Exam 2: The Regulatory Environment

Unlike the Sherman Act,which contains criminal penalties,the Clayton Act is a civil statute and allows private parties injured by the antitrust violations to sue in federal court for a multiple of their actual damages.

The Sarbanes-Oxley bill is intended to achieve which of the following:

Some state anti-takeover laws contain so-called "fair price provisions" requiring that all target shareholders of a successful tender offer receive the same price as those who actually tendered their shares.

A collaborative arrangement is a term used by regulators to describe agreements among competitors for all of the following except for

A diligent buyer must ensure that the target is in compliance with the labyrinth of labor and benefit laws,including those covering all of the following except for

Case Study Short Essay Examination Questions FCC Uses Its Power to Stimulate Competition in the Telecommunications Market Oh, So Many Hurdles Having received approval from the Justice Department and the Federal Trade Commission, Ameritech and SBC Communications received permission from the Federal Communications Commission to combine to form the nation's largest local telephone company. The FCC gave its approval of the $74 billion transaction, subject to conditions requiring that the companies open their markets to rivals and enter new markets to compete with established local phone companies. Satisfying the FCC's Concerns SBC, which operates under Southwestern Bell, Pacific Bell, SNET, Nevada Bell, and Cellular One brands, has 52 million phone lines in its territory. It also has 8.3 million wireless customers across the United States. Ameritech, which serves Illinois, Indiana, Michigan, Ohio, and Wisconsin, has more than 12 million phone customers. It also provides wireless service to 3.2 million individuals and businesses. The combined business would control 57 million, or one-third, of the nation's local phone lines in 13 states. The FCC adopted 30 conditions to ensure that the deal would serve the public interest. The new SBC must enter 30 new markets within 30 months to compete with established local phone companies. In the new markets, it would face fierce competition from Bell Atlantic, BellSouth, and U.S. West. The company is required to provide deep discounts on key pieces of their networks to rivals who want to lease them. The merged companies also must establish a separate subsidiary to provide advanced telecommunications services such as high-speed Internet access. At least 10% of its upgraded services would go toward low-income groups. Failure to satisfy these conditions would result in stiff fines. The companies could face $1.2 billion in penalties for failing to meet the new market deadline and could pay another $1.1 billion for not meeting performance standards related to opening up their markets. A Costly Remedy for SBC SBC has had considerable difficulty in complying with its agreement with the FCC. Between December 2000 and July 2001, SBC paid the U.S. government $38.5 million for failing to provide adequately rivals with access to its network. The government noted that SBC failed repeatedly to make available its network in a timely manner, to meet installation deadlines, and to notify competitors when their orders were filled. -Under what circumstances,if any,do you believe the government should relax the imposition of such fines in the SBC case?

