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Attorney Navpreet Panjrath: Definitions

The document discusses mergers and acquisitions (M&A) in India, noting that M&A deals have doubled from the previous year and are expected to exceed $100 billion. It defines various types of mergers such as horizontal, vertical, and conglomerate mergers. The document also outlines the legal procedures for mergers, amalgamations, and takeovers according to the Indian Companies Act of 1956.

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0% found this document useful (0 votes)
106 views16 pages

Attorney Navpreet Panjrath: Definitions

The document discusses mergers and acquisitions (M&A) in India, noting that M&A deals have doubled from the previous year and are expected to exceed $100 billion. It defines various types of mergers such as horizontal, vertical, and conglomerate mergers. The document also outlines the legal procedures for mergers, amalgamations, and takeovers according to the Indian Companies Act of 1956.

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swetavita
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We take content rights seriously. If you suspect this is your content, claim it here.
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Attorney Navpreet Panjrath

Introduction
The Indian economy has been growing with a rapid pace and has been emerging at the top, be it IT, R&D, pharmaceutical, infrastructure, energy,
consumer retail, telecom, financial services, media, and hospitality etc. It is second fastest growing economy in the world with GDP touching 9.3
% last year. This growth momentum was supported by the double digit growth of the services sector at 10.6% and industry at 9.7% in the first
quarter of 2006-07. Investors, big companies, industrial houses view Indian market in a growing and proliferating phase, whereby returns on
capital and the shareholder returns are high. Both the inbound and outbound mergers and acquisitions have increased dramatically. According to
Investment bankers, Merger & Acquisition (M&A) deals in India will cross $100 billion this year, which is double last year’s level and
quadruple of 2005.

In the first two months of 2007, corporate India witnessed deals worth close to $40 billion. One of the first overseas acquisitions by an Indian
company in 2007 was Mahindra & Mahindra’s takeover of 90 percent stake in Schoneweiss, a family-owned German company with over 140
years of experience in forging business. What hit the headlines early this year was Tata’s takeover of Corus for slightly over $10 billion. On the
heels of that deal, Hutchison Whampoa of Hong Kong sold their controlling stake in Hutchison-Essar to Vodafone for a whopping $11.1 billion.
Bangalore-based MTR’s packaged food division found a buyer in Orkala, a Norwegian company for $100 million. Service companies have also
joined the M&A game.

The taxation practice of Mumbai-based RSM Ambit was acquired by PricewaterhouseCoopers. There are many other bids in the pipeline. On an
average, in the last four years corporate earnings of companies in India have been increasing by 20-25 percent, contributing to enhanced
profitability and healthy balance sheets. For such companies, M&As are an effective strategy to expand their businesses and acquire global
footprint.

Mergers or amalgamation, result in the combination of two or more companies into one, wherein the merging entities lose their identities. No
fresh investment is made through this process. However, an exchange of shares takes place between the entities involved in such a process.
Generally, the company that survives is the buyer which retains its identity and the seller company is extinguished.

Definitions:
Mergers, acquisitions and takeovers have been a part of the business world for centuries. In today's dynamic economic environment, companies
are often faced with decisions concerning these actions - after all, the job of management is to maximize shareholder value. Through mergers
and acquisitions, a company can (at least in theory) develop a competitive advantage and ultimately increase shareholder value. The said terms to
a layman may seem alike but in legal/ corporate terminology, they can be distinguished from each other:

# Merger: A full joining together of two previously separate corporations. A true merger in the legal sense occurs when both businesses dissolve
and fold their assets and liabilities into a newly created third entity. This entails the creation of a new corporation.

# Acquisition: Taking possession of another business. Also called a takeover or buyout. It may be share purchase (the buyer buys the shares of
the target company from the shareholders of the target company. The buyer will take on the company with all its assets and liabilities. ) or asset
purchase (buyer buys the assets of the target company from the target company)
In simple terms, A merger involves the mutual decision of two companies to combine and become one entity; it can be seen as a decision made
by two "equals", whereas an acquisition or takeover on the other hand, is characterized the purchase of a smaller company by a much larger one.
This combination of "unequals" can produce the same benefits as a merger, but it does not necessarily have to be a mutual decision. A typical
merger, in other words, involves two relatively equal companies, which combine to become one legal entity with the goal of producing a
company that is worth more than the sum of its parts. In a merger of two corporations, the shareholders usually have their shares in the old
company exchanged for an equal number of shares in the merged entity. In an acquisition, the acquiring firm usually offers a cash price per share
to the target firm’s shareholders or the acquiring firm's share's to the shareholders of the target firm according to a specified conversion ratio.
Either way, the purchasing company essentially finances the purchase of the target company, buying it outright for its shareholders

# Joint Venture: Two or more businesses joining together under a contractual agreement to conduct a specific business enterprise with both
parties sharing profits and losses. The venture is for one specific project only, rather than for a continuing business relationship as in a strategic
alliance.

# Strategic Alliance: A partnership with another business in which you combine efforts in a business effort involving anything from getting a
better price for goods by buying in bulk together to seeking business together with each of you providing part of the product. The basic idea
behind alliances is to minimize risk while maximizing your leverage.

# Partnership: A business in which two or more individuals who carry on a continuing business for profit as co-owners. Legally, a partnership is
regarded as a group of individuals rather than as a single entity, although each of the partners file their share of the profits on their individual tax
returns.

