FTC Merger Remedy Study: Best Practices | Practical Law

FTC Merger Remedy Study: Best Practices | Practical Law

On February 3, 2017, the Federal Trade Commission (FTC) released a study examining merger remedies from 2006 through 2012. The study examined the remedies in 89 merger orders and identified best practices for parties negotiating remedies with the FTC staff, including specific recommendations for the pharmaceutical industry.

FTC Merger Remedy Study: Best Practices

Practical Law Legal Update w-005-7430 (Approx. 6 pages)

FTC Merger Remedy Study: Best Practices

by Practical Law Antitrust
Published on 03 Feb 2017 • USA (National/Federal)
On February 3, 2017, the Federal Trade Commission (FTC) released a study examining merger remedies from 2006 through 2012. The study examined the remedies in 89 merger orders and identified best practices for parties negotiating remedies with the FTC staff, including specific recommendations for the pharmaceutical industry.
On February 3, 2017, the FTC released The FTC's Merger Remedies 2006-2012: A Report of the Bureaus of Competition and Economics. In composing the report, the FTC examined 89 merger orders and the structural or behavioral remedies required in those orders.
The 89 merger remedies studied included 50 merger orders that were analyzed using a case study method from their 1999 study, 15 merger orders involving supermarkets, drug stores, funeral homes, dialysis clinics, and other health care markets, and 24 orders affecting the pharmaceutical market. The FTC staff interviewed the buyers of divested assets and the merged firms, analyzed sales data, and reviewed survey responses as part of their research.
The FTC found that:
  • Over 80% of the FTC's orders that were part of the case study successfully maintained or restored competition.
  • Divestitures of limited packages of assets performed less well than divestitures of ongoing businesses.
  • All remedies addressing vertical mergers that were part of the study were successful.
  • Remedies involving supermarkets, drug stores, funeral homes, dialysis clinics, and pharmaceuticals were generally successful.
  • The FTC's practices in implementing merger remedies are generally effective but had certain areas that could be improved.
At the end of the study, the FTC outlined best practices that respondents and proposed buyers should use in the merger remedy process to demonstrate that a proposed remedy would alleviate the harm to competition identified by the FTC.

Divestitures

Asset Package

The FTC stated that it prefers when a remedy includes a divestiture of an ongoing business as opposed to a limited package of assets. When proposing to divest an ongoing business, a respondent should:
  • Explain how the business is prepared to operate on its own.
  • Explain how a buyer can acquire and immediately begin operating that business.
  • Identify at least three legitimate potential buyers for that business.
  • Expect that the FTC will speak with potential buyers and market participants.
If a respondent chooses to divest a specific asset package instead of a business, it must demonstrate that divesting assets is likely to maintain or restore competition. A respondent divesting specific assets should:
  • Explain why divesting an ongoing business is not feasible or appropriate.
  • Show how the specific assets could function as a competitor in the market.
  • Explain the areas of the ongoing business that are excluded from the divested assets and how a buyer would fill that void, including the cost and time required to do so.
  • Provide a buyer with enough time and access to information to conduct due diligence.
A buyer of selected assets should:
  • Explain how it will maintain or restore competition with those assets.
  • Identify the additional assets and services it will need to operate as a competitive business.
  • Explain how it will obtain the additional assets and services, including the cost and time required to do so.
  • Record the cost and time estimates.

Back-Office Functions

The FTC stated that the successful transfer of back-office functions may be more important than the parties anticipate. If a buyer does not have the ability to perform back-office functions on its own or obtain those services from a third party, the respondent must either:
  • Provide those services on a transitional basis.
  • Divest the assets necessary to perform the back-office functions, if the functions are more specialized.
To help the FTC determine the scope of back-office functions that a buyer will need, the respondent should:
  • Identify to the FTC and the buyer all back-office functions, necessary personnel, and documentation related to the relevant products.
  • Confirm that a buyer can conduct sufficient due diligence to understand the necessary back-office functions and how those functions will be transferred.
  • Provide its own employees to discuss with buyer the transfer of back-office functions.
  • Provide the buyer with transitional back-office services until the buyer is able to transition all services.
The buyer should:
  • Identify the scope of the back-office functions it will need, how it will obtain those functions, and the cost of doing so.
  • Explain how long it will need transition services.

