Playing Monopoly

Sometimes it's just hard to let go. And it might be even harder when antitrust regulators have a gun to your head.

At the end of last year, Cal Dive International was forced to pay $2 million as part of a civil settlement with the Department of Justice after the company failed to sell certain assets in connection with its acquisitions of Stolt Offshore and S&H Diving. The DOJ had ordered Cal Dive to divest the assets back in 2005, citing antitrust concerns, and alleged that the company intentionally delayed the sale and had failed to provide basic upkeep for the properties after the order to divest.

Meanwhile, this past December, the Justice Department reached a similar settlement with Alltel Corp., ordering the company to pay $1.325 million over allegations that it didn't preserve certain assets that were ordered to be sold after its acquisition of Midwest Wireless.

In the press release announcing the Alltel settlement, Thomas Barnett, the assistant attorney general in charge of the Department's antitrust division, said: "Consent decrees entered into with the antitrust division are court orders that must be respected ... This civil contempt claim and payment demonstrate that the antitrust division will actively enforce its settlements and ensure that defendants carry out the agreed-upon remedies as required."

Despite Barnett's bravado, however, consent decrees are not exactly the motivator regulators may envision them to be. While the government may say otherwise, it's not necessarily in the interest of a company to pour capital into assets that are only going to be sold months later, often at below-market valuations. Moreover, the fines levied — if they're topping off at around $2 million — aren't going to break the banks of the offending parties. In fact, the $1.35 million fine assessed to Alltel as part of the DOJ settlement amounts to just 0.125% of the $1.08 billion purchase price paid to acquire Midwest Wireless in the first place.

Even as most businesses aren't out actively trying to ignore consent decrees, if little incentive exists to abide by them, then some companies will try to push the limits of what is acceptable. Many of the same issues came into play back in 2000. When MCI and WorldCom merged, the pair sold off MCI's Internet assets to get the deal past regulators. Only Cable & Wireless, the buyer of the Internet assets, alleged that the sellers delivered the business without key personnel and customer information. MCI Worldcom ultimately settled with Cable & Wireless, paying $200 million to have the company drop all litigation and complaints.

Jeff Spigel, a partner at law firm King & Spalding and a member of its antitrust practice, notes that in the early 1990s, regulators would typically want merging parties to have a remedy already in hand if a particular deal was going to arouse antitrust concerns. "They would want to have an identified buyer when the consent order was agreed to," he says, noting that such a detail removes the uncertainty that the assets could be left out in the marketplace to "wither away."

Spigel adds, though, that today it's often the case that parties can structure a remedy in which a buyer is not already in place, and instead negotiate a period of time in which the assets will be sold. In certain cases, though rare for the Department of Justice, regulators will structure a consent decree that contains a crown jewel provision, which would force merging parties to sell something more valuable if they can't live up to a decree within a certain time period. "It's more ammunition the government has to incentivize divestitures," he says.

Spigel notes that when regulators issue consent decrees without a buyer in place, what they are ultimately looking for are assets that are prepared to exist as a stand-alone entity. "They don't want any entanglements," he says. "They want the assets to have their own people, their own infrastructure and they would ultimately prefer to not have to rely on the merging parties for anything."

But when that's not the case, and something goes wrong with the assets that are to be divested, Spigel says that the regulators will often assume that it's a result of neglect on the part of the sellers.

From the merging parties' perspective, putting together a divestiture plan can become a game of cat and mouse. When Supervalu Inc. acquired Albertson's, the grocery giant tapped Cerberus Capital Management and other investors to buy certain Northern California stores. But the auction for Albertson's was competitive, and the buyers had to address antitrust concerns before it could be taken seriously as a buyer.

However, if any uncertainty exists as to whether a company would have to divest, it may not make sense for a merging entity to tip its hand by lining up a prearranged buyer.

It becomes even more difficult when one considers how many regulators there are to please. The Department of Justice, the Federal Trade Commission, and even various state attorneys general can weigh in with various views. For larger deals, the European Commission can also get a say. "It becomes a multidimensional game of chess, and what may appease one [regulator] may not appease another," Spigel says.

The fact that the government has had little luck lately challenging mergers only serves to weaken their position when pressuring parties to come up with a solution up front. In August, for example, the U.S. District Court for the District of Columbia denied the FTC's request for a preliminary injunction blocking the Whole Foods/Wild Oats merger.

However, while the Alltel and Cal Dive settlements might point to increased enforcement by regulators, Spigel says that he doesn't see those two instances as representing a larger trend, either in the enforcement or in the disregard of consent decrees.

With that said, he notes that companies will try to play all of their cards in a given situation. But he adds that as a lawyer he would never recommend a company cross the regulators. "It's not great for your public image, and it sets up a credibility issue with the government," he says. "And if you're involved in other transactions, the next time around the government will probably be more demanding."