Many mergers are in truth acquisitions. One business actually buys another and incorporates it into its own business model. Because of this
misuse of the term merger, many statistics on mergers are presented for the combined mergers and acquisitions (M&A) that are occurring. This
gives a broader and more accurate view of the merger market .
Types of Mergers:

From the perception of business organizations, there is a whole host of different mergers. However, from an economist point of view i.e. based
on the relationship between the two merging companies, mergers are classified into following:

# Horizontal merger- Two companies that are in direct competition and share the same product lines and markets i.e. it results in the
consolidation of firms that are direct rivals. E.g. Exxon and Mobil, Ford and Volvo, Volkswagen and Rolls Royce and Lamborghini

# Vertical merger- A customer and company or a supplier and company i.e. merger of firms that have actual or potential buyer-seller relationship
eg. Ford- Bendix, Time Warner-TBS.

# Conglomerate merger- generally a merger between companies which do not have any common business areas or no common relationship of
any kind. Consolidated firma may sell related products or share marketing and distribution channels or production processes. Such kind of
merger may be broadly classified into following:

# Product-extension merger - Conglomerate mergers which involves companies selling different but related products in the same market or sell
non-competing products and use same marketing channels of production process. E.g. Phillip Morris-Kraft, Pepsico- Pizza Hut, Proctor and
Gamble and Clorox

# Market-extension merger - Conglomerate mergers wherein companies that sell the same products in different markets/ geographic markets.
E.g. Morrison supermarkets and Safeway, Time Warner-TCI.

# Pure Conglomerate merger- two companies which merge have no obvious relationship of any kind. E.g. BankCorp of America- Hughes
Electronics.

On a general analysis, it can be concluded that Horizontal mergers eliminate sellers and hence reshape the market structure i.e. they have direct
impact on seller concentration whereas vertical and conglomerate mergers do not affect market structures e.g. the seller concentration directly.
They do not have anticompetitive consequences.

The circumstances and reasons for every merger are different and these circumstances impact the way the deal is dealt, approached, managed
and executed. .However, the success of mergers depends on how well the deal makers can integrate two companies while maintaining day-to-day
operations. Each deal has its own flips which are influenced by various extraneous factors such as human capital component and the leadership.
Much of it depends on the company’s leadership and the ability to retain people who are key to company’s on going success. It is important, that
both the parties should be clear in their mind as to the motive of such acquisition i.e. there should be census- ad- idiom. Profits, intellectual
property, costumer base are peripheral or central to the acquiring company, the motive will determine the risk profile of such M&A. Generally
before the onset of any deal, due diligence is conducted so as to gauze the risks involved, the quantum of assets and liabilities that are acquired
etc.

Legal Procedures for Merger, Amalgamations and Take-overs


The basis law related to mergers is codified in the Indian Companies Act, 1956 which works in tandem with various regulatory policies. The
general law relating to mergers, amalgamations and reconstruction is embodied in sections 391 to 396 of the Companies Act, 1956 which jointly
deal with the compromise and arrangement with creditors and members of a company needed for a merger. Section 391 gives the Tribunal the
power to sanction a compromise or arrangement between a company and its creditors/ members subject to certain conditions. Section 392 gives
the power to the Tribunal to enforce and/ or supervise such compromises or arrangements with creditors and members. Section 393 provides for
the availability of the information required by the creditors and members of the concerned company when acceding to such an arrangement.
Section 394 makes provisions for facilitating reconstruction and amalgamation of companies, by making an appropriate application to the
Tribunal. Section 395 gives power and duty to acquire the shares of shareholders dissenting from the scheme or contract approved by the
majority.

And Section 396 deals with the power of the central government to provide for an amalgamation of companies in the national interest. In any
scheme of amalgamation, both the amalgamating company or companies and the amalgamated company should comply with the requirements
specified in sections 391 to 394 and submit details of all the formalities for consideration of the Tribunal. It is not enough if one of the
companies alone fulfils the necessary formalities. Sections 394, 394A of the Companies Act deal with the procedures and the requirements to be
followed in order to effect amalgamations of companies coupled with the provisions relating to the powers of the Tribunal and the central
government in the matter of bringing about amalgamations of companies.

After the application is filed, the Tribunal would pass orders with regard to the fixation of the dates of the hearing, and the provision of a copy of
the application to the Registrar of Companies and the Regional Director of the Company Law Board in accordance with section 394A and to the
Official Liquidator for the report confirming that the affairs of the company have not been conducted in a manner prejudicial to the interest of
the shareholders or the public. Before sanctioning the scheme of amalgamation, the Tribunal has also to give notice of every application made to
it under section 391 to 394 to the central government and the Tribunal should take into consideration the representations, if any, made to it by the
government before passing any order granting or rejecting the scheme of amalgamation. Thus the central government is provided with an
opportunity to have a say in the matter of amalgamations of companies before the scheme of amalgamation is approved or rejected by the
Tribunal.

The powers and functions of the central government in this regard are exercised by the Company Law Board through its Regional Directors.
While hearing the petitions of the companies in connection with the scheme of amalgamation, the Tribunal would give the petitioner company an
opportunity to meet all the objections which may be raised by shareholders, creditors, the government and others. It is, therefore, necessary for
the company to keep itself ready to face the various arguments and challenges. Thus by the order of the Tribunal, the properties or liabilities of
the amalgamating company get transferred to the amalgamated company. Under section 394, the Tribunal has been specifically empowered to
make specific provisions in its order sanctioning an amalgamation for the transfer to the amalgamated company of the whole or any parts of the
properties, liabilities, etc. of the amalgamated company. The rights and liabilities of the employees of the amalgamating company would stand
transferred to the amalgamated company only in those cases where the Tribunal specifically directs so in its order.

