Mergers Acquisitions And Other Restructuring Activities 7th Edition by Donald DePamphilis -Test Bank

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Mergers Acquisitions And Other Restructuring Activities 7th Edition by Donald DePamphilis -Test Bank



Mergers Acquisitions And Other Restructuring Activities 7th Edition by Donald DePamphilis -Test Bank

Chapter 2

The Regulatory Environment



Examination Questions and Answers


Answer true or false to the following questions.


  1. Insider trading involves buying or selling securities based on knowledge not available to the general public. True or False

Answer: True


  1. The primary reason the Sarbanes-Oxly Act of 2002 was passed was to eliminate insider trading. True or False

Answer: False


  1. Federal antitrust laws exist to prevent individual corporations from assuming too much market power such that they can limit their output and raise prices without concern for any significant competitor reaction. True or False

Answer: True


  1. A typical consent decree for firms involved in a merger requires the merging parties to divest overlapping businesses or to restrict anticompetitive practices. True or False

Answer: True


  1. Foreign competitors are not relevant to antitrust regulators when trying to determine if a merger of two domestic firms would create excessive pricing power. True or False

Answer: False


  1. The U.S. Securities Act of 1933 requires that all securities offered to the public must be registered with the government. True or False

Answer: True


  1. Mergers and acquisitions are subject to federal regulation only. True or False

Answer: False


  1. Whenever either the acquiring or the target firms stock is publicly traded, the transaction is subject to the substantial reporting requirements of federal securities laws. True or False

Answer: True


  1. Antitrust laws exist to prevent individual corporations from assuming too much market power such that they can limit their output and raise prices without concern for how their competitors might react. True or False

Answer: True


  1. Unlike the Sherman Act, which contains criminal penalties, the Clayton Act is a civil statute and allows private parties injured by the antitrust violations to sue in federal court for a multiple of their actual damages. True or False

Answer: True


  1. The Williams Act of 1968 consists of a series of amendments to the Securities Act of 1933, and it is intended to protect target firm shareholders from lighting fast takeovers in which they would not have enough time to adequately assess the value of an acquirers offer. True or False

Answer: True


  1. Whenever an investor acquires 5% or more of public company, it must disclose its intentions, the identities of all investors, their occupation, sources of financing, and the purpose of the acquisition. True or False

Answer: True


  1. Whenever an investor accumulates 5% or more of a public companys stock, it must make a so-called 13(d) filing with the SEC. True or False

Answer: True


  1. If an investor initiates a tender offer, it must make a 14(d) filing with the SEC. True or False

Answer: True


  1. In the U.S., the Federal Trade Commission has the exclusive right to approve mergers and acquisitions if they are determined to be potentially anti-competitive. True or False

Answer: False


  1. In the U.S., the Sherman Act makes illegal all contracts, combinations and conspiracies, which unreasonably restrain trade. The Act applies to all transactions and businesses engaging in both interstate and intrastate trade.  True or False

Answer: False


  1. Acquisitions involving companies of a certain size cannot be completed until certain information is supplied to the federal government and until a specific waiting period has elapsed.

True or False

Answer: True


  1. If the regulatory authorities suspect that a potential transaction may be anti-competitive, they will file a lawsuit to prevent completion of the transaction. True or False

Answer: True


  1. Under a consent decree, the regulatory authorities agree to approve a proposed transaction if the parties involved agree to take certain actions following closing. True or False

Answer: True


  1. Negotiated agreements between the buyer and seller rarely have a provision enabling the parties to back out, if the proposed transaction is challenged by the FTC or SEC. True or False

Answer: False


  1. About 40% of all proposed M&A transactions are disallowed by the U.S. antitrust regulators, because they are believed to be anti-competitive. True or False

Answer: False


  1. The U.S. antitrust regulators are likely to be most concerned about vertical mergers. True or False

Answer: False


  1. The market share of the combined firms is rarely an important factor in determining whether a proposed transaction is likely to be considered anti-competitive. True or False

Answer: False


  1. A heavily concentrated market is one in which a single or a few firms control a disproportionately large share of the total market. True or False

Answer: True


  1. Market share is usually easy to define. True or False

Answer: False


  1. U.S. antitrust regulators may approve a horizontal transaction even if it results in the combined firms having substantial market share if it can be shown that significant cost efficiencies would result. True or False

Answer: True


  1. In addition to market share, antitrust regulators consider barriers to entry, the number of product substitutes, and the degree of product differentiation. True or False

Answer: True


  1. Antitrust authorities may approve a proposed takeover even if the resulting combination will substantially increase market concentration if the target from would go bankrupt if the takeover does not occur. True or False

Answer: True


  1. Alliances and joint ventures are likely to receive more intensive scrutiny by regulators because of their tendency to be more anti-competitive than M&As. True or False

Answer: False


  1. U.S. antitrust regulators in determining if a proposed business combination is likely to be anti-competitive consider only domestic competitors or foreign competitors with domestic operations. True or False

Answer: False


  1. Antitrust regulators rarely consider the impact of a proposed takeover on product and technical innovation. True or False

Answer: False


  1. There are no state statutes affecting proposed takeovers. True or False

Answer: False


  1. States are not allowed to pass any laws that impose restrictions on interstate commerce or that conflict in any way with federal laws regulating interstate commerce. True or False

Answer: True


  1. Some state anti-takeover laws contain so-called fair price provisions requiring that all target shareholders of a successful tender offer receive the same price as those who actually tendered their shares. True or False

Answer: True


  1. State antitrust laws are usually quite similar to federal laws. True or False

Answer: True


  1. Under federal law, states have the right to sue to block mergers they believe are anti-competitive, even if the FTC or SEC does not challenge them. True or False

