Merger & Acquisitions

End of an Era: The U.S. is No Longer the Authority Figure for Multinational Mergers

Recent 'Go / No-Go' Calls Made by U.K., E.U.

[Editor's Note: An earlier version of this post inaccurately described the work of the Federal Trade Commission. The authors wish to thank Bruce Hoffman, Director of the Bureau of Competition at the FTC from August 2017 to December 2019, who kindly provided useful commentary. Changes made June 11, 2020.]
In 2001, Time Magazine editor Michael Elliott asked legendary General Electric CEO Jack Welch to reflect on the termination of his dream acquisition of Honeywell International, not at the hands of U.S. antitrust agencies but by the European Commission. If consummated, the $45 billion deal would have been an enormous feather in Welch’s already well-feathered cap. Instead, it marked the first time a European competition agency would spoil a merger between two U.S. firms. “Should a European be able to shape a merger between two American companies?” Elliott asked. “That’s the law,” replied Welch. “That really is just the way the world works.” “We’d all better get used to it,” Elliott wrote, because “soon, something like it will happen again.”

Photo by Alex King on Unsplash

Elliott was correct. Not only have capable antitrust enforcers emerged in jurisdictions throughout the world, but the U.S. has also relaxed its own enforcement standards. As a result, the U.S. is often not the final antitrust arbiter when its multinational corporations merge. The termination of two recent deals – McGraw-Hill Education/Cengage Learning and Sabre Corp./Farelogix Inc. – illustrates this new world order, particularly as it relates to the U.K. Competition and Markets Authority (“CMA”).
U.S. agencies are also subject to the perception that European agencies are guiding international merger reviews even when they are not. U.S. enforcers must file and prepare to win a lawsuit to prohibit anticompetitive transactions; conversely, European competition authorities can simply issue a decision, which shifts the burden to the merging parties to seek a court order lifting the adverse decision. As a result, European agencies often issue findings more quickly, creating the impression they are dictating the review process. This is what happened in the review of the recently terminated merger between Pacific Biosciences of California, Inc. and Illumina, Inc. Despite the CMA and the FTC reaching similar conclusions in a similar timeframe, the CMA could voice its competition concerns publicly and solicit proposed remedies from the parties well before the FTC was prepared to file its complaint.
UK CMA Offers Most Resistance to McGraw-Hill and Cengage Merger
McGraw-Hill and Cengage, two leading multinational textbook publishers, announced their intention to merge in May 2019. The merger would have combined the second and third largest college textbook publishers, creating a duopoly with Pearson Plc that would have controlled more than 80% of the market. The merger threatened to create duopolies in related and emerging markets, including those for student learning data and all-inclusive textbook access fees. The merger also endangered pro-consumer markets like the used textbooks market.
Of the numerous agencies reviewing the merger, the CMA offered the greatest opposition. After conducting a Phase I investigation, the CMA gave the parties an ultimatum – provide remedies to the competition problems caused by the merger or face a Phase II investigation. The parties submitted remedies, but they were rejected because they “did not represent important enough constraints on educational publishers to offset the CMA’s concerns about the loss of competition arising from the merger.”
The U.S. Department of Justice, on the other hand, was reportedly in line to approve the merger with relatively minor divestitures. This decision was made despite detailed submissions by influential watchdog groups and student associations that outlined several of the competition problems caused by the merger.
Even U.S. lawmakers, who often fail to grasp nuanced antitrust issues, correctly pegged several of the competition problems associated with the merger. In a strongly worded letter to the DOJ, Rep. David N. Cicilline of Rhode Island, Chairman of the House Antitrust Subcommittee, and Rep. Jan Schakowsky of Illinois, Chairman of the House Consumer and Commerce Subcommittee, asked for increased scrutiny for the deal, citing its potential effects on textbook prices and student data, its impact on pro-consumer markets like that for used books, and its influence over whether the industry shifts to an inclusive access fee model, which “will completely remove students’ ability to price-shop and will prevent students from reselling textbooks.”
CMA Blocks Sabre/Farelogix Merger Despite U.S. Approval
Following an eight-day bench trial, a U.S. federal court greenlit airline booking services company Sabre Corp.’s acquisition of competitor and market disruptor Farelogix Inc., despite arguments by the DOJ that the deal would “extinguish crucial constraint on Sabre’s market power,” resulting in higher prices and less competition.
Although Sabre handles 50 percent of airline bookings made through U.S. travel agents and only a couple of other players occupy the market, U.S. Judge Leonard P. Stark ruled on April 7, 2020 that the DOJ hadn’t met its burden of proof and declined to enjoin the acquisition (United States v. Sabre Corp., No. 19-1548-LPS, 2020 U.S. Dist. LEXIS 64637 (D. Del. Apr. 7, 2020)).
Judge Stark’s decision seemed compelled by procedural and technical formalities, despite significant evidence that the acquisition was likely to harm competition. For example, he wrote that Farelogix “has historically been an innovator while Sabre has resisted change.” One airline executive testified, Farelogix “keeps GDS [global distribution systems] on their toes relative to innovating to keep up.” Sabre itself said in SEC filings that airlines with “direct connect initiatives” – like those offered by Farelogix – can weaken Sabre’s position when negotiating prices. Another airline executive described Farelogix’s direct connect technology as a “low cost substitute” for global distribution systems, like Sabre’s.
