Exam 2: The Regulatory Environment

Case Study Short Essay Examination Questions Anthem-Well Point Merger Hits Regulatory Snag In mid-2004, a California insurance regulator refused to approve Anthem Inc's ("Anthem") $20 billion acquisition of WellPoint Health NetWorks Incorporated ("WellPoint"). If allowed, the proposed merger would result in the nation's largest health insurer, with 28 million members. After months of regulatory review, the deal had already received approval from 10 state regulators, the Justice Department, and 97% of the shares outstanding of both firms. Nonetheless, California Insurance Commissioner, John Garamendi, denounced the proposed transaction as unreasonably enriching the corporate officers of the firms without improving the availability or quality of healthcare. Earlier the same day, Lucinda Ehnes, Director of the Department of Managed Healthcare in California approved the transaction. The Managed Healthcare Agency has regulatory authority over Blue Cross of California, a managed healthcare company that is by far the largest and most important WellPoint operation in the state. Mr. Garamendi's department has regulatory authority over about 4% of WellPoint's California business through its BC Life & Health Insurance Company subsidiary ("BC"). Interestingly, Ms. Ehnes is an appointee of California's Republican governor, Arnold Schwarzenegger, while Mr. Garamendi, a Democrat, is an elected official who had previously run unsuccessfully for governor. Moreover, two week's earlier he announced that he will be a candidate for lieutenant governor in 2006. Mr. Garamendi had asked Anthem to invest in California's low income communities an amount equal to the executive compensation payable to WellPoint executives due to termination clauses in their contracts. Estimates of the executive compensation ranged as high as $600 million. Anthem immediately sued John Garamendi, seeking to overrule his opposition to the transaction. In the lawsuit, Anthem argued that Garamendi acted outside the scope of his authority by basing his decision on personal beliefs about healthcare policy and executive compensation rather than on the criteria set forth in California state law. Anthem argued that the executive compensation payable for termination if WellPoint changed ownership was part of the affected executives' employment contracts negotiated well in advance of the onset of Anthem's negotiations to acquire WellPoint. The California insurance regulator finally dropped his objections when the companies agreed to pay $600 million to help cover the cost of treating California's uninsured residents. Following similar concessions in Georgia, Anthem was finally able to complete the transaction on December 1, 2004. Closing occurred almost one year after the transaction had been announced. : -What are the risks to Anthem and WellPoint of delaying the closing date? Be specific.

The primary shortcoming of industry concentration ratios is the frequent inability of antitrust regulators to define accurately what constitutes an industry,the failure to reflect ease of entry or exit,foreign competition,and the distribution of firm size.

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. : -Comment on whether antitrust policy can be used as an effective means of encouraging innovation.

The purpose of the 1968 Williams Act was to

A heavily concentrated market is one in which a single or a few firms control a disproportionately large share of the total market.

If the regulatory authorities suspect that a potential transaction may be anti-competitive,they will file a lawsuit to prevent completion of the transaction.

U.S.antitrust regulators may approve a horizontal transaction even if it results in the combined firms having substantial market share if it can be shown that significant cost efficiencies would result.

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. -Comment on the fairness and effectiveness of using the imposition of heavy fines to promote social policy.

In a tender offer,which of the following is true?

Antitrust regulators take into account the likelihood that a firm would fail and exit a market if it is not allowed to merger with another firm.

Transactions involving firms in different countries are complicated by having to deal with multiple regulatory jurisdictions in specific countries or regions.

Under a consent decree,the regulatory authorities agree to approve a proposed transaction if the parties involved agree to take certain actions following closing.

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 is anti-trust policy and why is it important? Why might its application be particularly important in the utility industry?

All of the following are true of the Williams Act except for

State "blue sky" laws are designed to

European antitrust policies differ from those in the U.S.in what important way?

Case Study Short Essay Examination Questions Anthem-Well Point Merger Hits Regulatory Snag In mid-2004, a California insurance regulator refused to approve Anthem Inc's ("Anthem") $20 billion acquisition of WellPoint Health NetWorks Incorporated ("WellPoint"). If allowed, the proposed merger would result in the nation's largest health insurer, with 28 million members. After months of regulatory review, the deal had already received approval from 10 state regulators, the Justice Department, and 97% of the shares outstanding of both firms. Nonetheless, California Insurance Commissioner, John Garamendi, denounced the proposed transaction as unreasonably enriching the corporate officers of the firms without improving the availability or quality of healthcare. Earlier the same day, Lucinda Ehnes, Director of the Department of Managed Healthcare in California approved the transaction. The Managed Healthcare Agency has regulatory authority over Blue Cross of California, a managed healthcare company that is by far the largest and most important WellPoint operation in the state. Mr. Garamendi's department has regulatory authority over about 4% of WellPoint's California business through its BC Life & Health Insurance Company subsidiary ("BC"). Interestingly, Ms. Ehnes is an appointee of California's Republican governor, Arnold Schwarzenegger, while Mr. Garamendi, a Democrat, is an elected official who had previously run unsuccessfully for governor. Moreover, two week's earlier he announced that he will be a candidate for lieutenant governor in 2006. Mr. Garamendi had asked Anthem to invest in California's low income communities an amount equal to the executive compensation payable to WellPoint executives due to termination clauses in their contracts. Estimates of the executive compensation ranged as high as $600 million. Anthem immediately sued John Garamendi, seeking to overrule his opposition to the transaction. In the lawsuit, Anthem argued that Garamendi acted outside the scope of his authority by basing his decision on personal beliefs about healthcare policy and executive compensation rather than on the criteria set forth in California state law. Anthem argued that the executive compensation payable for termination if WellPoint changed ownership was part of the affected executives' employment contracts negotiated well in advance of the onset of Anthem's negotiations to acquire WellPoint. The California insurance regulator finally dropped his objections when the companies agreed to pay $600 million to help cover the cost of treating California's uninsured residents. Following similar concessions in Georgia, Anthem was finally able to complete the transaction on December 1, 2004. Closing occurred almost one year after the transaction had been announced. : -To what extent should regulators use their powers to promote social policy?

All of the following is true about proxy contests except for

The U.S.Securities Act of 1933 requires that all securities offered to the public must be registered with the government.

Federal securities and antitrust laws are the only laws affecting corporate takeovers.Other laws usually have little impact.