Answer: True


  1. Federal securities and antitrust laws are the only laws affecting corporate takeovers. Other laws usually have little impact.  True or False

Answer: False


  1. Employee benefit plans seldom create significant liabilities for buyers. True or False

Answer: False


  1. Unlike the European Economic Union, a decision by U.S. antitrust regulators to block a transaction may be appealed in the courts. True or False

Answer: True


  1. The primary shortcoming of industry concentration ratios is the frequent inability of antitrust regulators to define accurately what constitutes an industry, the failure to reflect ease of entry or exit, foreign competition, and the distribution of firm size. True or false

Answer: True


  1. Antitrust regulators take into account the likelihood that a firm would fail and exit a market if it is not allowed to merger with another firm. True or False

Answer: True


  1. Efficiencies rarely are considered by antitrust regulators in determining whether to accept or reject a proposed merger. True or False

Answer: False


  1. The Herfindahl-Hirschman Index is a measure of industry concentration used by U.S. antitrust regulators in determining whether to accept or reject a proposed merger. True or False

Answer: True


  1. Horizontal mergers are rarely rejected by antitrust regulators. True or False

Answer: False


  1. The Sherman Act makes illegal all contracts, combinations, and conspiracies that unreasonably restrain trade. True or False

Answer: True


  1. The requirements to be listed on most major public exchanges far exceed the auditor independence requirements of the Sarbanes-Oxley Act. True or False

Answer: True


  1. U.S. and European Union antitrust law are virtually identical. True or False

Answer: False


  1. Transactions involving firms in different countries are complicated by having to deal with multiple regulatory jurisdictions in specific countries or regions. True or False

Answer: True


  1. Antitakeover laws do not exist at the state level. True or False

Answer: False


  1. Environmental laws in the European Union are generally more restrictive than in the U.S. True or False

Answer: True


Multiple Choice: Circle only one of the alternatives.


  1. In determining whether a proposed transaction is anti-competitive, U.S. regulators look at all of the following except for


  1. Market share of the combined businesses
  2. Potential for price fixing
  3. Ease of new competitors to enter the market
  4. Potential for job loss among target firms employees
  5. The potential for the target firm to fail without the takeover

Answer: D


  1. Which of the following is among the least regulated industries in the U.S.?


  1. Defenses
  2. Communications
  3. Retailing
  4. Public utilities
  5. Banking

Answer: C


  1. All of the following are true of the Williams Act except for


  1. Consists of a series of amendments to the 1934 Securities Exchange Act
  2. Facilitates rapid takeovers over target companies
  3. Requires investors acquiring 5% or more of a public company to file a 13(d) with the SEC
  4. Firms undertaking tender offers are required to file a 14(d)-1 with the SEC
  5. Acquiring firms initiating tender offers must disclose their intentions and business plans

Answer: B


  1. The Securities Act of 1933 requires the registration of all securities issued to the public. Such

registration requires which of the following disclosures:


  1. Description of the firms properties and business
  2. Description of the securities
  3. Information about management
  4. Financial statements audited by public accountants
  5. All of the above.

Answer: E


  1. All of the following is true about proxy contests except for


  1. Proxy materials must be filed with the SEC immediately following their distribution to investors
  2. The names and interests of all parties to the proxy contest must be disclosed in the proxy materials
  3. Proxy materials may be distributed by firms seeking to change the composition of a target firms board of directors
  4. Proxy materials may be distributed by the target firm seeking to influence how their shareholders vote on a particular proposal
  5. Target firm proxy materials must be filed with the SEC.

Answer: A


  1. The purpose of the 1968 Williams Act was to


  1. Give target firm shareholders time to review takeover proposals
  2. Prosecute target firm shareholders who misuse information
  3. Protect target firm employees from layoffs
  4. Prevent tender offers
  5. Promote tender offers

Answer: A


  1. Which of the following represent important shortcomings of using industry concentration ratios to

determine whether the combination of certain firms will result in an increase in market power?


  1. Frequent inability to define what constitutes an industry
  2. Failure to measure ease of entry or exit for other firms
  3. Failure to account for foreign competition
  4. Failure to account properly for the distribution of firms of different sizes
  5. All of the above

Answer: E


  1. In a tender offer, which of the following is true?


  1. Both acquiring and target firms are required to disclose their intentions to the SEC
  2. The targets management cannot advise its shareholders how to respond to a tender offer until has disclosed certain information to the SEC
  3. Information must be disclosed only to the SEC and not to the exchanges on which the targets shares are traded
  4. A and B
  5. A, B, and C

Answer: D


  1. Which of the following are true about the Sherman Antitrust Act?


  1. Prohibits business combinations that result in monopolies.
  2. Prohibits business combinations resulting in a significant increase in the pricing power of a single firm.
  3. Makes illegal all contracts unreasonably restraining trade.
  4. A and C only
  5. A, B, and C

Answer: E


  1. All of the following are true of the Hart-Scott-Rodino Antitrust Improvements Act except for


  1. Acquisitions involving firms of a certain size cannot be completed until certain information is supplied to the FTC
  2. Only the acquiring firm is required to file with the FTC
  3. An acquiring firm may agree to divest certain businesses following the completion of a transaction in order to get regulatory approval.
  4. The Act is intended to give regulators time to determine whether the proposed combination is anti-competitive.
  5. The FTC may file a lawsuit to block a proposed transaction

Answer: B


  1. All of the following are true of antitrust lawsuits except for


  1. The FTC files lawsuits in most cases they review.
  2. The FTC reviews complaints that have been recommended by its staff and approved by the FTC
  3. FTC guidelines commit the FTC to make a final decision within 13 months of a complaint
  4. As an alternative to litigation, a company may seek to negotiate a voluntary settlement of its differences with the FTC.
  5. FTC decisions can be appealed in the federal circuit courts.

