On July 22, 2013, the Federal Trade Commission challenged Solera Holdings’ acquisition of Actual Systems of America, Inc. (ASA), a competing provider of software used by the automotive recycling industry. The transaction, which closed in May 2012, had not been subject to review under the report-and-wait provisions of the Hart-Scott-Rodino Act (HSR) because its value, $8.7 million, fell below the then-effective “size of transaction” threshold, now $70.9 million. Nevertheless, the FTC challenged the deal, resulting in a consent decree that forced Solera to divest all of ASA’s assets to a holding company created by ASA’s former managers.
The agency’s challenge to this small, non-reportable transaction was not unique. It was one of more than a dozen consummated deals that federal antitrust enforcers have challenged during the Obama administration. Because such challenges typically result in an order requiring the post-merger firm to divest the acquired assets at any price – including a fire-sale price if no buyer will pay more – the economic risk of a post-consummation challenge falls solely on the buyer, assuming there is no evidence that the buyer and seller conspired to evade HSR reporting. If the parties acknowledge the risk of a post-consummation challenge before striking a deal, the allocation of this risk will materially impact the negotiations. Parties to a deal should consider several issues.
Issues to Consider in Non-HSR-Reportable Deals
First, and most importantly, is a post-consummation challenge likely? Sometimes, even cursory antitrust review before consummation would suggest a challenge is likely. For example, according to the Solara complaint, the deal merged two of the three key providers of specialized software to the automotive recycling industry. Complaints by disgruntled customers, or disappointed bidders, should have been foreseeable, especially if Solara raised prices after closing the deal.
Second, the parties’ views about the degree of risk may strongly differ. If so, that difference of opinion will at a minimum impact valuation – how much is the target really worth if it comes with antitrust baggage? Differences of opinion may also affect key deal terms; they may, for example, lead the buyer to propose (a) a series of payments over time, rather than complete payment at closing, or (b) the inclusion of explicit “unwinding” provisions in the agreement in the event of a challenge. Sellers will object to these terms, of course, but may be willing to accept a lower purchase price to buy certainty at closing.
Third, to get a better sense of the degree of risk, the parties may consider bringing the proposed deal to the attention of the antitrust enforcement agencies on an informal basis to obtain a “clean bill of health.” In addition to a likely delay of the deal, this course of action may have the opposite of its intended effect: an investigation where one might not have taken place had the parties simply closed the deal without informing the government.
In short, for a buyer considering a bid for a competitor in a non-HSR-reportable deal, the best advice is “look before you leap.” Any deal of this type requires a full review of antitrust risk by both parties, with due concern for privilege issues, and for the buyer, an examination of potential remedies short of full divestiture if the deal is later challenged. Where possible, the buyer should negotiate price or other terms that effectively require the seller to share the risk of a post-consummation challenge.