Question

Question 11.1: Corporate mergers and acquisitions

1. Distinguish a merger from an acquisition, and state the conditions under which both raise regulatory concern.
2. Characterize as precisely as possible two indexes the Department of Justice’s antitrust division uses to approve mergers and acquisitions.
3. What levels of each would trigger scrutiny from the U.S. Federal Trade Commission?
4. What are the new directions for assessing the argument for approving mergers and acquisitions?

Answer 1

a. Difference between Merger and Acquision is here under:

Definition of Merger & Acquisition

A merger is defined as the process by which two or more entities, companies, or business ventures come together and join forces to work on a common strategy. The strategic decision they make is aimed at realizing better approaches towards a common goal in relation to a common product or service they all offer.

whereas an acquisition is the process by which a company acquires another and the latter ceases to exist altogether. The company doing the acquisition acquires more than 50 percent of shares for the acquisition to happen. Unlike a merger, an acquisition does not happen on friendly terms.

Title

When a merger happens, a new name is given. It could be coined by joining the companies’ names together or creating a new one. For acquisition, the acquiring company’s name continues to be used.

Terms

Mergers are considered friendly and out of a mutual decision by each of the merging companies while an acquisition is considered as either friendly or hostile, voluntary or involuntary.

Scenarios

In the case of a merger, two or more companies considering each other on equal basis come together and merge for a strategic decision. When an acquisition is on the table, the acquiring company is usually larger than the acquired ones.

Power

For merging companies, their powers are almost nil while for an acquisition, the acquiring company gets the ultimate powers and to dictate terms.

Governing Laws

A merger is surrounded by more legal formalities in comparison to an acquisition.

b.

The term “HHI” means the Herfindahl–Hirschman Index, a commonly accepted measure of market concentration. The HHI is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For example, for a market consisting of four firms with shares of 30, 30, 20, and 20 percent, the HHI is 2,600 (302 + 302 + 202 + 202 = 2,600).

The HHI takes into account the relative size distribution of the firms in a market. It approaches zero when a market is occupied by a large number of firms of relatively equal size and reaches its maximum of 10,000 points when a market is controlled by a single firm. The HHI increases both as the number of firms in the market decreases and as the disparity in size between those firms increases.

The agencies generally consider markets in which the HHI is between 1,500 and 2,500 points to be moderately concentrated, and consider markets in which the HHI is in excess of 2,500 points to be highly concentrated.  See U.S. Department of Justice & FTC, Horizontal Merger Guidelines § 5.3 (2010). Transactions that increase the HHI by more than 200 points in highly concentrated markets are presumed likely to enhance market power under the Horizontal Merger Guidelines issued by the Department of Justice and the Federal Trade Commission

C.

Among the key provisions in U.S. antitrust law is one designed to prevent anticompetitive mergers or acquisitions. Under the Hart-Scott-Rodino Act, the FTC and the Department of Justice review most of the proposed transactions that affect commerce in the United States and are over a certain size, and either agency can take legal action to block deals that it believes would “substantially lessen competition.” Although there are some exemptions, for the most part current law requires companies to report any deal that is valued at more than $94 million to the agencies so they can be reviewed.

After the companies report a proposed deal, the agencies will do a preliminary review to determine whether it raises any antitrust concerns that warrant closer examination. Because the FTC and the Department of Justice share jurisdiction over merger review, transactions requiring further review are assigned to one agency on a case-by-case basis depending on which agency has more expertise with the industry involved. During the preliminary review, the parties must wait 30 days (15 days in the case of a cash tender or bankruptcy transaction) before closing their deal. Based on what the agency finds, it can: 1) terminate the waiting period and allow the parties to consummate their transaction (this action often is referred to as an “early termination”); 2) let the waiting period to expire, which allows the parties to consummate the transaction; or 3) if the initial review has raised competition issues, the agency may extend the review and ask the parties to turn over more information so it can take a closer look at how the transaction will affect competition (this action often is referred to as a “second request.”).

The vast majority of deals reviewed by the FTC and the Department of Justice are allowed to proceed after the first, preliminary review.

However, if a second request is issued, the companies must provide more information. Once the parties have certified that they have substantially complied with the request, the investigating agency has 30 additional days (10 days in the case of a cash tender or bankruptcy transaction) to complete its review of the transaction and take action if necessary. The agency may decide at this point to: 1) close the investigation; 2) enter into a settlement with the companies; 3) take legal action in federal district court or through the FTC’s administrative process to block the deal from going forward.

D.

The United States has a federal system of government. Accordingly, regulation of M&A activity falls within the dual jurisdiction of the federal government and the individual state in which the target company is incorporated. Generally, the federal government regulates sales and transfers of securities through the Securities and Exchange Commission (SEC), and polices competition matters through the Antitrust Division of the Department of Justice (DOJ) and the Federal Trade Commission (FTC). Other federal agencies impose additional requirements over acquisitions in certain regulated industries.

Tender offers in the United States are subject to the federal rules and regulations on tender offers and beneficial ownership reporting under the Securities Exchange Act of 1934, as amended (Exchange Act). Acquisitions completed by means of a merger are governed by the law of the state of incorporation of the target company. The solicitation of votes to approve a merger by the target company shareholders must comply with federal rules and regulations on proxy statements under the Exchange Act. If the bidder offers securities as consideration to the target company shareholders, the registration requirements of the Securities Act of 1933, as amended (Securities Act), will also apply, unless an exemption from the registration requirements is available.

The law of the state of incorporation of a company regulates the internal affairs of a company, including the fiduciary duties owed by the company's board of directors to its shareholders in responding to a takeover bid and the applicable statutory requirements for approving and effecting merger transactions. The ability of a target company to impose anti-takeover devices also will largely be determined by the law of its state of incorporation.

Many states, including Delaware (where many of the largest corporations in the United States are incorporated), have antitakeover statutes. State anti-takeover statutes generally take one of two forms: control share acquisition statutes or business combination statutes. Control share acquisition statutes generally provide that an acquiring shareholder is not permitted to vote target company shares in excess of certain percentage ownership thresholds, without first obtaining approval from the other shareholders. Business combination statutes generally provide that after acquiring securities in the target company in excess of a specified threshold (e.g., 15%), a shareholder is barred from entering into business combination transactions with the target company for a specified period of time, unless the shareholder has obtained approval from a supermajority (e.g., 66⅔%) of the shares held by the target company's other shareholders or, prior to acquiring such specified ownership threshold, target company board approval. Companies incorporated in the state may opt out of the protection of the state's anti-takeover statutes in their certificate of incorporation. Delaware has a business combination statute.

Finally, the exchange upon which the company's securities are listed may impose additional rules, in particular with respect to corporate governance matters and shareholder approval for certain actions.