Answer: A


  1. All of the following are true about a consent decree except for


  1. Requires the merging parties to divest overlapping businesses
  2. An acquirer may seek to negotiate a consent decree in advance of consummating a deal.
  3. In the absent of a consent decree, a buyer usually makes the receipt of regulatory approval necessary to closing the deal.
  4. FTC studies indicate that consent decrees have historically been largely ineffectual in promoting competition
  5. Consent decrees tend to be most effective in promoting competition if the divestitures made by the acquiring firms are to competitors.

Answer: D


  1. U.S. antitrust regulators are most concerned about what types of transaction?


  1. Vertical mergers
  2. Horizontal mergers
  3. Alliances
  4. Joint ventures
  5. Minority investments

Answer: B


  1. Which of the following are used by antitrust regulators to determine whether a proposed

transaction will be anti-competitive?


  1. Market share
  2. Barriers to entry
  3. Number of substitute products
  4. A and B only
  5. A, B, and C

Answer: E


  1. European antitrust policies differ from those in the U.S. in what important way?


  1. They focus on the impact on competitors
  2. They focus on the impact on consumers
  3. They focus on both consumers and competitors
  4. They focus on suppliers
  5. They focus on consumers, suppliers, and competitors

Answer: A


  1. Which other types of legislation can have a significant impact on a proposed transaction?


  1. State anti-takeover laws
  2. State antitrust laws
  3. Federal benefits laws
  4. Federal and state environmental laws
  5. All of the above

Answer: E


  1. State blue sky laws are designed to


  1. Allow states to block M&As deemed as anticompetitive
  2. Protect individual investors from investing in fraudulent securities offerings
  3. Restrict foreign investment in individual states
  4. Protect workers pensions
  5. Prevent premature announcement of M&As

Answer: B


  1. All of the following are examples of antitakeover provisions commonly found in state statutes except for


  1. Fair price provisions
  2. Business combination provisions
  3. Cash-out provisions
  4. Short-form merger provisions
  5. Share control provisions

Answer: D


  1. A collaborative arrangement is a term used by regulators to describe agreements among competitors for all of the following except for


  1. Joint ventures
  2. Strategic alliances
  3. Mergers and acquisitions
  4. A & B only
  5. A & C only

Answer: C


  1. Vertical mergers are likely to be challenged by antitrust regulators for all of the following reasons except for


  1. An acquisition by a supplier of a customer prevents the suppliers competitors from having access to the customer.
  2. The relevant market has few customers and is highly concentrated
  3. The relevant market has many suppliers.
  4. The acquisition by a customer of a supplier could become a concern if it prevents the customers competitors from having access to the supplier.
  5. The suppliers products are critical to a competitors operations

Answer: C


  1. All of the following are true of the U.S. Foreign Corrupt Practices Act except for which of the following:


  1. The S. law carries anti-bribery limitations beyond U.S. political boundaries to within the domestic boundaries of foreign states.
  2. This Act prohibits individuals, firms, and foreign subsidiaries of S. firms from paying anything of value to foreign government officials in exchange for obtaining new business or retaining existing contracts.
  3. The Act permits so-called facilitation payments to foreign government officials if relatively small amounts of money are required to expedite goods through foreign custom inspections, gain approvals for exports, obtain speedy passport approvals, and related considerations.
  4. The payments described in c above are considered legal according to S. law and the laws of countries in which such payments are considered routine
  5. Bribery is necessary if a S. company is to win a contract that comprises more than 10% of its annual sales.

Answer: E


  1. Foreign direct investment in U.S. companies that may threaten national security is regulated by which of the following:


  1. Hart-Scott-Rodino Antitrust Improvements Act
  2. Defense Production Act
  3. Sherman Act
  4. Federal Trade Commission Act
  5. Clayton Act

Answer: B


  1. A diligent buyer must ensure that the target is in compliance with the labyrinth of labor and benefit laws, including those covering all of the following except for


  1. Sexual harassment
  2. Age discrimination,
  3. National security
  4. Drug testing
  5. Wage and hour laws.

Answer: C


  1. All of the following factors are considered by U.S. antitrust regulators except for


  1. Market share
  2. Potential adverse competitive effects
  3. Barriers to entry
  4. Purchase price paid for the target firm
  5. Efficiencies created by the combination

Answer: D


  1. The Sarbanes-Oxley bill is intended to achieve which of the following:


  1. Auditor independence
  2. Corporate responsibility
  3. Improved financial disclosure
  4. Increased penalties for fraudulent behavior
  5. All of the above

Answer: E


Case Study Short Essay Examination Questions


Overcoming Regulatory Hurdles: Exelon Buys Constellation Energy


Key Points:

  • Rising costs associated with more stringent environmental laws and the need to upgrade power grids are spurring consolidation in the fragmented U.S. electric utility industry.
  • However, acquiring utilities often is particularly challenging due to the complex regulatory approval process.


Reflecting increased demands for clean power, an aging electric power grid and other infrastructure, and the rising cost of fuels to generate power, the highly fragmented U.S. electric utility industry has undergone significant consolidation in recent years.  By achieving increased scale, electric utilities are hoping to lower operating costs and gain the financial strength to finance the necessary investments in infrastructure and alternative energy sources. Utilities also are increasingly confronted by a combination of regulated and non-regulated electricity markets.


