that would be gained in the merger, Rite Aid may only have to divest 25 stores. FW