The assets and liabilities of the amalgamating company automatically gets vested in the amalgamated company by virtue of the order of the
Tribunal granting a scheme of amalgamation. The Tribunal also make provisions for the means of payment to the shareholders of the transferor
companies, continuation by or against the transferee company of any legal proceedings pending by or against any transferor company, the
dissolution (without winding up) of any transferor company, the provision to be made for any person who dissents from the compromise or
arrangement, and any other incidental consequential and supplementary matters to secure the amalgamation process if it is necessary. The order
of the Tribunal granting sanction to the scheme of amalgamation must be submitted by every company to which the order applies (i.e., the
amalgamating company and the amalgamated company) to the Registrar of Companies for registration within thirty days.

Motives behind M & A


These motives are considered to add shareholder value:
# Economies of Scale: This generally refers to a method in which the average cost per unit is decreased through increased production, since fixed
costs are shared over an increased number of goods. In a layman’s language, more the products, more is the bargaining power. This is possible
only when the companies merge/ combine/ acquired, as the same can often obliterate duplicate departments or operation, thereby lowering the
cost of the company relative to theoretically the same revenue stream, thus increasing profit. It also provides varied pool of resources of both the
combining companies along with a larger share in the market, wherein the resources can be exercised.

# Increased revenue /Increased Market Share: This motive assumes that the company will be absorbing the major competitor and thus increase
its power (by capturing increased market share) to set prices.

# Cross selling: For example, a bank buying a stock broker could then sell its banking products to the stock brokers customers, while the broker
can sign up the bank’ customers for brokerage account. Or, a manufacturer can acquire and sell complimentary products.
# Corporate Synergy: Better use of complimentary resources. It may take the form of revenue enhancement (to generate more revenue than its
two predecessor standalone companies would be able to generate) and cost savings (to reduce or eliminate expenses associated with running a
business).

# Taxes : A profitable can buy a loss maker to use the target’s tax right off i.e. wherein a sick company is bought by giants.

# Geographical or other diversification: this is designed to smooth the earning results of a company, which over the long term smoothens the
stock price of the company giving conservative investors more confidence in investing in the company. However, this does not always deliver
value to shareholders.

# Resource transfer: Resources are unevenly distributed across firms and interaction of target and acquiring firm resources can create value
through either overcoming information asymmetry or by combining scarce resources. Eg: Laying of employees, reducing taxes etc.

# Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge
may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing
in the investment community: bigger firms often have an easier time raising capital than smaller ones.

Advantages of M&A’s:
The general advantage behind mergers and acquisition is that it provides a productive platform for the companies to grow, though much of it
depends on the way the deal is implemented. It is a way to increase market penetration in a particular area with the help of an established base.
As per Mr D.S Brar (former C.E.O of Ranbaxy pharmaceuticals), few reasons for M&A’s are:
# Accessing new markets
# maintaining growth momentum
# acquiring visibility and international brands
# buying cutting edge technology rather than importing it
# taking on global competition
# improving operating margins and efficiencies
# developing new product mixes

Conclusion
In real terms, the rationale behind mergers and acquisitions is that the two companies are more valuable, profitable than individual companies
and that the shareholder value is also over and above that of the sum of the two companies. Despite negative studies and resistance from the
economists, M&A’s continue to be an important tool behind growth of a company. Reason being, the expansion is not limited by internal
resources, no drain on working capital - can use exchange of stocks, is attractive as tax benefit and above all can consolidate industry - increase
firm's market power.

With the FDI policies becoming more liberalized, Mergers, Acquisitions and alliance talks are heating up in India and are growing with an ever
increasing cadence. They are no more limited to one particular type of business. The list of past and anticipated mergers covers every size and
variety of business -- mergers are on the increase over the whole marketplace, providing platforms for the small companies being acquired by
bigger ones.

The basic reason behind mergers and acquisitions is that organizations merge and form a single entity to achieve economies of scale, widen their
reach, acquire strategic skills, and gain competitive advantage. In simple terminology, mergers are considered as an important tool by companies
for purpose of expanding their operation and increasing their profits, which in façade depends on the kind of companies being merged. Indian
markets have witnessed burgeoning trend in mergers which may be due to business consolidation by large industrial houses, consolidation of
business by multinationals operating in India, increasing competition against imports and acquisition activities. Therefore, it is ripe time for
business houses and corporates to watch the Indian market, and grab the opportunity.
Hindu business line 5 march 2007 - Newspapers are abuzz with speculation. India is
emerging a vibrant player in the world of mergers and acquisitions (M&A). Not long
ago, Mr Lakshmi Mittal acquired Arcelor, and had Tata Steel's bid for the Corus group of
the UK gone through, it would have made the company the world's fifth largest
producer. Tata Group companies and many in the information technology,
pharmaceutical and banking sectors have made a host of other acquisitions. Could
anybody have imagined such a showing by Indian entrepreneurs even a few years ago?

In many areas, India is emerging at the top. A leader in Information Technology, India
was designated the third most attractive research and development centre in the world
by Unctad (United Nations Conference on Trade and Development) in its World
Investment Report (WIR), 2005. India is also the biggest foreign investor in the UK,
outpacing even the US.

There has been a spurt in overseas investments by India. From $0.7 billion in 2000-01,
the overseas investments increased to $2.7 billion in 2005-06 and would have soared
to $11 billion in 2006-07 had the Tata's Corus buy gone through; that is, it would be
almost double the inbound foreign direct investments, estimated at around $5.5 billion
for 2006-07. The industries that attracted Indian investments included metal, energy,
pharmaceutical, IT and banking. But why M&As? Six reasons, according to the former
Ranbaxy CEO, Mr D. S. Brar, drive M&As: Accessing new markets, maintaining growth
momentum, acquiring visibility and international brands, buying cutting-edge
technology rather than importing it, developing new product mixes, improving
operating margins and efficiencies, and taking on the global competition. Unctad's WIR
2006 pointed out four factors that drive developing nations to go global. First, it helps
market penetration. Indian multinational corporations looking for niche markets — such
as IT services and pharmaceutical products — gained substantially through outbound
investments.