Case Study Short Essay Examination Questions The Legacy of GE's Aborted Attempt to Merge with Honeywell Many observers anticipated significant regulatory review because of the size of the transaction and the increase in concentration it would create in the markets served by the two firms. Most believed, however, that, after making some concessions to regulatory authorities, the transaction would be approved, due to its perceived benefits. Although the pundits were indeed correct in noting that it would receive close scrutiny, they were completely caught off guard by divergent approaches taken by the U.S. and EU antitrust authorities. U.S regulators ruled that the merger should be approved because of its potential benefits to customers. In marked contrast, EU regulators ruled against the transaction based on its perceived negative impact on competitors. Honeywell's avionics and engines unit would add significant strength to GE's jet engine business. The deal would add about 10 cents to GE's 2001 earnings and could eventually result in $1.5 billion in annual cost savings. The purchase also would enable GE to continue its shift away from manufacturing and into services, which already constituted 70 percent of its revenues in 2000. The best fit is clearly in the combination of the two firms' aerospace businesses. Revenues from these two businesses alone would total $22 billion, combining Honeywell's strength in jet engines and cockpit avionics with GE's substantial business in larger jet engines. As the largest supplier in the aerospace industry, GE could offer airplane manufacturers "one-stop shopping" for everything from engines to complex software systems by cross-selling each other's products to their biggest customers. ^{BusinessWeek, 2000b} Honeywell had been on the block for a number of months before the deal was consummated with GE. Its merger with Allied Signal had not been going well and contributed to deteriorating earnings and a much lower stock price. Honeywell's shares had declined in price by more than 40 percent since its acquisition of Allied Signal. While the euphoria surrounding the deal in late 2000 lingered into the early months of 2001, rumblings from the European regulators began to create an uneasy feeling among GE's and Honeywell's management. Mario Monti, the European competition commissioner at that time, expressed concern about possible "conglomerate effects" or the total influence a combined GE and Honeywell would wield in the aircraft industry. He was referring to GE's perceived ability to expand its influence in the aerospace industry through service initiatives. GE's services offerings help differentiate it from others at a time when the prices of many industrial parts are under pressure from increased competition, including low-cost manufacturers overseas. In a world in which manufactured products are becoming increasingly commodity-like, the true winners are those able to differentiate their product offering. GE and Honeywell's European competitors complained to the EU regulatory commission that GE's extensive services offering would give it entrée into many more points of contact among airplane manufacturers, from communications systems to the expanded line of spare parts GE would be able to supply. This so-called range effect or portfolio power is a relatively new legal doctrine that has not been tested in transactions of this size. ^{Murray, 2001} On May 3, 2001, the U.S. Department of Justice approved the buyout after the companies agreed to sell Honeywell's helicopter engine unit and take other steps to protect competition. The U.S. regulatory authorities believed that the combined companies could sell more products to more customers and therefore could realize improved efficiencies, although it would not hold a dominant market share in any particular market. Thus, customers would benefit from GE's greater range of products and possibly lower prices, but they still could shop elsewhere if they chose. The U.S. regulators expressed little concern that bundling of products and services could hurt customers, since buyers can choose from among a relative handful of viable suppliers. To understand the European position, it is necessary to comprehend the nature of competition in the European Union. France, Germany, and Spain spent billions subsidizing their aerospace industry over the years. The GE-Honeywell deal has been attacked by their European rivals from Rolls-Royce and Lufthansa to French avionics manufacturer Thales. Although the European Union imported much of its antitrust law from the United States, the antitrust law doctrine evolved in fundamentally different ways. In Europe, the main goal of antitrust law is to guarantee that all companies be able to compete on an equal playing field. The implication is that the European Union is just as concerned about how a transaction affects rivals as it is consumers. Complaints from competitors are taken more seriously in Europe, whereas in the United States it is the impact on consumers that constitutes the litmus test. Europeans accepted the legal concept of "portfolio power," which argues that a firm may achieve an unfair advantage over its competitors by bundling goods and services. Also, in Europe, the European Commission's Merger Task Force can prevent a merger without taking a company to court. The EU authorities continued to balk at approving the transaction without major concessions from the participants-concessions that GE believed would render the deal unattractive. On June 15, 2001, GE submitted its final offer to the EU regulators in a last-ditch attempt to breathe life into the moribund deal. GE knew that if it walked away, it could continue as it had before the deal was struck, secure in the knowledge that its current portfolio of businesses offered substantial revenue growth or profit potential. Honeywell clearly would fuel such growth, but it made sense to GE's management and shareholders only if it would be allowed to realize potential synergies between the GE and Honeywell businesses. GE said it was willing to divest Honeywell units with annual revenue of $2.2 billion, including regional jet engines, air-turbine starters, and other aerospace products. Anything more would jeopardize the rationale for the deal. Specifically, GE was unwilling to agree not to bundle (i.e., sell a package of components and services at a single price) its products and services when selling to customers. Another stumbling block was the GE Capital Aviation Services unit, the airplane-financing arm of GE Capital. The EU Competition Commission argued that that this unit would use its influence as one of the world's largest purchasers of airplanes to pressure airplane manufacturers into using GE products. The commission seemed to ignore that GE had only an 8 percent share of the global airplane leasing market and would therefore seemingly lack the market power the commission believed it could exert. On July 4, 2001, the European Union vetoed the GE purchase of Honeywell, marking it the first time a proposed merger between two U.S. companies has been blocked solely by European regulators. Having received U.S. regulatory approval, GE could ignore the EU decision and proceed with the merger as long as it would be willing to forego sales in Europe. GE decided not to appeal the decision to the EU Court of First Instance (the second highest court in the European Union), knowing that it could take years to resolve the decision, and withdrew its offer to merge with Honeywell. On December 15, 2005, a European court upheld the European regulator's decision to block the transaction, although the ruling partly vindicated GE's position. The European Court of First Instance said regulators were in error in assuming without sufficient evidence that a combined GE-Honeywell could crush competition in several markets. However, the court demonstrated that regulators would have to provide data to support either their approval or rejection of mergers by ruling on July 18, 2006, that regulators erred in approving the combination of Sony BMG in 2004. In this instance, regulators failed to provide sufficient data to document their decision. These decisions affirm that the European Union needs strong economic justification to overrule cross-border deals. GE and Honeywell, in filing the suit, said that their appeal had been made to clarify European rules with an eye toward future deals, since they had no desire to resurrect the deal. In the wake of these court rulings and in an effort to avoid similar situations in other geographic regions, coordination among antitrust regulatory authorities in different countries has improved. For example, in mid-2010, the U.S. Federal Trade Commission reached a consent decree with scientific instrument manufacturer Agilent in approving its acquisition of Varian, in which Agilent agreed to divest certain overlapping product lines. While both firms were based in California, each has extensive foreign operations, which necessitated gaining the approval of multiple regulators. Throughout the investigation, FTC staff coordinated enforcement efforts with the staffs of regulators in the European Union, Australia, and Japan. The cooperation was conducted under the auspices of certain bilateral cooperation agreements, the OECD Recommendation on Cooperation among its members, and the European Union Best Practices on Cooperation in Merger Investigation protocol. Discussion Questions -What are the important philosophical differences between U.S.and EU antitrust regulators? Explain the logic underlying these differences? To what extent are these differences influenced by political rather than economic considerations? Explain your answer.

