Tough Balancing Acts In Antitrust Cases

Antitrust is tough enough for m&a dealmakers to handle on its own. When competition cases get entangled with other elements of the law, the complexities can be mind-boggling. But that is exactly what happened in a brace of recent high-profile enforcement actions that, in addition to market positioning, involved national defense procurement policy, brand ownership litigation, and bankruptcy court proceedings. In two bidding contests, federal intervention upset initially favored buyers and tipped the balance to competitors. In a third case, a defendant company was left wrestling with the threat that it might be frozen out of a robust market. Antitrust experts warned that these complications might become more commonplace as deals get increasingly complicated. In the cases that presented dealmakers and their lawyers with multifaceted challenges: * The Justice Department (DOJ), acting on the advice of the Defense Department (DOD), sued to block General Dynamics Corp.’s acquisition of Newport News Shipbuilding Inc. The two companies scrubbed their deal, sending Newport News into negotiations with Northrop Grumman Corp., another defense contractor that had designs on the shipbuilder. * The Federal Trade Commission (FTC) mounted a challenge to the joint acquisition of Vivendi Universal SA’s Seagram Wine & Spirits business by Diageo PLC of the U.K. and Pernod Ricard SA of France. The battle was over the increased share of the thriving rum market that Diageo would gain, but left the company in a quandary because ownership of a key rum brand is tied up in the courts. * A bankruptcy judge ruled in mid-November that SunGard Data Systems Inc. would be the winning bidder for Comdisco Inc.’s disaster recovery business, despite a pending antitrust suit filed in late October by the DOJ against a SunGard acquisition of the unit. Comdisco previously had agreed to sell the business to competing bidder Hewlett-Packard Co., even though the company had submitted a lower offer. (See Corporate Restructuring on page 24 for more information.) Harry Davis, an antitrust lawyer at Schulte, Roth & Zabel, notes that despite the differences in the businesses and the complicating entanglements, the cases share a common element in that they would reduce the ranks of competitors in specific markets. With the rum and disaster recovery businesses, the number of top players would be cut from three to two, and in the shipbuilding market, only one producer of nuclear submarines would emerge. The DOJ said that had General Dynamics been allowed to buy Newport News it would have gained “a permanent monopoly in nuclear submarines” and reduced competition in conventionally powered surface ships and electric drive technology for powering naval vessels. Northrop Grumman presents less of a market concentration problem with its shipbuilding operations. Davis says that the DOD’s position is consistent with its resistance to having only one supplier for big-ticket capital equipment. While Pernod and Diageo would divvy up a large number of internationally popular whiskey and wine brands, the rum market was the only one that seemed to present a competition problem to U.S. regulators. The market leader, with about a 55% market share, is Bacardi Ltd. Diageo, which already has the third-place brand, Malibu, would acquire the runner-up, Captain Morgan, from Seagram. If allowed to keep both brands, Diageo’s market share would only be in the 25% to 26% range, far below Bacardi’s. But the FTC consistently has opposed deals that concentrate a market by creating duopolies. An easy way out is to sell Malibu, and, indeed, Diageo has talked to Pernod about buying the brand. But it’s not that simple. The rights to Captain Morgan are tied up in a court case in Puerto Rico. Destileria Serralles, a Puerto Rican rum supplier that initially licensed the brand to Seagram, has claimed that it should regain the rights under a change-of-control provision and would like to sell it to Allied Domecq PLC, a British distiller, which has brought the suit to get Captain Morgan. “Diageo is in a dilemma,” Davis notes. “If it sells Malibu, it still could lose Captain Morgan and it wouldn’t have any products in the rum market.” SunGard had offered $825 million for Comdisco’s disaster recovery business, which provides backup computer facilities to large corporations, and is expected to thrive in the more security-conscious environment since the terrorist attacks of September 11. That bid was substantially higher than a $610 million offer by Hewlett-Packard. The DOJ filed an antitrust suit in late October against a SunGard purchase of the division, noting that SunGard and Comdisco were direct competitors in the three-company field and charged that their union would result in higher prices and lower quality. Hewlett-Packard returned with a $750 million bid that won over Comdisco creditors, and Comdisco agreed to sell the business to Hewlett-Packard in late October. In a reversal of fate, a bankruptcy judge ultimately ruled against Hewlett-Packard’s attempt to snatch the business away from SunGard, saying that it violated the auction rules established by the court. Comdisco then named SunGard the winning bidder in mid-November, despite the pending suit against the company. Stephen E. Stack Jr., an antitrust lawyer at Dechert, says that it was not the first time that antitrust regulators had intervened in a bankruptcy proceeding. “I think you will see more of this, if, instead of trying to work things out between creditors and the debtor, there is a decision to sell assets to strategic buyers that compete with the company in distress,” he states. If that develops, there is a potential for increased conflict between antitrust regulation and the responsibility of bankruptcy courts to maximize value for creditors. As of now, the legal balance appears to favor the regulators, although the issue is not clear-cut. The clash of laws is a “difficult thing to resolve,” says Stack, who adds that it might require legislation to give an edge to bankruptcy. “I think the general rule is that when there is a conflict, or someone tries to assert an exception to antitrust or another federal law, that exceptions like that are strictly construed,” he notes. “You would need a real extension of congressional intent to supplant the antitrust laws.”