Second, rising labour costs at home push MNCs abroad. Third, competitive pressures in
the domestic economy force MNCs to invest abroad. Fourth, home government policy
liberalisations stimulate outbound investments; indeed, since 2003, New Delhi has
taken steps to liberalise overseas investments.

According to Unctad's WIR 2006, developing and transition economies have emerged
significant outward investors, as this has become an important tool for development of
the domestic economy.

`Emerging' investors

In 1990, only six developing and transition countries had made any outward
investment. In 2005, the number had increased to 25. Between 1987 and 2005, the
share of global M&As by MNCs from developing and transition countries rose from 4 per
cent to 13 per cent in value terms, and their share in greenfield and expansion projects
exceeded 15 per cent in 2005.
This buoyancy of overseas investment by the developing and transition countries is
mainly because of India and China that are emerging the significant players. Happily
they are not in competition as in the case of inbound foreign direct investments. Their
objectives of and destinations for overseas investment are different.

Comparisons with China

Though China has also stepped up its overseas investments they are of little
consequence vis-à-vis the FDI inflows into the country, which touched $60 billion.
China's direct investments overseas were $6.92 billion in 2005, up 25.8 per cent over
the previous year. Also, while Indian investments are northwards, Chinese investment
are south-south. In 2005-06 and 2006-07, over 80 per cent of Indian investment
abroad was made in the US and the UK. As much as 60 per cent of China's overseas
investments flowed into Asian countries.

Though India's public sector took the lead in investing abroad, especially looking for oil
assets, the private sector is now going full speed ahead, driving overseas investments.
In China, state enterprises and the public sector have been the principal investors. In
2004, 80 per cent of China's outbound investments was made by state and public
sector-owned enterprises. However, a major share of China's private overseas
investment is tied with "round tripping" funds (estimated at 15-20 per cent), flowing
from tax havens such as Hong Kong, the Cayman Islands and the Virgin Islands — the
three largest destinations for outward investments.

From this perspective, India's outbound investment is more accountable in global FDI
outflow than China's. India's primary motive is to increase market penetration while
China's aim is to bolster its domestic industries.

Eyebrows have been raised over the rapid growth in India's investments abroad, but
that should be no reason to curb them as the benefits they bring to domestic industry
are many and significant.

The most important benefit that the developing and transition economies derive from
outward investments is increased competitiveness. This strengthens the arms of local
companies and of the MNCs to survive in a competitive milieu. Therefore, the more the
domestic industries invest abroad, the more the benefits to the home economy

Washington, D.C.

Mr. Chairman and Members of the Committee, I am pleased to present the Statement of the
Federal Trade Commission on Mergers and Corporate Consolidation in the New Economy. The
subject is one immediately familiar to us because the Commission, along with the Antitrust
Division of the Department of Justice, has a statutory responsibility to review the competitive
implications of almost every large merger that is proposed.

Recently, merger review has been an extremely daunting and challenging task. The number of
mergers reported to the antitrust agencies under the Hart-Scott-Rodino ("HSR") Act has
increased dramatically from 1,529 filings in fiscal year 1991 to an estimated 4,500 in fiscal year
1998. It has been predicted that the market value of merger transactions this year could exceed
$2 trillion, compared to $600 billion for the peak year (1989) during the merger wave of the
1980's. Although antitrust requires a highly case-specific analysis, over the course of reviewing
almost 20,000 transactions in the last seven years, we have been able to gain valuable insight into
the forces that drive mergers. HSR regulations require merging companies to provide certain
studies, analyses and reports that evaluate the proposed transaction. In many cases, the
companies supplement those documents with "white papers" prepared for the antitrust agencies
that offer their reasons for a particular transaction. These documents, as well as other evidence
gathered in our investigations, reveal a number of factors that underlie the growth in mergers and
acquisitions. This statement will touch on some of the economic forces and corporate
motivations underpinning this merger phenomenon, what it means for the competitiveness of the
U.S. economy, and the appropriate governmental response.

I. Market Conditions and Corporate Responses

Why has the pace of consolidations increased so dramatically in the last few years? Are mergers
today different in character from those of a decade ago? We believe it is fair to say that the
current merger wave is significantly different from the "junk bond"-fueled mergers of the
1980's. Some of those mergers involved the acquisition of unrelated businesses that were
targeted for their break-up value or designed to generate cash for corporate raiders. Today's
mergers are more likely to be motivated by fundamental developments in the rapidly changing
economy and reflect more traditional corporate goals of efficiency and competitiveness. Among
the more prominent factors are the following:

Globalization of competition. Many of the largest and most important product markets for
American consumers have become much more global in scope -- automobiles, computers,
pharmaceuticals, and commercial aircraft, to name just a few. A merger may enhance a firm's
ability to compete in foreign markets by providing rapid access to an established distribution
system, knowledge of local markets, economies of scale, and complementary products.

Deregulation. Many mergers are taking place in industries undergoing or anticipating


deregulation. In the 1980's, the Commission reviewed a substantial number of mergers in the
natural gas industry, which was then undergoing deregulation. Now, deregulatory changes are
taking place in electricity, telecommunications, and banking and financial services. Deregulation
often engenders structural change and more competition. Mergers may enable firms to acquire
quickly the assets and other capabilities needed to expand into new product or geographic
markets. Deregulation also facilitates market entry across traditional industry lines. For example,
banks seek to provide other financial services, and other firms seek to serve markets traditionally
served by banks. Firms increasingly seek to provide a bundle of services that cross industry lines
as regulatory constraints are lowered. We see that happening in several deregulating industries
such as financial services, telecommunications, and public utilities. Consequently, we can expect
to see a number of cross-industry mergers.

