M &A Roundup – Washington Update: Sell-Off Onus On Merger-Makers

Companies doing high-profile, big-ticket mergers will have to go the extra mile to persuade antitrust regulators that their deals don’t strangle competition. As part of a getting tougher enforcement stance – in response to the escalating size and more powerful market impact of megatransactions – merger makers have been served notice that the ball is in their court on the difficult question of divesting a combined company’s assets to cure any anticompetitive taint. In a February 17 speech to antitrust lawyers in New York, Federal Trade Commission (FTC) chairman Robert Pitofsky indicated that merging companies should devise their own restructuring blueprints before filing for government approval of their deals. Antitrust lawyers say they already are advising merger clients to think ahead about what they can and cannot keep and offer an acceptable plan for shedding overlapping businesses or operations when the corporate combination will overly concentrate a geographical or product market. “It should be clear that the burden of coming forward with adequate restructure proposals should be on the sponsors of the merger,” Pitofsky said. “They are likely to have more extensive information about their industry and the effect of the proposal than any set of enforcement officials. The FTC’s job is to make clear what its reservations are about the proposed transaction and to be available for constructive dialogue on how any problem can be adequately addressed. It is not the FTC’s job to propose solutions – indeed I have reservations about whether the FTC is always qualified to play that role.” Pitofsky mostly spelled out existing practice in handling merger-connected dispositions, but the speech was closely monitored because of recent actions at the FTC. The agency cleared the merger of oil giants Exxon Co. and Mobil Corp. after winning a massive asset divestiture while blocking the smaller deal in which BP Amoco PLC wanted to buy Atlantic Richfield Co., and dispositions are prominent flash points. Tefft W. Smith, an antitrust lawyer at Kirkland & Ellis, said that while the “rhetoric was stronger than reality and behavior,” Pitofsky’s speech reflected a tightening of the screws on big mergers. “He was trying to send a message that there is a more rigorous analysis of potential divestiture solutions, particularly in high-profile transactions.” Be ready to compromise on high-profile deals “We always tell clients that they need to have a compromise solution in mind when they go in with a high-profile deal,” he said. In general, Pitofsky said, the FTC wants divestitures that will maintain competition. Specific guidelines include identifying buyers with the resources to wage strong competition and ensuring that businesses marked for sale are not damaged goods. In holding up the $31 billion merger of BP Amoco and ARCO, the FTC maintained that the combination violated antitrust laws by reducing competition and increasing market power in two key sectors – exploration and production of oil on the Alaska North Slope and its sale to West Coast refineries, and pipeline and storage facilities in Cushing, Okla., which the agency said would hike crude oil prices throughout North America. However, the cross-border merger-makers bowed to the FTC’s demands in mid-March and won clearance for their deal by agreeing to sell off ARCO’s huge oil assets in Alaska. The properties were dealt to Phillips Petroleum Corp. for $6.5 billion in cash and up to another $500 million based on a formula tied to the price of crude oil. As it turned out, the divestiture was a win-win deal for both sides — for BP and ARCO, so they could bring their long-pending merger to completion, and for Phillips, because it is restructuring to focus on an oil and gas exploration as its key business. The transaction, moreover, meets the FTC’s demands for maintaining competition by turning the Alaska properties over to a major, well-established oil industry player. Phillips CEO Jim Mulva noted that his company will become a “major merchant supplier of crude oil to the West Coast.” A sacrifice for getting the deal on its way The divestiture was not entirely painless for BP Amoco, however. The Anglo-American firm had counted on an increased share of Alaska crude oil supplies to contribute to huge cost savings – upwards of $1 billion – that it expects from the deal. But the merger with ARCO still provides a major competitive advantage by setting up BP Amoco as a major refining and marketing operator on the West Coast, one of the fastest-growing sectors of the industry and an area where it had not been represented. The Cushing, Okla., operations are also due to be divested at some point. The FTC had gone to federal court to hold up the combination of BP Amoco and ARCO but held up the lawsuit when the Alaska sell-off was unveiled. Goldman, Sachs represented Phillips in the purchase. The FTC’s price for green-lighting the $76 billion Exxon-Mobil merger was disposition of about 2,400 gas stations, mostly in the Northeast, a California oil refinery, and other oil and gas assets. ExxonMobil agreed to sell more than 1,700 gas stations to Tosco Corp. r