Proposed Buyer Review

The FTC stated that when proposing a buyer, the respondent should:
  • Explain the process of selecting the buyer.
  • Give the FTC any offering documents or other information it will provide potential buyers, before distribution.
  • Expect the FTC to speak with potential buyers and market participants.
The proposed buyer should:
  • Identify:
    • how it will finance the acquisition;
    • how it chose its financing sources; and
    • the structure of and limitations on the funding.
  • Explain how it and its financers evaluated and authorized the acquisition.
  • Provide details financial and business plans and any supporting documentation to show its competitive and financial strength.
  • Explain assumptions used to create its financial and business plans, including any contingency plans.
  • Provide FTC staff access to:
    • the necessary business representatives or employees, including from marketing, accounting, and sales; and
    • representatives from the financing entities.

Implementing the Remedy

To alleviate buyer concerns that implementing a remedy will be too difficult, the FTC suggested ways a respondent can make the implementation more seamless.

Due Diligence

The FTC stated that to allow a buyer an adequate opportunity to conduct due diligence, the respondent should provide the buyer:
  • Access to information, facilities, and employees as it would in an arm's length transaction.
  • Direct access to key employees identified in a remedy order.
  • If the buyer is upfront, direct access to the acquired business's information, facilities, and employees, and not require the buyer to work with the respondent's representatives.
  • If the buyer is post-order, direct access to the hold separate business, including the monitor and manager.
The buyer should:
  • Provide the FTC with any due diligence efforts specifics and any due diligence concerns.
  • If the divestiture is upfront, directly access the acquired business's information, facilities, and employees, not through a representative.
  • If the divestiture is post-order, directly access the hold separate business, monitor, and manager.

Customer and Third-Party Relationships

To help the transition with customers and other third-parties, the respondent should:
  • Provide the buyer with access to customers and other third parties early on in the transition process.
  • Inform its customers of:
    • the divestiture;
    • the buyer's identity; and
    • their right to terminate any contracts with the divesting firms without penalty.
  • If assignable, assign customer contracts to buyer.
  • If consent is required to assign contracts, help buyer obtain those consents.
  • If required, waive any restrictions that limit customers from switching to the buyer.
  • Help buyer obtain regulatory and governmental approvals.
The buyer should:
  • Utilize early access to customers and third parties.
  • Take steps to understand customer and third-party relationships, including:
    • buying patterns;
    • brand and product loyalty; and
    • switching costs.
  • If a contract is terminable, work with respondent to inform the customers of that right.

Supply Agreements

The FTC notes that, like transition services, supply agreements are often critical in ensuring a buyer's successful entry into a market. Respondents should ensure that a buyer has sufficient supply of a product or input to quickly enter the market. To that end, a respondent should:
  • Supply enough product or input to last through the product qualification process or the length of time the buyer takes to begin manufacturing the product or obtaining inputs on its own.
  • Allow the buyer to extend the supply time when necessary.

Hold Separates

If assets are required to be held separate, the respondent should help those assets stay competitive during the transition period. The respondent should:
  • Give the hold separate manager direct, independent access to staff.
  • Allow the hold separate manager to make competition decisions, including:
    • respond to market pricing;
    • determine proper production levels; and
    • implement planned capital investments.

Pharmaceutical Industry Remedies

The FTC stated that for successful pharmaceutical remedies, a respondent should:
  • Where possible, divest the easier-to-divest product, such as products already made by a third party.
  • Give a proposed buyer a complete set of information upfront so buyer can quickly assume respondent's place.
  • Work with the proposed buyer to develop a technology and manufacturing transfer plan and identify the employees necessary to oversee the transfer.
  • Retain an FTC-approved monitor before entry of the order to oversee development of the technology transfer.
A proposed pharmaceutical buyer should:
  • Identify all third-party manufacturers if the buyer will not manufacture the product in its own facilities.
  • Provide the FTC with business plans for products in development.

Communication

The FTC urged buyers or any affected party to immediately contact the FTC or any appointed monitor with any issues or concerns they have during the remedy process.
For more on merger remedies, see Practice Note, Merger Remedies and FTC Consent Order Process Flowchart.