Industry downsizing and consolidation. While this probably was a more important factor several
years ago, a number of mergers continue to be associated with industry downsizing and
consolidation. That is particularly true in some defense industries. With lower procurement
levels and fewer new projects on the horizon, companies have sought to rationalize or reduce
capacity through merger.

Downsizing and consolidation also are significant forces in the health care industry. Changes in
health care practices, such as shorter hospital stays, may result in excess capacity in some
hospitals. A merger may enable two hospitals to eliminate unneeded capacity and operate more
efficiently. Structural changes also are occurring in health care as firms seek not only to become
more efficient but to meet broader public policy goals, such as increasing the cost effectiveness
of health care, increasing the quality of care, and providing diversity of choice. This, too, can
lead to mergers that cross traditional industry lines.

Technological change. Economic progress is often driven by innovation and technological


change, and mergers may be a response to that change or contribute to it. In a fast-moving,
technology-driven economy, a merger may enable a firm to acquire quickly the technology or
other capabilities to enter a new market or to be a stronger competitor. The communications
industry is a good example. Other mergers may be driven by a desire to consolidate research and
development resources to produce a greater research capability. Some pharmaceutical mergers fit
that mold.

Strategic mergers. Many mergers, perhaps more than in some years past, involve direct
competitors and appear to be motivated by "strategic" considerations. Firms are increasingly
concerned about being number one or a strong number two in their markets, or perhaps even
dominant. That drive can lead to mergers intended to boost market share, eliminate competitors,
or acquire an important supplier of inputs needed by competitors. In these types of mergers we
may be concerned that a firm has acquired a dominant position. In addition, a concentrated
market can make it easier to collude. These mergers also require close scrutiny.

Financial market conditions. Low interest rates and low inflation have produced a favorable
climate for investment, and that is reflected in the booming stock market. One result of the
above-described emphasis on strategic combinations is that relatively fewer mergers today are
financed with cash or debt, as compared to the 1980's. Today, more companies are financing
mergers through exchanges of stock. To the extent that a company's improved performance is
reflected in higher stock values, its managers may be more willing to acquire another corporation
or be acquired by another corporation through the exchange of stock.

II. How Does The Merger Wave Affect Consumers and the U.S. Economy?

Some mergers can harm competition. The harm to competition, in turn, can harm consumers in
many ways -- higher prices, restricted supply of products, lower quality goods and services, less
variety from which to choose, and less innovation for the future. In addition, less competition
may dampen the incentives to be efficient, and economic performance will suffer. A fundamental
goal of the Clayton Act, including its Hart-Scott-Rodino provisions, therefore, is to prevent harm
to competition by stopping anticompetitive mergers before they take place. The Commission's
efforts to achieve this goal during the current merger wave explains why the Commission now
devotes over two-thirds of its competition mission resources to merger enforcement, compared to
about fifty percent a few years ago. We believe those resources are well spent and produce
significant dividends in protecting American consumers from competitive abuses and keeping
the U.S. economy strong and competitive.

But current resources are inadequate to the task. Despite a three-fold increase in merger activity
since 1991, the total workyears budgeted for the Commission's competition mission have
remained essentially flat. We have tried to keep pace by being more efficient and working longer
hours, and by shifting resources from non-merger enforcement. We are now stretched to the
limit. Merger analysis has become increasingly sophisticated and fact-intensive to ensure that we
understand the competitive implications of each transaction. We must examine the possible
anticompetitive consequences as well as the potential efficiencies and procompetitive benefits of
the transaction. This analysis produces better decisions, but it also is more resource-intensive.
Consequently, more resources are needed for both the FTC and the Antitrust Division to do our
job of ensuring a competitive American economy.

Although we have found that the majority of mergers do not appear to harm competition, we are
able to make that determination only after reviewing the facts of each transaction. We must be
able to do that quickly and accurately. We believe we have been quite successful under the
circumstances. For example, of the 3,702 transactions filed under HSR in fiscal year 1997,
roughly 70% were reviewed very quickly and allowed to proceed before the end of the statutory
30-day waiting period; that is, they were granted "early termination." Approximately 14% of
the transactions raised enough issues to proceed beyond the initial review stage and were
assigned to either the Commission or the Antitrust Division for further substantive review. In the
past year, 4.5% raised questions serious enough to warrant a request for additional information
("second request") from either the Commission or the Antitrust Division. These are the most
intensive investigations and require major resources. Almost half of those transactions resulted in
enforcement action or abandonment due to antitrust concerns. In fiscal 1997, the Commission
and the Antitrust Division challenged a total of 52 mergers through court or administrative
actions and settlement proceedings, and an additional seven transactions were abandoned before
formal enforcement action was announced. Over the past three fiscal years (1995-1997),
Commission action has resulted in an average of 32 transactions per year either challenged or
abandoned. Although the number of problematic mergers is small in relation to the total, the
consequences of anticompetitive mergers can be enormous. For example, enforcement action in
one case alone -- the proposed merger of Staples and Office Depot -- saved consumers an
estimated $1.1 billion over five years.