The judge acknowledged that allowing the deal may not seem in line with many of his findings “[o]n several points that received a great deal of attention at trial — whether Farelogix is a valuable company enjoying relative success in the market, whether Sabre and Farelogix compete, whether Sabre understands GDS bypass is a threat, whether Sabre stands to lose revenue even from the expansion of GDS passthrough, and Sabre's motivation for its proposed acquisition of Farelogix ….” On these issues the Court was more persuaded by the DOJ than by the merging parties “largely due to the surprising lack of credibility … of certain defense witnesses,” referring by name to the Sabre and Farelogix CEOs and the Sabre deal leader.
Despite this evidence, Judge Stark held “Defendants have won this case. This is because the burden of proof was on DOJ, not Defendants. Defendants opted to tell the Court a story that is not adequately supported by the facts, but it was their choice whether to do so, and their failing does not determine the outcome of this case. Instead, it is DOJ which, under the law, has the obligation to prove its contention that the Sabre-Farelogix transaction will harm competition in a relevant product and geographic market. DOJ failed.” The judge said the government based on the “simply unpersuasive” expert analysis. “Unlike Defendants’ evidentiary failings, DOJ’s are dispositive.”
The government selectively and “without persuasive explanation” dissected Sabre’s services into a category of “booking services,” leaving out the other services it provides to travel agencies, so the DOJ failed, according to the judge, to identify a relevant product market. This “does not accurately correspond to what actually is transacted in the market relevant to the proposed transaction,” Judge Stark found. Because Sabre operated a transaction platform for airline tickets between travel agents on one side and airlines on the other, the judge felt bound by the holding in Ohio v. American Express to require the DOJ to allege and prove harm to competition in a two-sided market. Because Sabre operated only on one side, providing services to airlines for both ticket sales as well as other transaction features not available on Sabre, the judge found it implausible that a firm like Sabre, which operates a two-sided transaction platform, would be competing in the same market.
As a result, the DOJ had failed in the court’s view to demonstrate harm to competition, prove new barriers to entry, establish the likelihood of increased prices, show that the deal would stifle innovation, or even identify a relevant geographic market.
A few days later, the CMA blocked the deal. Acknowledging that CMA’s decision comes at a challenging time for the travel industry due to the COVID-19 pandemic, CMA Chairman Martin Coleman nonetheless said, “It remains important that we protect competition among businesses that provide services to airlines and the benefits such competition can bring for airlines and passengers. We never take decisions to block mergers lightly and in this case the evidence of harm is clear.” Although we have no way of knowing, but the U.K.’s CMA would seem to agree with Judge Stark’s own comment that his ultimate decision “may strike some, including the litigants, as somewhat odd,” given his several findings that militated against the companies and their deal and in favor of the U.S. government’s case to block it.
Legal Constraints Created False Impression that the CMA Guided Illumina/PacBio Review
Illumina, which dominates the market for short-read DNA sequencing, announced in late 2018 that it would acquire PacBio, which dominates the emerging long-read DNA sequencing market. The central issue for the reviewing agencies was whether the companies are competitors, even though short- and long-read sequencing were traditionally viewed as poor substitutes.
In October 2019, the CMA issued provisional findings based on their view that the genetic sequencing industry is marked by rapidly developing and converging technology and, therefore, the companies are competitors in a single, dynamic market. The CMA reached its decision largely on the basis of non-price factors, including that merging parties (i) compete through innovation, (ii) are particularly attentive to one another’s innovations, and (iii) share a desire to be the preferred sequencer for as many projects as possible, including projects aimed at potential customers not currently in the market. The CMA concluded the deal was likely to reduce competition between the two firms, potentially increase prices or lead to a deterioration in quality or service, and harm innovation. The CMA indicated that its preferred resolution was to block the deal altogether rather than to regulate the parties’ behavior or require curative divestitures. Nonetheless, it permitted the parties to submit proposed remedies, which they did in mid-November.
In its complaint filed in mid-December 2019, the FTC identified many of the same competition problems as the CMA, ultimately concluding (i) the companies operated in the same market, (ii) the merger would perpetuate Illumina’s dominance in this market, and (iii) the merger was therefore unlawful. But, based on when the findings were disclosed, the FTC seemed to reach its conclusions months after the CMA, creating the impression that the CMA had taken the lead in challenging the transaction.
In truth, the difference in timing was likely attributable to procedural burdens faced by a U.S. competition authority seeking to block a transaction. Unlike the CMA, the FTC negotiates potential remedies with merging parties behind closed doors. Only after those negotiations end does the Commission publicly disclose its position in a complaint filed in federal court, which sometimes includes a settlement agreement reflecting a successfully negotiated remedy. In the Illumina/PacBio case, the parties could not achieve a negotiated remedy terminated the merger in January 2020.