In most retail electricity markets in which electricity is sold directly to the end customer, rates that can be charged are regulated by local public utility commissions.  While some utilities own their own generating capacity, others are dependent to varying degrees on purchasing electric power in the wholesale power market.  A wholesale electricity market exists when competing generators offer their electricity output to retailers. Increasingly, large end-users can bypass retail electric utility companies to buy directly from wholesale power generators in a bid to access lower cost power by eliminating the middleman. Some states allow competition in their electricity markets while others do not. In competitive markets, power suppliers, including renewable and conventional oil and gas power generators, compete against each other to provide the best possible service at the lowest cost in order to attract and retain customers. In contrast, in monopoly-regulated states, power providers have no incentive to innovate or lower costs because ratepayers are captive to their monopoly-protected supplier.


Some utilities are attempting to shift to a mix of regulated and non-regulated electricity markets. The latest illustration of this strategy is Exelon Corps acquisition of Constellation Energy for $7.9 billion in April 2011.  The deal creates the largest electric utilityand power generator in the U.S. The combined firm will gain stakes in five nuclear reactors and become the largest U.S. electricity marketer. Exelon is currently the largest owner and operator of U.S. nuclear plants and owns electric utilities Commonwealth Edison in Chicago and Peco Energy in Pennsylvania. Constellation owns the utility Baltimore Gas & Electric. Most of its revenue comes from the retail sale of electricity in states that allow competition. The merger creates the number one competitive energy provider with one of the industrys cleanest and lowest cost power generation plant systems in the country.


The combined company will keep the Exelon name and its headquarters in Chicago, as well as own more than 34 gigawatts of power generation. The companys power generation mix would be 55 percent nuclear, 24 percent natural gas, 6 percent hydro and renewable, and 7 percent oil, and 6 percent coal.  Exelon will add 1.2 million electric customers in Constellation service areas.


This deal is Exelons largest transaction. Exelon has tried unsuccessfully three times to buy other electric power companies since 2003. Exelon was thwarted by regulators in efforts to buy independent power producer NRG Energy in 2009, Public Service Enterprise Group in 2006, and Illinois Power in 2003. Constellation has been the target of two failed bids by other suitors. A $14.8 billion sale of Constellation to NextEra Energy Inc., the largest U.S. wind-power generator and owner of Floridas largest utility, collapsed in 2005.


Exelon announced on December 20, 2011 that it had received approval by the U.S. Justice Department to buy Constellation Energy Group Inc. The approval was contingent on Exelon selling three electricity generating plants in Maryland. The sale of the three power plants in the Baltimore area will significantly reduce the combined firms market share in that region.  The Justice Department believed that the combination, as originally proposed, would have lessened competition in the wholesale electricity market and increased prices for consumers in the Mid-Atlantic states (i.e., New York, Pennsylvania, and Maryland). Exelon and Constellation have also received regulatory approval from the Maryland and New York regulators as well as the Nuclear Regulatory Commission.


Discussion Questions:


  1. What is anti-trust policy and why is it important? Why might its application be particularly important in the utility industry?


Answer: Anti-trust policy is a government policy intended to prevent firms from achieving excessive pricing power, i.e., the ability to raise prices to levels much higher than could have been achieved under more competitive conditions.  Firms achieving monopoly or near-monopoly status usually charge higher prices and produce at lower output and therefore employment levels than would have existed under more competitive conditions.  By working to prevent monopoly conditions, anti-trust policy if applied reasonably results in lower average prices, greater product selection, higher employment levels, and possibly more product and service innovation.


The utility industry often is described as a natural monopoly in that the high level of capital requirements often makes it economically impractical to have multiple utilities competing in the same market.  Even where alternative power sources exist in a wholesale market giving large retail users the opportunity to bypass retail utilities to buy in the wholesale market, the barriers (both capital and regulatory) are often so high as to discourage new entrants. In the absence of a competitive market, rates charged utility customers are heavily regulated.


  1. How does the FTC define market share? In the electric utility market, to what extent does this methodology apply?  To what extent does it not apply?


Answer: The market is generally defined by the regulators as a product or group of products offered in a specific geographic area.  Market participants are those currently producing and selling these products in this geographic area, as well as potential entrants. Regulators calculate market shares of all firms identified as market participants based on total sales or capacity currently devoted to the relevant markets.  In addition, the market share estimates include capacity that is likely to be diverted to this market in response to a small, but significant and sustainable, increase in price.


The emergence of wholesale energy markets in which multiple power generators  compete for customers and in which subsidized renewable energy suppliers offer new sources of supply requires that traditional notions of the retail market as a natural monopoly should be discarded. Rather the market needs to include both the retail and wholesale markets.


  1. What factors other than market share should be considered in determining whether a potential merger might result in an increased pricing power? Of these factors, which do you believe represent the most important justifications for the merger of Exelon and Constellation?


Answer:  Other factors include the availability of substitute products and services, ease of entering the market, customer price sensitivity, the impact on employment, and the potential for improved operating efficiency as a result of the merger. The later factor is often cited as a justification for allowing businesses to combine if there is reason to believe that the resulting combination will result in an overall improvement in efficiency due to economies of scale and scope and subsequently potentially lower prices in the long-run.


The merger of Constellation Energy and Exelon offered the prospect of improved operating efficiency and potentially lower prices for the firms customers. By dramatically expanding the firms customer base, existing power plants could be run at a higher average operating rate to take advantage of economies of scale. This would be especially important for the nuclear power plants which usually have extremely startup costs that must be recovered by the utility operator to cover the firms capital costs.


Justice Department Requires VeriFone Systems to Sell Assets

before Approving Hypercom Acquisition

Key Points:

  • Asset sales commonly are used by regulators to thwart the potential build-up of market power resulting from a merger or acquisition.
  • In such situations, defining the appropriate market served by the merged firms is crucial to identifying current and potential competitors.