III. The Antitrust Agencies' Response

Given the tremendous numbers of recent mergers, it is appropriate to ask whether the antitrust
agencies are doing enough to prevent anticompetitive mergers. We believe the level of
enforcement has been appropriate. To the extent the mergers not challenged are procompetitive,
consumers benefit and companies can be more competitive in both domestic and international
marketplaces. We should be concerned about the relatively small but important number of
mergers that pose a serious threat to competition and to consumers. We believe we have been
successful in distinguishing between the mergers that should be allowed to proceed, and those
that raise significant concerns. We review transactions efficiently, we promptly give the green
light to those that clearly are not anticompetitive, and we challenge those that present a serious
threat to competition and consumers. Furthermore, we place great emphasis on implementing an
effective remedy when we find reason to believe that a merger will be anticompetitive.

Forward-looking analysis. The dynamics of the new economy make it especially important that
merger analysis be rigorous and forward-looking. In fact, the Commission held a series of public
hearings in 1995-96 to address precisely whether antitrust analysis should be modified in light of
competitive conditions in the new high-tech, global marketplace. Some of the issues considered
were whether antitrust analysis recognized the international nature of competition, merger review
in industries that were downsizing, the standards for strategic alliances and joint ventures, and
evaluation of cost-savings or efficiency claims.

The hearings produced a comprehensive report and a general consensus that antitrust policy is on
the right course. This consensus reflects the basic fact that the antitrust laws have been and
continue to be sufficiently flexible to accommodate new economic learning and a changing
business environment. Court decisions and the agencies' guidelines demonstrate that our
interpretation and application of those laws have changed with the times. Merger analysis has
moved from strict reliance on structure-based presumptions that focused largely on market share
data to a sophisticated analysis that takes account of the dynamic nature of competition in the
real world. The analysis recognizes that competition in many markets is global. Thus, antitrust
analysis takes account of competition from imports, and it recognizes the need for U.S. firms to
be competitive in world markets.

As we undertake this analysis, we find there is little inconsistency or conflict between the goal of
the antitrust laws to protect U.S. consumers and competition in domestic markets, on the one
hand, and the imperatives of global competition on the other. Competition in world markets and
competition at home go hand in hand -- one benefits the other. Likewise, efforts to increase
efficiency and competitiveness transcend national boundaries. A merger that produces a stronger
competitor in a global market could very well have procompetitive benefits in the United States,
and those efficiencies will be taken into account. Further, if a merger does create a competitive
problem in a domestic market, antitrust remedies are targeted to the specific competitive
problem; we make every effort not to interfere with the remainder of the transaction. A
Commission order may require a partial divestiture, or licensing of technology, and the
remainder of the merger is allowed to proceed. In most cases it is not necessary to block a
merger entirely.

Thus, the Commission's enforcement decisions recognize that the principles of merger analysis
must be applied with sharp attention to the dynamics of competition in the new economy. It is
important to take a careful look at how firms compete in the marketplace, and how a merger
might affect that competition. The following are some examples of our analytic focus:
 Identifying new markets and new methods of competition. It is important to recognize
new markets and new forms of competition, and identify what firms act as a competitive
constraint on others. For example, in the proposed merger of Staples and Office Depot,
many people thought that the relevant market for antitrust analysis would consist of all
stores that sell office supplies. However, Staples and Office Depot had created a new
market segment called office supply "superstores" that provided a bundle of products
and services unavailable from other retailers. Extensive evidence, much of it from the
companies' own documents and from their pricing behavior, showed that other retailers
were not a competitive constraint on the pricing of Staples and Office Depot. The district
court agreed that office supply superstores constituted a separate market for purposes of
antitrust analysis. Because the merging companies were the two largest of only three
firms in that market, the court found that the merger would be anticompetitive and
granted the Commission's motion to enjoin the transaction.

 Innovation competition. Our examination of innovation markets is another example of


paying close attention to the dynamics of new competition. Research and development --
innovation -- is the lifeblood of our economy. It produces new products and services, and
it can greatly affect the competitive landscape of markets in the future. In fact, it is a way
that firms compete for future market position.

Some mergers can enhance R&D efforts by combining complementary talents or technologies.
Some of those mergers can enable a firm to gain market entry with a new product and interject
new competition. Other mergers, however, can restrict R&D efforts and lessen competition. A
recent example is the merger of Ciba-Geigy and Sandoz, two pharmaceutical giants based in
Switzerland but with far-reaching global operations. Both companies were developing gene
therapy treatments for various forms of cancer and other serious illnesses. These research efforts
held significant promise for new treatments within the next few years. But, Ciba-Geigy and
Sandoz were the only two firms with the bundle of patent rights and technology needed to
develop products in this promising new area.

The Commission's concern with the Ciba-Geigy merger was that it would enable Ciba-Geigy to
gain monopoly control over competing patents and other important technologies and, therefore,
the power to preclude development and commercialization of these new products by other
companies. The Commission therefore challenged the merger but allowed it to proceed with the
condition that Ciba-Geigy license certain intellectual property to other firms so that the race to
develop and commercialize these important new products could continue.

 Evolving forms of business organization. We may observe a variety of complex business


relationships as firms enter into new markets. Many of these affiliations bring together
businesses from different industries and nations. Firms may find the need to enter into
strategic alliances with competitors, suppliers, or customers, or combinations of those
entities. Examples include joint ventures and holding companies, which we already see in
the financial sector as banks and insurance companies seek to affiliate. It will be
important to sort through those relationships to determine their competitive significance.
 Mergers in deregulating markets. It is not unusual to see an increase in merger activity in
deregulating markets as firms seek out new opportunities. In most cases, that is healthy
for competition. However, we must also watch for mergers that may enable firms to
retain market power they enjoyed under their prior sheltered existence. Such mergers
obviously can frustrate the goals of deregulation and deprive consumers of the benefits of
competition. Current concerns about the state of competition in certain sectors of the
airline industry are a vivid reminder of the importance of close antitrust scrutiny as
industries restructure under deregulation. More rigorous application of antitrust principles
to airline mergers in the 1980's could have prevented the levels of market concentration
we now see in certain airline hubs across the country.