All of the following factors are considered by U.S.antitrust regulators except for

All of the following are true of the U.S.Foreign Corrupt Practices Act except for which of the following:

In addition to market share,antitrust regulators consider barriers to entry,the number of product substitutes,and the degree of product differentiation.

All of the following are examples of antitakeover provisions commonly found in state statutes except for

Whenever either the acquiring or the target firm's stock is publicly traded,the transaction is subject to the substantial reporting requirements of federal securities laws.

The Securities Act of 1933 requires the registration of all securities issued to the public.Such registration requires which of the following disclosures:

Case Study Short Essay Examination Questions Justice Department Requires VeriFone Systems to Sell Assets before Approving Hypercom Acquisition Key Points: •Asset sales commonly are used by regulators to thwart the potential build-up of market power resulting from a merger or acquisition. •In such situations, defining the appropriate market served by the merged firms is crucial to identifying current and potential competitors. ______________________________________________________________________________ In late 2011, VeriFone Systems (VeriFone) reached a settlement with the U.S. Justice Department to acquire competitor Hypercom Corp on the condition it sold Hypercom's U.S. point-of-sale terminal business. Business use point-of-sale terminals are used by retailers to accept electronic payments such as credit and debit cards. The Justice Department had sued to block the $485 million deal on concerns that the combination would limit competition in the market for retail checkout terminals. The asset sale is intended to create a significant independent competitor in the U.S. The agreement stipulates that private equity firm Gores Group LLC will buy the terminals business. San Jose, California-based VeriFone is the second largest maker of electronic payment equipment in the U.S. and Hypercom, based in Scottsdale, Arizona, is number three. Together, the firms control more than 60 percent of the U.S. market for terminals used by retailers. Ingenico SA, based in France, is the largest maker of card-payment terminals. The Justice Department had blocked a previous attempt to sell Hypercom's U.S. point-of-sale business to rival Ingenico, saying that it would have increased concentration and undermined competition. VeriFone will retain Hypercom's point-of-sale equipment business outside the U.S. The acquisition will enable VeriFone to expand in the emerging market for payments made via mobile phones by giving it a larger international presence in retail stores and the opportunity to install more terminals capable of accepting mobile phone payments abroad. -Do you believe requiring consent decrees that oblige the acquiring firm to dispose of certain target company assets is an abuse of government power? Why or why not?