Although both agencies reached the same conclusion at roughly the same time, the CMA publicly disclosed its opposition to the merger in mid-October, received proposed remedies from the merging parties in mid-November, and determined the proposed remedies to be insufficient in late November. It was not until mid-December, after all of this had occurred, that the FTC filed its complaint to block the deal.
Unlike other forms of international cooperation grounded in notions of comity and geopolitical realities, leadership in international merger clearance defaults to the jurisdiction with the most restrictive policy. For decades, the U.S. served in this role; merger clearance by the FTC or DOJ would practically ensure worldwide approval. But the E.C.’s decision to block the GE-Honeywell acquisition marked something of an inflection point in the path of global enforcement.
The actions by the DOJ and CMA regarding the Cengage/McGraw-Hill merger exemplify the simultaneous weakening in the U.S. and strengthening in Europe of substantive merger clearance standards and demands. The CMA applied the more expedient and, based on reports, more restrictive standard and therefore led the clearance process. By mid-March 2020, the CMA conducted an initial inquiry, considered and rejected proposed remedies by the merging parties, and referred the merger for a Phase 2 inquiry. Roughly six weeks later, Cengage and McGraw-Hill terminated the merger, strongly implying the CMA’s actions played a key role in stopping the deal. The DOJ, on the other hand, was reportedly poised to approve the merger with relatively minor divestitures, largely ignoring competition concerns raised by lawmakers and advocacy groups.
Global divergence in substantive standards also played out in the Sabre/Farelogix debacle, in which the U.S. government challenged the consolidation of two technology companies in the back-office reservation, ticketing, and sales market of the airline industry only to be confronted with seemingly insurmountable legal hurdles. Judge Stark’s mechanical and misguided interpretation of the Supreme Court’s holding in Ohio v. Amex—that the competitive effects in an antitrust case involving any transaction platform must be analyzed within a two-sided market definition—created an impossible legal hurdle for the government because the court ruled that only a two-sided transaction platform could compete against Sabre, a characterization that Farelogix did not fulfill.
Putting aside the wrong-headedness of the court’s interpretation of Amex (examples abound of anticompetitive conduct by a two-sided transaction platform that does not require defining a two-sided market), the greater sin may have been to elevate formalism over substance. It is well known that substantive rights can be rolled back through purely procedural maneuvers. In the Sabre-Farelogix case, the court created an excessively inflexible market definition requirement and reached a conclusion seemingly at odds with the evidence largely because the government failed to offer a prima facie case. In other words, the merging parties needn’t have bothered presenting their unreliable and misleading evidence. The court ruled the DOJ failed to make out its case in chief, so all the merging parties had to do was show up.
By contrast, the CMA satisfied its market definition and elemental requirements through overwhelming evidence that demonstrated Farelogix represented the most likely source of industry innovation and, as such, the most significant competitive constraint on Sabre’s market leadership. The U.S. court was aware of this, having noted that Farelogix represents the only real threat to Sabre and the testimony of one airline executive who said it would cost $40 million for an airline to develop its own platform and more than $20 million a year to maintain. An innovator like Farelogix could be easily and/or intentionally stymied if controlled by Sabre, a proposition that seemed self-evident to the CMA but was swallowed whole by the procedural obstacles erected by the U.S. court.
Indeed, the U.S.-European procedural divergence in merger control is deep-seated. U.S. authorities are required to prove a case in court to obtain an injunction, whereas agencies like the DG-Competition or the CMA can prohibit transactions without judicial intervention. This places the onus on the merging parties to challenge the injunction in court. One can prefer the U.S. system and harbor suspicion of the European approach, but the U.S. legal structure should not be become an instrument to roll back the reach of the antitrust laws, as appeared to be the case in the Sabre-Farelogix litigation.
Thus, even when U.S. and European agencies reach the same conclusions in a similar timeframe, the legal hurdles faced by U.S. agencies can create the impression that the European agencies are guiding the process, a phenomenon that played out in the review of the Illumina/PacBio merger.
Although both the FTC and CMA indicated they would seek to block the merger for similar reasons, the FTC simply could not publicly discuss either its competition concerns or its negotiations with the merging parties prior to filing its complaint in federal court. And where a U.S. authority does not challenge a merger, the record of its analysis and negotiations with the parties remain private. Observers following a review process in the trans-Atlantic context are likely to consider the CMA as the principal competition agency guiding the review.
In terms of both substantive competition law and the procedural demands underlying the review process, the U.S and Europe appear headed in opposite directions. And, based on the three deals discussed above, the U.S. is where adjustments need to be made to enhance the overall efficiency of the world’s merger approval process.
Edited by Tom Hagy for MoginRubin LLP.

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