In late 2011, VeriFone Systems (VeriFone) reached a settlement with the U.S. Justice Department to acquire competitor Hypercom Corp on the condition it sold Hypercoms U.S. point-of-sale terminal business. Business use point-of-sale terminals are used by retailers to accept electronic payments such as credit and debit cards.


The Justice Department had sued to block the $485 million deal on concerns that the combination would limit competition in the market for retail checkout terminals. The asset sale is intended to create a significant independent competitor in the U.S. The agreement stipulates that private equity firm Gores Group LLC will buy the terminals business.


San Jose, California-based VeriFone is the second largest maker of electronic payment equipment in the U.S. and Hypercom, based in Scottsdale, Arizona, is number three. Together, the firms control more than 60 percent of the U.S. market for terminals used by retailers. Ingenico SA, based in France, is the largest maker of card-payment terminals. The Justice Department had blocked a previous attempt to sell Hypercoms U.S. point-of-sale business to rival Ingenico, saying that it would have increased concentration and undermined competition.


VeriFone will retain Hypercoms point-of-sale equipment business outside the U.S. The acquisition will enable VeriFone to expand in the emerging market for payments made via mobile phones by giving it a larger international presence in retail stores and the opportunity to install more terminals capable of accepting mobile phone payments abroad.

Discussion Questions


  1. Do you believe requiring consent decrees that oblige the acquiring firm to dispose of certain target

company assets is an abuse of government power? Why or why not?


U.S. antitrust regulators are required to promote the smooth functioning of interstate commerce.  The sale of assets to create a viable competitor to the combined firms requesting regulatory approval is a fair means of preserving competition in certain markets. It is fair in that the firms requesting approval do not have to accept the asset sale and can choose not to combine. The challenge for the regulators is to properly define the served market by the combined firms and in turn the current and potential competitors.


  1. What alternative actions could the government take to limit market power resulting from a business



Answer: Regulators could require the combined firms to submit to price controls or to subject price increases to regulatory approval. However, this is likely to slow the ability of management to make good business decisions and introduces an element of uncertainty into any business decision in that the price change may not be approved.


The Legacy of GEs Aborted Attempt to Merge with Honeywell


Many observers anticipated significant regulatory review because of the size of the transaction and the increase in concentration it would create in the markets served by the two firms. Most believed, however, that, after making some concessions to regulatory authorities, the transaction would be approved, due to its perceived benefits. Although the pundits were indeed correct in noting that it would receive close scrutiny, they were completely caught off guard by divergent approaches taken by the U.S. and EU antitrust authorities. U.S regulators ruled that the merger should be approved because of its potential benefits to customers. In marked contrast, EU regulators ruled against the transaction based on its perceived negative impact on competitors.


Honeywells avionics and engines unit would add significant strength to GEs jet engine business. The deal would add about 10 cents to GEs 2001 earnings and could eventually result in $1.5 billion in annual cost savings. The purchase also would enable GE to continue its shift away from manufacturing and into services, which already constituted 70 percent of its revenues in 2000.[1] The best fit is clearly in the combination of the two firms aerospace businesses. Revenues from these two businesses alone would total $22 billion, combining Honeywells strength in jet engines and cockpit avionics with GEs substantial business in larger jet engines. As the largest supplier in the aerospace industry, GE could offer airplane manufacturers one-stop shopping for everything from engines to complex software systems by cross-selling each others products to their biggest customers.


Honeywell had been on the block for a number of months before the deal was consummated with GE. Its merger with Allied Signal had not been going well and contributed to deteriorating earnings and a much lower stock price. Honeywells shares had declined in price by more than 40 percent since its acquisition of Allied Signal. While the euphoria surrounding the deal in late 2000 lingered into the early months of 2001, rumblings from the European regulators began to create an uneasy feeling among GEs and Honeywells management.


Mario Monti, the European competition commissioner at that time, expressed concern about possible conglomerate effects or the total influence a combined GE and Honeywell would wield in the aircraft industry. He was referring to GEs perceived ability to expand its influence in the aerospace industry through service initiatives. GEs services offerings help differentiate it from others at a time when the prices of many industrial parts are under pressure from increased competition, including low-cost manufacturers overseas. In a world in which manufactured products are becoming increasingly commodity-like, the true winners are those able to differentiate their product offering. GE and Honeywells European competitors complained to the EU regulatory commission that GEs extensive services offering would give it entre into many more points of contact among airplane manufacturers, from communications systems to the expanded line of spare parts GE would be able to supply. This so-called range effect or portfolio power is a relatively new legal doctrine that has not been tested in transactions of this size.[2]


On May 3, 2001, the U.S. Department of Justice approved the buyout after the companies agreed to sell Honeywells helicopter engine unit and take other steps to protect competition. The U.S. regulatory authorities believed that the combined companies could sell more products to more customers and therefore could realize improved efficiencies, although it would not hold a dominant market share in any particular market. Thus, customers would benefit from GEs greater range of products and possibly lower prices, but they still could shop elsewhere if they chose. The U.S. regulators expressed little concern that bundling of products and services could hurt customers, since buyers can choose from among a relative handful of viable suppliers.


To understand the European position, it is necessary to comprehend the nature of competition in the European Union. France, Germany, and Spain spent billions subsidizing their aerospace industry over the years. The GEHoneywell deal has been attacked by their European rivals from Rolls-Royce and Lufthansa to French avionics manufacturer Thales. Although the European Union imported much of its antitrust law from the United States, the antitrust law doctrine evolved in fundamentally different ways. In Europe, the main goal of antitrust law is to guarantee that all companies be able to compete on an equal playing field. The implication is that the European Union is just as concerned about how a transaction affects rivals as it is consumers. Complaints from competitors are taken more seriously in Europe, whereas in the United States it is the impact on consumers that constitutes the litmus test. Europeans accepted the legal concept of portfolio power, which argues that a firm may achieve an unfair advantage over its competitors by bundling goods and services. Also, in Europe, the European Commissions Merger Task Force can prevent a merger without taking a company to court.