Case Study Short Essay Examination Questions Justice Department Requires VeriFone Systems to Sell Assets before Approving Hypercom Acquisition Key Points: •Asset sales commonly are used by regulators to thwart the potential build-up of market power resulting from a merger or acquisition. •In such situations, defining the appropriate market served by the merged firms is crucial to identifying current and potential competitors. ______________________________________________________________________________ In late 2011, VeriFone Systems (VeriFone) reached a settlement with the U.S. Justice Department to acquire competitor Hypercom Corp on the condition it sold Hypercom's U.S. point-of-sale terminal business. Business use point-of-sale terminals are used by retailers to accept electronic payments such as credit and debit cards. The Justice Department had sued to block the $485 million deal on concerns that the combination would limit competition in the market for retail checkout terminals. The asset sale is intended to create a significant independent competitor in the U.S. The agreement stipulates that private equity firm Gores Group LLC will buy the terminals business. San Jose, California-based VeriFone is the second largest maker of electronic payment equipment in the U.S. and Hypercom, based in Scottsdale, Arizona, is number three. Together, the firms control more than 60 percent of the U.S. market for terminals used by retailers. Ingenico SA, based in France, is the largest maker of card-payment terminals. The Justice Department had blocked a previous attempt to sell Hypercom's U.S. point-of-sale business to rival Ingenico, saying that it would have increased concentration and undermined competition. VeriFone will retain Hypercom's point-of-sale equipment business outside the U.S. The acquisition will enable VeriFone to expand in the emerging market for payments made via mobile phones by giving it a larger international presence in retail stores and the opportunity to install more terminals capable of accepting mobile phone payments abroad. -What alternative actions could the government take to limit market power resulting from a business combination?

Case Study Short Essay Examination Questions How the Microsoft Case Could Define Antitrust Law in the "New Economy" The Microsoft case was about more than just the software giant's misbehavior. Antitrust law was also on trial. When the Justice Department sued Microsoft in 1998, it argued that the century old Sherman Antitrust Act could be applied to police high tech monopolies. This now looks doubtful. As the digital economy evolves, it is likely to be full of natural monopolies (i.e., those in which only one producer can survive, in hardware, software, and communications), since consumers are motivated to prefer products compatible with ubiquitous standards. Under such circumstances, monopolies emerge. Companies whose products set the standards will be able to bundle other products with their primary offering, just like Microsoft has done with its operating system. What type of software can and cannot be bundled continues to be a thorny issue for antitrust policy. Although the proposed remedy did not stand on appeal, the Microsoft case had precedent value because of the perceived importance of innovation in the information-based, technology-driven "new economy." This case illustrates how "trust busters" are increasingly viewing innovation as a central issue in enforcement policy. Regulators increasingly are seeking to determine whether proposed business combinations either promote or impede innovation. Because of the accelerating pace of new technology, government is less likely to want to be involved in imposing remedies that seek to limit anticompetitive behaviors by requiring the government to monitor continuously a firm's performance to a consent decree. In fact, the government's frustration with the ineffectiveness of sanctions imposed on Microsoft in the early 1990s may have been a contributing factor in their proposal to divide the firm. Antitrust watchdogs are likely to pay more attention in the future to the impact of proposed mergers or acquisitions on start-ups, which are viewed as major contributors to innovation. In some instances, business combinations among competitors may be disallowed if they are believed to be simply an effort to slow the rate of innovation. The challenge for regulators will be to recognize when cooperation or mergers among competitors may provide additional incentives for innovation through a sharing of risk and resources. However, until the effects on innovation of a firm's actions or a proposed merger can be more readily measured, decisions by regulators may appear to be more arbitrary than well reasoned. The economics of innovation are at best ill-defined. Innovation cycles are difficult to determine and may run as long as several decades between the gestation of an idea and its actual implementation. Consequently, if it is to foster innovation, antitrust policy will have to attempt to anticipate technologies, markets, and competitors that do not currently exist to determine which proposed business combinations should be allowed and which firms with substantial market positions should be broken up. : -Was Microsoft a good antitrust case in which to test the effectiveness of antitrust policy on promoting innovation? Why or why not?

