Feds Taking a Harder Look at Mega-Mergers

Even as U.S. corporate mergers and acquisitions have grown consistently larger and more frequent in recent years, the potential for deals to run into an antitrust obstacle had seemed to grow ever more remote.

But now federal regulators are sending unmistakable signals that they are taking a closer look at big mergers, as well as the competitive practices of major corporations, and that they have the political backbone to challenge powerful interests.

The result is a government regulatory apparatus baring its teeth at Microsoft Chairman Bill Gates, the wealthiest American, and Lockheed Martin, the world’s largest arms maker. Deals in the airline, accounting, drug and telecom industries are getting a hard look.

This week, Lockheed hit a snag in its plan to buy Northrop Grumman, as the government objected. The news sent Northrop shares plunging $20.13 on Monday, and the stock lost more ground Tuesday, down $3.06 to $114 on the New York Stock Exchange. Lockeed shares fell $3.56 to $112.44 on Tuesday.

Any threat of a widespread crackdown on mergers could cast a shadow over stocks’ bull market, which has been fueled to a large degree by takeover mania. So far, however, the market isn’t spooked: Blue-chip stocks soared to new highs Tuesday.

Although the Federal Trade Commission and the Justice Department are not challenging a significantly larger percentage of mergers, they are taking a closer look at so-called strategic mergers that result in greater market concentration, said William Baer, who heads the FTC’s Bureau of Competition.

As more corporations attempt to live by the credo of being top dog in their industry, deals are increasingly cutting closer to what the government will allow. Antitrust regulators are seeing more mergers that combine the largest firms in already highly concentrated industries, Baer said.

“If everybody wants to be No. 1 or No. 2, then you are going to see a lot of markets where there are only going to be one or two competitors,” he said.

Mega-mergers that in the past might have sailed through the antitrust reviews now are finding the going far tougher, experts say.

“There is certainly a more critical approach to mergers and acquisitions than there was 10 years ago, when the attitude was fairly relaxed,” Baer said.

But the sheer volume of mergers means regulators are facing a more difficult task than ever evaluating deals. The squeeze on federal agency budgets has kept staffing nearly level, while deals are busting the record books.

In 1992, regulators examined 1,589 mergers that filed for review under the Hart Scott Rodino Antitrust Act. Last year the number was 3,702, and this year the number is expected to surpass 5,000.

The total number of merger transactions announced last year between U.S. companies totaled 9,992, worth $845 billion. That’s double the 4,950 deals worth just $139 billion announced in 1992, according to Securities Data Co., which tallies such deals.

Meanwhile, regulators have challenged or blocked more mergers. In 1997, the FTC challenged 27 deals and the Justice Department challenged 17. In 1991, the FTC challenged 14 and the Justice Department fought just four.

While the number of challenges to deals represents a tiny fraction of the total, it is the quality of the challenges that appears to be attracting attention.

Many mergers have involved companies facing an outlook for slow sales growth and seeking to boost their market share and earnings growth--and thereby stock value--by taking over competitors, in so-called horizontal mergers.

While the government has sought to block some of those deals--most recently, two separate mergers proposed by four large drug distributors--merger regulation since the early 1980s has largely avoided impeding U.S. companies in their push to become bigger and thus better able to compete with foreign rivals.

But key industrial sectors like defense also are seeing major firms attempt to vertically integrate, giving them the capability of building all the constituent parts of their products. Such firms can lock out competing parts makers.

It appears that is exactly what the Justice Department was worried about in the Lockheed Martin deal to buy Northrop for $11.6 billion. Lockheed would have the ability, for example, to build fighter jets with its own radar and electronic warfare systems and other electronics it would get from Northrop.

The issue is growing more important because of an economy-wide convergence of technologies, said Steven Sunshine, former antitrust chief at the Justice Department.

Big players are rushing to buy the capabilities they need to create new markets, such as putting video over telephone lines or putting the Internet over cable systems, which no single company has the know-how to do, Sunshine said.

But that is triggering new concentration worries. “What you are seeing is increased aggressiveness” by regulators, he said. “In terms of philosophy and substance, that hasn’t moved much in the last several years. But you are seeing an increased willingness to take on the tough cases.”

Challenges to vertical mergers are also more visible in cases where a company attempts to expand its reach--for example, from production to distribution, according to Keith Shugarman, chairman of the antitrust department at the Washington law firm of Goodwin Procter & Hoar.

Shugarman cites challenges to such deals as drug maker Eli Lilly’s acquisition of distributor PCS and, perhaps most prominent, the ongoing probe of Microsoft’s practices.

“There are signs that [vertical] issues are making a comeback” with regulators, said Sam Peltzman, professor of economics at the University of Chicago.

The government has objected to what it views as Microsoft’s ability to use its Windows operating system for personal computers to crush competition in other businesses, such as Internet browsers.

But in the case of most deals, the government’s primary focus hasn’t changed, experts say: Shugarman, a former FTC attorney, says the key question regulators ask themselves in judging a merger’s impact is whether “prices are likely to rise as a result of eliminating competition. . . . That is still the touchstone of antitrust analysis.”

The dramatic growth of data on major industries over the last 20 years, coupled with the power of personal computers, allows regulators to essentially create models demonstrating a given industry’s competitiveness and how it would be affected by fewer players.

Analysts say the bottom line is that rising business competition worldwide has made it tougher to justify blocking deals on pricing worries, because little pricing power exists in the global economy. That is why so many deals that would have attracted challenges in the 1950s and ‘60s are easily passing review today.

What’s more, the few deals that are challenged usually are settled--not in court, but in negotiations among corporate lawyers and regulators.

“Twenty years ago they would stop a deal entirely,” Shugarman said. “Now we can do more ‘laser surgery’ ” to make a deal palatable to regulators, often with the sale of certain businesses.

In any case, most experts don’t expect that heightened antitrust enforcement will significantly slow the pace of mergers.

“I don’t see it having a real chilling effect,” said Robert Sacks, an antitrust attorney at Sullivan & Cromwell in Los Angeles.

Ken Moelis, managing director of investment banking with Donaldson Lufkin & Jenrette, who has worked on such high-profile deals as Hilton Hotels’ unsuccessful bid for ITT, said antitrust issues are always an issue and will continue to be a focus. “It’s going to be deal-specific,” he said. “But I don’t see it changing the general trend toward mergers.”

Ian Pereira, principal with Morgan Stanley Dean Witter in Century City, agreed, saying he doesn’t see much of a change in antitrust challenges, because “it’s not exactly clear why they pick certain deals rather than others.”

But other experts say the government message is already having an impact, forcing corporations to more seriously ponder whether potential deals will get through federal review.

“Businessmen don’t like to waste their time in transactions that don’t pass muster,” Baer said. “The word is out there that both agencies are willing to go to court where consumers are at risk.”

Vartabedian reported from Washington; Petruno and Vrana reported from Los Angeles.