Covid-19 has brought iconic companies to their knees. Many predict a coming wave of failures in hard-hit industries such as commercial real estate, hospitality, and travel. These economic conditions create challenges—but also opportunities for companies and investors that are thinking strategically.
In assessing whether to make a move, you’ll need to understand when economic conditions may be advantageous in shepherding a transaction through regulatory approval.
The antitrust rules governing mergers and acquisitions apply with full force during a down economy. But economic conditions can impact the extent to which a transaction may harm competition. For example, if a firm and its assets would exit the market without a merger, then the merger is unlikely to have anti-competitive consequences.
Poor economic conditions typically impact merger analysis through the “failing firm” defense. Many jurisdictions, including the U.S., U.K., and EU, recognize versions of this defense, which generally focuses on two issues: (1) Is the target firm on the brink of a failure that cannot be remedied through a bankruptcy reorganization? and (2) Has the firm sought alternative transactions that do not raise the same anticompetitive concerns?
Beyond the failing-firm defense, poor economic conditions may create pro-competitive efficiencies that would not otherwise exist. For example, if credit markets freeze, a merger of a stronger rival with a weaker one could provide access to capital needed to compete or expand.
Regulatory officials will look with a jaundiced eye at any claim that the economic conditions justify a transaction that otherwise might harm competition. As a senior Federal Trade Commission official recently warned, the agency “will not relax the stringent conditions that define a genuinely ‘failing’ firm” and “will not relax the intensity of our scrutiny or the vigor of our enforcement efforts” in response to the pandemic.
Steps to Help Maximize a Merger Success
Nonetheless, regulators have also made clear that antitrust “analysis must always reflect market realities, including financial distress at the industry and/or firm level.”
In other words, real-world economic conditions matter, but platitudes that a merger is necessary to survive or thrive considering those conditions will not suffice. You will need to prove that economic conditions justify the transaction.
Taking these practical steps can help maximize your chances of success:
1. Assess whether the target firm is really failing. The target firm’s financial condition is central to any potential transaction and that is no different here. But the antitrust focus is on whether the firm will fail absent the deal. If it doesn’t raise capital now, how long could it survive? Will the economy improve over that time? Is any financial weakness the result of a short-term cash crunch that the target could alleviate short of a sale?
The goal is to assess whether the transition is necessary to keep the weakened firm’s assets in the market. Consider hiring investment bankers or bankruptcy counsel to advise on these issues.
2. Assess the economic condition of the relevant market. The condition of the broader industry is also important. Certain markets—think commercial leasing, travel, and hospitality—may suffer long-term structural losses as the economy adjusts post-pandemic (e.g., less office space and travel are needed). Firms in these markets may exit regardless of any particular transaction, in which case the proposed transaction may have little real-world impact on competition.
Conversely, if the market is emerging, regulators may be skeptical of any deal in which a dominant firm buys a nascent rival, even if the rival is in dire straits.
3. Assess alternatives. In any scenario, regulators will consider other options available to the target firm. Can you offer pro-competitive benefits that others cannot? Are you in a uniquely strong financial position to ensure that the target firm’s assets will, in the long-term, continue in the market? Do your products offer unique synergies with the target firm compared to other bidders?
4. Timing matters. The justification for a merger may exist at the beginning of an economic crisis but not later. For instance, in April, U.K. competition officials at the Competition and Markets Authority provisionally blessed Amazon’s purchase of a 16% stake in meal delivery service Deliveroo because Deliveroo demonstrated that it would have exited the market without Amazon’s investment.
But the CMA rejected a failing-firm defense in its August final order on the transaction because of the improved condition of both Deliveroo and the broader economy, approving the deal on other grounds. As economic conditions change, so will regulators’ view of the competitive analysis of a transaction. The timing of when you present these issues to the relevant agencies will matter.
5. Maintain your credibility. The head of the FTC’s Bureau of Competition observed a marked increase in “failing firm” arguments when the pandemic began. He was not impressed, noting that the FTC rarely accepted those arguments and warning that counsel who frequently invoked failing-firm arguments “on behalf of businesses that go on to make miraculous recoveries may find that we apply particularly close scrutiny to similar claims in their future cases.”
So, it is critical that merging parties evaluate with clear eyes whether a transaction qualifies under the “failing firm” defense or generates pro-competitive efficiencies that flow from dire economic conditions. Making weak arguments on either front will be counter-productive, both for the immediate transaction and the company’s and counsel’s future interactions with regulators.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Daniel T. Fenske is an antitrust and competition partner at Mayer Brown LLP. He would like to thank his Mayer Brown colleagues Meytal McCoy, Jessica Michaels, and Mark Ryan for their helpful comments on this article.