State regulators are flexing their muscles in M&A cases more often and with considerable spirit in recent months, pursuing issues ranging from job preservation to market competition. Some industry experts wouldn’t be surprised to see more activism in sectors of the dealmaking front where federal watchdogs cannot or will not tread. Massachusetts Secretary of the Commonwealth William Galvin, who has been examining Procter & Gamble Co.’s $57 billion acquisition of Gillette Co. exemplified the heightened profile of state regulators in June. He made headlines when he subpoenaed executives including Goldman Sachs CEO Henry Paulson to testify about his banking firm’s role in the megadeal – a move rarely seen at the state level. Galvin is investigating whether the price P&G is paying for Gillette is too low. He also is investigating the objectivity of fairness opinions that Goldman and UBS supplied to Gillette. “Specifically, we are looking into whether the fairness opinion issued to Gillette violated the Massachusetts Security Act,” says Brian McNiff, a spokesman for Galvin. In Connecticut, Attorney General Richard Blumenthal has opposed the $11.5 billion acquisition of Citigroup Inc.’s Travelers Life & Annuity unit by MetLife Inc. on grounds that it would cost the Hartford area as many as 700 jobs. His input, and that of other state officials, pressured MetLife to pledge that it would maintain 1,310 jobs in Hartford for one year after the deal closes. Jobs have not been an issue tackled by state insurance departments, which clear mergers of insurers that do business in their states. These two deal challenges, as well other examples of increased activism on the part of state officials, such as California Insurance Commissioner John Garamendi’s resistance to the merger of WellPoint Health Networks Inc. and Anthem Inc., are indications of growing willingness by state regulators to challenge deals even in the absence of federal opposition. Deal opposed on anticipated job losses “The only people who complain about state regulators doing their jobs are those who have a vested interest in getting rid of any regulation at all,” says Jim Tierney, head of Columbia University Law School’s National State Attorneys General Program. Tierney credits the most high-profile state regulator in the country, New York Attorney General Elliot Spitzer, as “not having drilled a dry hole yet” in his investigations of abuses in IPO spinning, mutual fund trading, analyst conflicts, excessive executive pay at the New York Stock Exchange, improper accounting in the insurance industry, and other areas. Spitzer’s influence in the deals arena While Spitzer has not instituted lawsuits in an M&A situation, Tierney and other observers say his work has encouraging other state regulators to challenge corporate actions in mergers and other areas. “It’s widely agreed that most other regulatory agencies, both federal and state, were late to the party and were forced to act by Spitzer’s investigations,” notes Arthur Wilmarth, a George Washington University law professor who specializes in banking regulation. Increased scrutiny of mergers may continue to fall to state regulators because of a number of developments at the federal level. Experts cite the defeat by the DOJ’s antitrust division in its attempt to block the PeopleSoft Inc./Oracle Corp. deal as a case that may have a chilling effect on future acquisition challenges. In addition, some observers point to the appointment of U.S. Rep. Christopher Cox (R., Calif.) as head of the SEC as a development that is unlikely to increase regulatory pressure. “While he has been tough on fraud, people don’t expect Cox to be a heavy-handed regulator,” Wilmarth says. And in the agencies that directly rule on mergers, the recent appointment of Thomas Barnett as Acting Assistant Attorney General of the DOJ’s antitrust division and the continuing tenure of Deborah Platt Majoras as the chief official at the FTC don’t auger for a radical increase in merger scrutiny at the federal level. Tierney points out that it’s not only state attorneys general that can take action to block deals. The challenge to the Anthem/WellPoint deal by Commissioner Garamendi or the actions of Massachusetts Secretary of the Commonwealth Galvin underscore that there are a number of state officers who can get involved in deals. Tierney says that in situations in which a state pension fund suffers a loss of shareholder value in an investment, the fund itself often will bring the claim. “Usually the largest shareholder is named lead plaintiff, so this can mean a pension fund can challenge flawed accounting measures or other problems,” he says. Public utility regulators also can get a piece of the action, which happened when state boards nixed two attempts by private equity firms to buy utilities because the bidders couldn’t satisfy requirements that the deals were in the public interest. Thumbs down on two energy deals In March, the Oregon Public Utilities Commission turned down a group of private investors led by Texas Pacific Group Inc. which tried to buy Portland General Electric for $2.4 billion. The same thing happened last December when the Arizona Corporation Commission rejected a $853 million bid for UniSource Energy Corp. from Kohlberg Kravis Roberts & Co., J.P. Morgan Partners, and Wachovia Capital Partners. Wilmarth says that because the national banking regulator, the Office of the Comptroller of the Currency (OCC), tends to have a pro-merger policy, there is a need for state regulators to review banking mergers. He noted that since the OCC is funded by the banks whose charters it regulates, it can be beneficial for state attorneys general to review banking deals because their offices aren’t funded by the financial institutions they regulate. He also noted that the frontline merger review agencies, the DOJ and FTC, aren’t responsible for enforcing consumer protection pacts in merging financial institutions. “This is just one area where the states can play a significant role,” Wilmarth states. In all, he feels it’s better to have both state and federal officials looking at deals. He quotes the late Supreme Court Justice Louis Brandeis that “sunshine is the best disinfectant,” and reasons that two sets of regulators can best provide that. (c) 2005 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com

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