Deregulating markets can be affected in several different ways through mergers. One, of course,
is through a merger with a direct competitor. That was the case in the airline industry, and we
would expect to see a number of horizontal mergers to occur in industries now undergoing or
anticipating deregulation, such as electricity, telecommunications, and banking and financial
services. We are prepared to review those mergers to the extent they are within our jurisdiction.

The goals of deregulation also can be frustrated by mergers that result in the elimination of a
potential future competitor -- a firm that is not yet in the market but is poised to enter and
provide new competition. An example is a merger the Commission challenged in 1995,
involving the proposed acquisition of a likely entrant into the natural gas pipeline market in the
Salt Lake City area. The natural gas industry had undergone substantial deregulation and was
offering new competitive opportunities for consumers. The potential entrant already was having
a positive effect on the market through its efforts to line up customers before constructing new
pipeline facilities. Enforcement action preventing the acquisition preserved the benefits of
deregulation for industrial customers in the Salt Lake City area.

It is also important to take a close look at the strategic implications of vertical mergers in the new
market environment. While many, if not most, vertical mergers are likely to be efficiency-
enhancing, such as by joining complementary assets, some vertical mergers can be
anticompetitive. For example, by acquiring the supplier of a critical input for which there are few
or no alternatives, a firm may be able to raise the input costs of its rivals or foreclose entry. Two
recent examples serve to illustrate this point.

The first is the merger of Time Warner and Turner Broadcasting. Both companies were major
producers of video programming for distribution on cable television. In addition, Time Warner
was a major operator of cable television systems, as was TCI, which held a significant interest in
Turner Broadcasting. At the time, deregulation of the telecommunications industry promised to
interject new competition for cable television, as telephone companies and others sought to use
new technology to deliver video programming through alternative channels. The merger,
however, threatened to give the combined entity control over competition and entry conditions in
both the video programming and cable distribution markets. As a result, the Commission issued a
consent order that prohibits Time Warner from discriminating against rivals at either level of the
market.
Another recent example is the proposed merger of PacifiCorp and The Energy Group. PacifiCorp
is a significant generator of electric power in the western United States. It sought to acquire
certain coal mines that were the only source of fuel for several generating plants owned by
competitors. By controlling a critical supply of coal, PacifiCorp could raise its rivals' costs and
effectively boost the wholesale price of electricity during certain periods. Had that acquisition
taken place, the goals of electric power deregulation in California could have been frustrated and
consumers would have faced higher prices.

 Focus on high technology. The importance of high technology in the American economy
cannot be overstated. High technology markets are marked by creativity, rapid change,
and growth. It is precisely these characteristics that may allow anti-competitive behavior
to have a more significant impact on a market. We recognize that many mergers may be
beneficial to the advancement and commercialization of technology, but some mergers
can be harmful. The rapid pace of technological change can appear to obviate competitive
concerns because any market power will be short-lived, but that is not always the case.
Entry into some high-technology markets can be difficult, and it can be made more
difficult by incumbents with market power. It is important to maintain a climate that is
conducive to innovation and competition. That requires a carefully balanced approach.
Accordingly, the Commission devotes substantial resources to understanding and
evaluating issues in this area.

A recent example is the enforcement action involving Digital Equipment Corporation's sale of
microprocessor assets to Intel. The microprocessor at issue was Digital's Alpha chip, regarded
by many as the fastest microprocessor in the world. It is the closest present substitute for Intel's
Pentium chip for computers running the Windows NT operating system. Intel today is the
dominant producer of microprocessors, and Digital is one of the few other innovation
competitors in the design and development of high-performance microprocessors. The
transaction would have given Intel sole control over the production of the Alpha chip and
enabled Intel to block this competitive alternative to Intel's Pentium. As a result of the
Commission's investigation, Digital agreed to a consent order that will require it to license
Alpha technology to certain Commission-approved producers of microprocessors or
semiconductor products. The order will ensure the continued availability of the Alpha chip as a
competitive alternative.

Another example is a case involving software used to automate the design of integrated circuits,
or "microchips." The software, called "routing" software, is used to map out the connections
between the millions of miniature electronic components within a microchip. The acquiring
company, Cadence Design Systems, was the leading supplier of a complementary product that
microchip designers used in conjunction with routing software. The evidence indicated that
Cadence's acquisition of the routing software would give it an incentive to foreclose competition
from competing developers of routing software, which needed to interface with Cadence's
product. The Commission's consent order requires Cadence to allow other software developers
to participate in Cadence software design programs on a non-discriminatory basis, to ensure
compatibility of their products.
Finally, as an illustration of the fact that technological change cannot always be counted on to
resolve competitive problems, there are continuing concerns about the state of competition in
cable television markets. Our investigations show that alternative technologies for delivering
video programming have not yet had a significant restraining effect on cable television rates.
Since most local cable markets are franchised monopolies, antitrust has limited application in
preventing higher prices. However, some communities authorize multiple franchises to serve
their consumers, thereby permitting competition. Mergers in those situations are something we
can address, and we have. Most recently, Commission action preserved competition between
cable systems in two cities in New Jersey.