The EU authorities continued to balk at approving the transaction without major concessions from the participantsconcessions that GE believed would render the deal unattractive. On June 15, 2001, GE submitted its final offer to the EU regulators in a last-ditch attempt to breathe life into the moribund deal. GE knew that if it walked away, it could continue as it had before the deal was struck, secure in the knowledge that its current portfolio of businesses offered substantial revenue growth or profit potential. Honeywell clearly would fuel such growth, but it made sense to GEs management and shareholders only if it would be allowed to realize potential synergies between the GE and Honeywell businesses.


GE said it was willing to divest Honeywell units with annual revenue of $2.2 billion, including regional jet engines, air-turbine starters, and other aerospace products. Anything more would jeopardize the rationale for the deal. Specifically, GE was unwilling to agree not to bundle (i.e., sell a package of components and services at a single price) its products and services when selling to customers. Another stumbling block was the GE Capital Aviation Services unit, the airplane-financing arm of GE Capital. The EU Competition Commission argued that that this unit would use its influence as one of the worlds largest purchasers of airplanes to pressure airplane manufacturers into using GE products. The commission seemed to ignore that GE had only an 8 percent share of the global airplane leasing market and would therefore seemingly lack the market power the commission believed it could exert.


On July 4, 2001, the European Union vetoed the GE purchase of Honeywell, marking it the first time a proposed merger between two U.S. companies has been blocked solely by European regulators. Having received U.S. regulatory approval, GE could ignore the EU decision and proceed with the merger as long as it would be willing to forego sales in Europe. GE decided not to appeal the decision to the EU Court of First Instance (the second highest court in the European Union), knowing that it could take years to resolve the decision, and withdrew its offer to merge with Honeywell.


On December 15, 2005, a European court upheld the European regulators decision to block the transaction, although the ruling partly vindicated GEs position. The European Court of First Instance said regulators were in error in assuming without sufficient evidence that a combined GEHoneywell could crush competition in several markets. However, the court demonstrated that regulators would have to provide data to support either their approval or rejection of mergers by ruling on July 18, 2006, that regulators erred in approving the combination of Sony BMG in 2004. In this instance, regulators failed to provide sufficient data to document their decision. These decisions affirm that the European Union needs strong economic justification to overrule cross-border deals. GE and Honeywell, in filing the suit, said that their appeal had been made to clarify European rules with an eye toward future deals, since they had no desire to resurrect the deal.


In the wake of these court rulings and in an effort to avoid similar situations in other geographic regions, coordination among antitrust regulatory authorities in different countries has improved. For example, in mid-2010, the U.S. Federal Trade Commission reached a consent decree with scientific instrument manufacturer Agilent in approving its acquisition of Varian, in which Agilent agreed to divest certain overlapping product lines. While both firms were based in California, each has extensive foreign operations, which necessitated gaining the approval of multiple regulators. Throughout the investigation, FTC staff coordinated enforcement efforts with the staffs of regulators in the European Union, Australia, and Japan. The cooperation was conducted under the auspices of certain bilateral cooperation agreements, the OECD Recommendation on Cooperation among its members, and the European Union Best Practices on Cooperation in Merger Investigation protocol.

Discussion Questions


  1. What are the important philosophical differences between U.S. and EU antitrust regulators?

Explain the logic underlying these differences?  To what extent are these differences influenced by

political rather than economic considerations? Explain your answer.


Answer:  In Europe, the main goal of antitrust policy is to ensure that all companies are able to compete on a level playing field.  The impact of a merger on competitors is just as important to regulators as its impact on consumers.  Consequently, complaints about impending mergers from competitors are given much more credence in Europe than in the U.S. where the impact on consumers is of paramount importance.  In the U.S., regulators often approve M&As if the resulting company is likely to be more efficient and if there is a reasonable likelihood that the resulting lower costs will result in lower prices to consumers.  In Europe, regulators believe that maintaining the viability of competitors is more likely to ensure that consumers pay fair prices.  Europeans are less willing to tolerate increasing unemployment that may result in the short-run due to a merger than in the U.S.  Therefore, political considerations are more likely to override economic factors.


  1. This is the first time that a foreign regulatory body has prevented a deal involving U.S. firms only from occurring. What do you think are the long-term implications, if any, of this precedent?


Answer: Concerns about not receiving regulatory approval may discourage firms from engaging in cross-border transactions involving firms with European operations.   Consequently, the potential benefits of improved efficiencies resulting from such mergers may not be realized.


  1. What were the major obstacles between GE and the EU regulators? Why do you think these were obstacles? Do you think the EU regulators were justified in their position? Why/why not?


Answer:  European regulators have accepted a legal concept called portfolio power which argues that a firm may achieve an unfair advantage over its competitors by bundling goods and services.  GE viewed bundling of services as a major source of future revenue, and it was unwilling to give up this strategy. Moreover, the regulators expressed concern that GE Capital Services, its airplane financing business, would use its influence as one of the worlds largest purchasers of airplanes to pressure airplane manufacturers into using GE products.  It is unclear if the regulators really believed their arguments or whether they were simply excuses for protecting GEs competitors in Europe.  It may be a combination of both factors.


  1. Do you think that competitors are using antitrust to their advantage? Explain your answer.


Answer: Since EU regulators have made it clear that protecting European firms from unfair competition is a major priority, it is likely that competitors would leverage this doctrine to their advantage.  The EU antitrust regulators thus create another barrier to entry for those wishing to compete in Western Europe.  This barrier is particularly formidable since rulings by EU regulators cannot, at this time, be appealed in court, as they can be in the U.S.