Case Study Short Essay Examination Questions Overcoming Regulatory Hurdles: Exelon Buys Constellation Energy Key Points: •Rising costs associated with more stringent environmental laws and the need to upgrade power grids are spurring consolidation in the fragmented U.S. electric utility industry. •However, acquiring utilities often is particularly challenging due to the complex regulatory approval process. ______________________________________________________________________________ Reflecting increased demands for clean power, an aging electric power grid and other infrastructure, and the rising cost of fuels to generate power, the highly fragmented U.S. electric utility industry has undergone significant consolidation in recent years. By achieving increased scale, electric utilities are hoping to lower operating costs and gain the financial strength to finance the necessary investments in infrastructure and alternative energy sources. Utilities also are increasingly confronted by a combination of regulated and non-regulated electricity markets. In most retail electricity markets in which electricity is sold directly to the end customer, rates that can be charged are regulated by local public utility commissions. While some utilities own their own generating capacity, others are dependent to varying degrees on purchasing electric power in the wholesale power market. A wholesale electricity market exists when competing HYPERLINK "http://en.wikipedia.org/wiki/Electricity_generation" \o "Electricity generation" generators offer their electricity output to HYPERLINK "http://en.wikipedia.org/wiki/Electricity_retailing" \o "Electricity retailing" retailers. Increasingly, large end-users can bypass retail electric utility companies to buy directly from wholesale power generators in a bid to access lower cost power by eliminating the middleman. Some states allow competition in their electricity markets while others do not. In competitive markets, power suppliers, including renewable and conventional oil and gas power generators, compete against each other to provide the best possible service at the lowest cost in order to attract and retain customers. In contrast, in monopoly-regulated states, power providers have no incentive to innovate or lower costs because ratepayers are captive to their monopoly-protected supplier. Some utilities are attempting to shift to a mix of regulated and non-regulated electricity markets. The latest illustration of this strategy is Exelon Corp's acquisition of Constellation Energy for $7.9 billion in April 2011. The deal creates the largest electric utility and power generator in the U.S. The combined firm will gain stakes in five nuclear reactors and become the largest U.S. electricity marketer. Exelon is currently the largest owner and operator of U.S. nuclear plants and owns electric utilities Commonwealth Edison in Chicago and Peco Energy in Pennsylvania. Constellation owns the utility Baltimore Gas & Electric. Most of its revenue comes from the retail sale of electricity in states that allow competition. The merger creates the number one competitive energy provider with one of the industry's cleanest and lowest cost power generation plant systems in the country. The combined company will keep the Exelon name and its headquarters in Chicago, as well as own more than 34 gigawatts of power generation. The company's power generation mix would be 55 percent nuclear, 24 percent natural gas, 6 percent hydro and renewable, and 7 percent oil, and 6 percent coal. Exelon will add 1.2 million electric customers in Constellation service areas. This deal is Exelon's largest transaction. Exelon has tried unsuccessfully three times to buy other electric power companies since 2003. Exelon was thwarted by regulators in efforts to buy independent power producer NRG Energy in 2009, Public Service Enterprise Group in 2006, and Illinois Power in 2003. Constellation has been the target of two failed bids by other suitors. A $14.8 billion sale of Constellation to NextEra Energy Inc., the largest U.S. wind-power generator and owner of Florida's largest utility, collapsed in 2005. Exelon announced on December 20, 2011 that it had received approval by the U.S. Justice Department to buy Constellation Energy Group Inc. The approval was contingent on Exelon selling three electricity generating plants in Maryland. The sale of the three power plants in the Baltimore area will significantly reduce the combined firm's market share in that region. The Justice Department believed that the combination, as originally proposed, would have lessened competition in the wholesale electricity market and increased prices for consumers in the Mid-Atlantic states (i.e., New York, Pennsylvania, and Maryland). Exelon and Constellation have also received regulatory approval from the Maryland and New York regulators as well as the Nuclear Regulatory Commission. : -What factors other than market share should be considered in determining whether a potential merger might result in an increased pricing power? Of these factors,which do you believe represent the most important justifications for the merger of Exelon and Constellation?

Foreign competitors are not relevant to antitrust regulators when trying to determine if a merger of two domestic firms would create excessive pricing power.

Negotiated agreements between the buyer and seller rarely have a provision enabling the parties to back out,if the proposed transaction is challenged by the FTC or SEC.

Which of the following are used by antitrust regulators to determine whether a proposed transaction will be anti-competitive?