 Recognition of efficiencies. It also is important to recognize and give proper weight to the
potential efficiency effects of mergers. With dynamic competition in a global setting,
efficient firms will be in the best position to compete. One result of the Commission's
1995-96 hearings on competition policy in the new high-tech, global marketplace was a
revision of the joint DOJ/FTC 1992 Horizontal Merger Guidelines to explain in greater
detail how the agencies will analyze merger-generated efficiencies in assessing the
overall competitive effects of a merger. The question of merger efficiencies need not be
reached unless it appears that the merger may pose a serious threat to competition. When
merger efficiencies are relevant, the Commission gives serious consideration to valid,
substantiated claims of merger-specific efficiencies.

 A balanced approach. Another important principle is that the agencies use a balanced,
carefully focused approach, and we do. First, of course, the agencies must direct their
enforcement resources at mergers that pose a serious threat to competition and to
consumers. Two cases illustrating the importance of strong antitrust enforcement have
already been mentioned: the proposed mergers of Ciba-Geigy/Sandoz, and Staples/Office
Depot. In the first, enforcement action preserved competition in the race to develop life-
saving treatments for cancer and other diseases. In the second, enforcement action saved
consumers from paying substantially higher prices as a result of the merger -- an
estimated $1.1 billion over five years.

These cases demonstrate some of the many benefits of carefully focused merger enforcement:
direct savings for consumers, business customers, and taxpayers; preservation of rivalry in
innovation of products -- some life-saving -- for the future; and maintenance of open markets by
preserving competitive opportunities for new firms. Importantly, the Commission devotes a
major portion of its investigative resources to six high-priority economic sectors that affect
millions of consumers and taxpayers: information and technology, health care, pharmaceuticals,
defense, energy, and consumer goods and services. Increasingly, we leverage our resources by
cooperating closely with state antitrust enforcers. They have been very supportive of
Commission enforcement actions, as in the Staples case.

The other part of the equation is that antitrust should not intervene when it is not necessary. An
example is the merger of Boeing and McDonnell Douglas. Although the merger would give
Boeing control over 60 percent of the market for commercial airliners and leave only one major
competitor, the evidence from the Commission's extensive investigation showed that
McDonnell Douglas was no longer a significant competitive force in the market, and there was
little likelihood that it would regain that status. Thus, although market concentration data
suggested that a merger of Boeing and McDonnell Douglas would raise competitive concerns, a
careful review of the evidence indicated that the merger would not significantly lessen
competition.

 Minimizing burdens. The Commission also recognizes that it is important to minimize


burdens on business as we conduct this essential review. Since the majority of mergers do
not raise anticompetitive concerns, they should be reviewed quickly and allowed to
proceed. We have taken several recent steps to reduce burdens. Last year, we adopted
five new rules to exempt certain mergers from the Hart-Scott-Rodino reporting and
waiting period requirements. Our experience showed that those kinds of transactions
were very unlikely to raise competitive concerns. The new HSR exemptions reduced the
reporting requirement by about seven to ten percent and resulted in a significant saving of
filing fees and other reporting costs for companies engaging in those transactions, as well
as a saving of resources for the antitrust agencies in processing and reviewing those
filings. While adoption of additional exemptions may be possible, we must proceed
cautiously. The fact-specific nature of merger analysis makes it very difficult to
determine beforehand which transactions are not likely to raise competitive concerns.

The agencies also have worked on process improvements -- ways to make merger review faster
and more efficient. We have expedited the process, called "clearance," through which we
decide which agency will review a particular merger. The agencies have also adopted a more
streamlined joint model request for additional information, and we implemented a "quick look"
investigative process that permits an investigation to be terminated if certain threshold
information indicates that the merger is not likely to be anticompetitive.

 Continued evaluation of antitrust standards. Plainly, the antitrust agencies must continue
to be forward-looking in their antitrust analysis, and must do so with efficiency and
sophistication. In that regard, another observation from our review of marketplace
behavior is that companies increasingly are entering into strategic alliances and joint
ventures that are something less than a complete merger. That phenomenon is occurring
in a number in industries, including high-tech markets, and a number of joint ventures are
international. These ventures may involve, for example, joint research and development,
joint manufacturing, marketing agreements, or joint distribution arrangements. While we
would expect many of those ventures to be procompetitive, certain concerns inevitably
arise whenever competitors collaborate. The need for further study of this issue is another
outgrowth of the Commission's global competition hearings. As a result of those
hearings, the Commission formed a task force to study the competitive implications of
joint ventures and other forms of competitor collaboration, with the goal of providing
additional antitrust guidance to firms and practitioners. That task force has completed its
hearings and is in the process of preparing recommendations to the Commission. We, of
course, are collaborating with the Antitrust Division in that effort.

 Adequate resources. Finally, it is important to ensure that agency resources are adequate
to accomplish both parts of our job -- to conduct a timely review of transactions to
distinguish ones that are not anticompetitive, and to challenge those that are. The
American public and American businesses are entitled to prompt and effective antitrust
enforcement. We are doing that job, but with too few resources. As noted before, the
workyears budgeted for the maintaining competition mission have been essentially flat
since 1991. Mr. Klein's testimony indicates that the Antitrust Division is facing similar
constraints. We are making every effort to keep pace with the surge of merger activity,
but our resources currently are stretched to the limit.

IV. Conclusion

In summary, we appreciate this Committee's attention to the dramatically increasing level of


merger activity that has enveloped our country over the past several years, and the opportunity to
share with you our views of important issues pertaining to recent mergers and consolidations.
We believe that many of these mergers are the result of fundamental economic changes in both
our economy and world markets, and that they are, for the most part, beneficial to the economy
and to consumers. At the same time, it is critically important to review each of these transactions
to ensure that competition, and consumers, will not be harmed. The Federal Trade Commission
embraces that challenge and the important responsibility to protect American consumers

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