  1. Do you think the EU regulators would have taken a different position if the deal had involved a less visible firm than General Electric? Explain your answer.


Answer:  Yes, the regulators may have been using GE as a signal to Washington about how they could retaliate for what Europeans believe to be unfair U.S. trade policies and practices and trade-related cases involving the U.S. and its European trading partners that were being contested in the World Court.


The Lehman Brothers Meltdown

Even though regulations are needed to promote appropriate business practices, they may also produce a false sense of security. Regulatory agencies often are coopted by those they are supposed to be regulating due to an inherent conflict of interest. The objectivity of regulators can be skewed by the prospect of future employment in the firms they are responsible for policing. No matter how extensive, regulations are likely to fail to achieve their intended purpose in the absence of effective regulators.


Consider the 2008 credit crisis that shook Wall Street to its core. On September 15, 2008, Lehman Brothers Holdings announced that it had filed for bankruptcy. Lehmans board of directors decided to opt for court protection after attempts to find a buyer for the entire firm collapsed. With assets of $639 billion and liabilities of $613 billion, Lehman is the largest bankruptcy in history in terms of assets. The next biggest bankruptcies were WorldCom and Enron, with $126 billion and $81 billion in assets, respectively.


In the months leading up to Lehmans demise, there were widespread suspicions that the book value of the firms assets far exceeded their true market value and that a revaluation of these assets was needed. However, little was known about Lehmans aggressive use of repurchase agreements or repos. Repos are widely used short-term financing contracts in which one party agrees to sell securities to another party (a so-called counterparty), with the obligation to buy them back, often the next day. Because the transactions are so short-term in nature, the securities serving as collateral continue to be shown on the borrowers balance sheet. The cash received as a result of the repo would increase the borrowers cash balances and be offset by a liability reflecting the obligation to repay the loan. Consequently, the borrowers balance sheet would not change as a result of the short-term loan.


In early 2010, a report compiled by bank examiners indicated how Lehman manipulated its financial statements, with government regulators, the investing public, credit rating agencies, and Lehmans board of directors being totally unaware of the accounting tricks. Lehman departed from common accounting practices by booking these repos as sales of securities rather than as short-term loans. By treating the repos as a sale of securities (rather than a loan), the securities serving as collateral for the repo were removed from the books, and the proceeds generated by the repo were booked as if they had been used to pay off an equivalent amount of liabilities. The resulting reduction in liabilities gave the appearance that the firm was less levered than it actually was despite the firms continuing obligation to buy back the securities. Since the repos were undertaken just prior to the end of a calendar quarter, their financial statements looked better than they actually were.


The firms outside auditing firm, Ernst & Young, was aware of the moves but continued to pronounce the firms financial statements to be in accordance with generally accepted accounting principles. The SEC, the recipient of the firms annual and quarterly financial statements, failed to catch the ruse. In the weeks before the firms demise, the Federal Reserve had embedded its own experts within the firm and they too failed to uncover Lehmans accounting chicanery. Passed in 2002, Sarbanes-Oxley, which had been billed as legislation that would prevent any recurrence of Enron-style accounting tricks, also failed to prevent Lehman from cooking its books. As required by the Sarbanes-Oxley Act, Richard S. Fuld, Lehmans chief executive at the time, certified the accuracy of the firms financial statements submitted to the SEC.


When all else failed, market forces uncovered the charade. It was the much maligned short-seller who uncovered Lehmans scam. Although not understanding the extent to which the firms financial statements were inaccurate, speculators borrowed Lehman stock and sold it in anticipation of buying it back at a lower price and returning it to its original owners. In doing so, they effectively forced the long-insolvent firm into bankruptcy. Without short-sellers forcing the issue, it is unclear how long Lehman could have continued the sham.


A Federal Judge Reprimands Hedge Funds in their Effort to Control CSX


Investors seeking to influence a firms decision making often try to accumulate voting shares. Such investors may attempt to acquire shares without attracting the attention of other investors, who could bid up the price of the shares and make it increasingly expensive to accumulate the stock. To avoid alerting other investors, certain derivative contracts called cash settled equity swaps allegedly have been used to gain access indirectly to a firms voting shares without having to satisfy 13(D) prenotification requirements.


Using an investment bank as a counterparty, a hedge fund could enter into a contract obligating the investment bank to give dividends paid on and any appreciation of the stock of a target firm to the hedge fund in exchange for an interest payment made by the hedge fund. The amount of the interest paid is usually based on the London Interbank Offer Rate (LIBOR) plus a markup reflecting the perceived risk of the underlying stock. The investment bank usually hedges or defrays risk associated with its obligation to the hedge fund by buying stock in the target firm. In some equity swaps, the hedge fund has the right to purchase the underlying shares from the counterparty.


Upon taking possession of the shares, the hedge fund would disclose ownership of the shares. Since the hedge fund does not actually own the shares prior to taking possession, it does not have the right to vote the shares and technically does not have to disclose ownership under Section 13(D). However, to gain significant influence, the hedge fund can choose to take possession of these shares immediately prior to a board election or a proxy contest. To avoid the appearance of collusion, many investment banks have refused to deliver shares under these circumstances or to vote in proxy contests.


In an effort to surprise a firms board, several hedge funds may act together by each buying up to 4.9 percent of the voting shares of a target firm, without signing any agreement to act in concert. Each fund could also enter into an equity swap for up to 4.9 percent of the target firms shares. The funds together could effectively gain control of a combined 19.6 percent of the firms stock (i.e., each fund would own 4.9 percent of the target firms shares and have the right to acquire via an equity swap another 4.9 percent). The hedge funds could subsequently vote their shares in the same way with neither fund disclosing their ownership stakes until immediately before an election.


The Childrens Investment Fund (TCI), a large European hedge fund, acquired 4.1 percent of the voting shares of CSX, the third largest U.S. railroad in 2007. In April 2008, TCI submitted its own candidates for the CSX board of directors election to be held in June of that year. CSX accused TCI and another hedge fund, 3G Capital Partners, of violating disclosure laws by coordinating their accumulation of CSX shares through cash-financed equity swap agreements. The two hedge funds owned outright a combined 8.1 percent of CSX stock and had access to an additional 11.5 percent of CSX shares through cash-settled equity swaps.


In June 2008, the SEC ruled in favor of the hedge funds, arguing that cash-settled equity swaps do not convey voting rights to the swap party over shares acquired by its counterparty to hedge their equity swaps. Shortly after the SECs ruling, a federal judge concluded that the two hedge funds had deliberately avoided the intent of the disclosure laws. However, the federal ruling came after the board election and could not reverse the results in which TCI was able to elect a number of directors to the CSX board. Nevertheless, the ruling by the federal court established a strong precedent limiting future efforts to use equity swaps as a means of circumventing federal disclosure requirements.


Discussion Questions


  1. Do you agree or disagree with the federal courts ruling? Defend your position.
  2. What criteria might have been used to prove collusion between TCI and 3G in the absence of signed agreements to coordinate their efforts to accumulate CSX voting shares?


Google Thwarted in Proposed Advertising Deal with Chief Rival Yahoo!


A proposal that gave Yahoo! an alternative to selling itself to Microsoft was killed in the face of opposition by U.S. government antitrust regulators. The deal called for Google to place ads alongside some of Yahoo!s search results. Google and Yahoo! would share in the revenues generated by this arrangement. The deal was supposed to bring Yahoo! $250 million to $450 million in incremental cash flow in the first full year of the agreement. The deal was especially important to Yahoo!, due to the continued erosion in the firms profitability and share of the online search market.


The Justice Department argued that the alliance would have limited competition for online advertising, resulting in higher fees charged to online advertisers. The regulatory agency further alleged that the arrangement would make Yahoo! more reliant on Googles already superior search capability and reduce Yahoo!s efforts to invest in its own online search business. The regulators feared this would limit innovation in the online search industry.


On November 6, 2008, Google and Yahoo! announced the cessation of efforts to implement an advertising alliance. Google expressed concern that continuing the effort would result in a protracted legal battle and risked damaging lucrative relationships with their advertising partners.


The Justice Departments threat to block the proposal is a sign that Google can expect increased scrutiny in the future. High-tech markets often lend themselves to becoming natural monopolies in markets in which special factors foster market dominance by a single firm. Examples include Intels domination of the microchip business, as economies of scale create huge barriers to entry for new competitors; Microsofts preeminent market share in PC operating systems and related application software, due to its large installed customer base; and Googles dominance of Internet search, resulting from its demonstrably superior online search capability.


Discussion Questions


  1. In what way might the Justice Departments actions result in increased concentration in the online search business in the future?
  2. What are the arguments for and against regulators permitting natural monopolies?


BHP Billiton and Rio Tinto Blocked by Regulators in an International Iron Ore Joint Venture


The revival in demand for raw materials in many emerging economies fueled interest in takeovers and joint ventures in the global mining and energy sectors in 2009 and 2010. BHP Billiton (BHP) and Rio Tinto (Rio), two global mining powerhouses, had hoped to reap huge cost savings by combining their Australian iron ore mining operations when they announced their JV in mid-2009. However, after more than a year of regulatory review, BHP and Rio announced in late 2010 that they would withdraw their plans to form an iron ore JV corporation valued at $116 billion after regulators in a number of countries indicated that they would not approve the proposal due to antitrust concerns.


BHP and Rio, headquartered in Australia, are the worlds largest producers of iron ore, an input critical to the production of steel. Together, these two firms control about one-third of the global iron ore output. The estimated annual synergies from combining mining and distribution operations of the two firms were estimated to be $10 billion. The synergies would come from combining BHPs more productive mining capacity with Rios more efficient distribution infrastructure, enabling both firms to eliminate duplicate staff and redundant overhead and BHP to transport its ore to coastal ports more cheaply.


The proposal faced intense opposition from the outset from steel producers and antitrust regulators. The greatest opposition came from China, which argued that the combination would concentrate pricing power further in the hands of the top iron ore producers. China imports about 50 million tons of iron ore monthly, largely from Australia, due to its relatively close proximity.


The European Commission, the Australian Competition and Consumer Commission, the Japan Fair Trade Commission, the Korea Fair Trade Commission, and the German Federal Cartel Office all advised the two firms that their proposal would not be approved in its current form. While some regulators indicated that they would be willing to consider the JV if certain divestitures and other remedies were made to alleviate concerns about excessive pricing power, others such as Germany said they would not approve the proposal under any circumstances.


Discussion Questions


  1. A remedy to antitrust regulators is any measure that would limit the ability of parties in a business combination from achieving what is viewed as excessive market or pricing power. What remedies do you believe could have been put in place by the regulators that might have been acceptable to both Rio and BHP? Be specific.
  2. Why do you believe the antitrust regulators were successful in this instance but so unsuccessful limiting the powers of cartels such as the Organization of Petroleum Exporting Countries (OPEC), which currently controls more than 40 percent of the worlds oil production?


Justice Department Approves Maytag/Whirlpool Combination

Despite Resulting Increase in Concentration


When announced in late 2005, many analysts believed that the $1.7 billion transaction would face heated anti-trust regulatory opposition. The proposed bid was approved despite the combined firms dominant market share of the U.S. major appliance market. The combined compa

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