IN THIS OCTOBER 2024 ISSUE
OVERVIEW
The US antitrust regulators continued to aggressively challenge transactions and associated Hart-Scott-Rodino (HSR) violations during the third quarter of 2024. The Federal Trade Commission (FTC) litigated two merger challengers involving Kroger/Albertsons and Tapestry/Capri. On October 24, 2024, Tapestry/Capri was decided in the government’s favor and a Kroger/Albertsons decision is expected in the next month. The FTC filed a lawsuit in July challenging the Tempur Sealy/Mattress Firm transaction under a novel customer foreclosure theory and at least one transaction was abandoned due to FTC opposition. Both the Department of Justice (DOJ) and FTC also brought gun-jumping HSR violations, resulting in significant fines. In addition, the US antitrust agencies just released new rules for HSR filings, which will make HSR filings more costly and lengthy.
In Europe, the European Commission (EC) lost its challenge to the Illumina/Grail transaction under an Article 22 referral, which will likely make it more difficult for the EC to investigate and challenge smaller transactions. In the UK, the Competition Markets Authority (CMA) approved a transaction under a rarely accepted “failing firm defense.”
Below we provide more detail on these developments, among other notable M&A events that occurred during the third quarter of 2024.
UNITED STATES
- The FTC Releases Final Rules Governing Premerger Notification Filings
On October 10, 2024, the FTC voted 5-0 to issue the long-awaited final rules amending the HSR premerger notification filing requirements. While the final rules are pared back from the draft rules in several respects, the final rules will significantly increase the reporting obligations of filing parties. The most significant changes from the prior premerger filing regime include requiring (i) written descriptions for horizontal product overlaps and vertical supply relationships, (ii) broader production of transaction-related documents and ordinary-course documents regarding overlap products, and (iii) reporting on the activities of officers or directors that serve in similar roles at firms that compete with the target. In addition to these significant changes, there are a multitude of other changes to the HSR reporting requirements which, in the aggregate, will substantially increase the time required to make a filing. The McDermott antitrust team has published an in-depth review of the final rules providing a discussion of each notable change to the HSR reporting requirements.
These final rules require filing parties to take a more proactive approach to their deals from an antitrust standpoint. Antitrust counsel should be engaged earlier in the deal process to review drafts of ordinary course and deal documents, identify relevant overlaps, and determine the extent of a party’s filings obligations.
- The FTC Dusts Off the Customer Foreclosure Theory of Competitive Harm
In a departure from the status quo, in July 2024 the FTC filed a lawsuit challenging Tempur Sealy’s proposed acquisition of Mattress Firm under a customer foreclosure theory. Mattress Firm is a large downstream seller of Tempur Sealy and other competitors’ mattress products, and the FTC alleges that Tempur Sealy’s mattress competitors will be harmed by no longer being able to sell their mattresses at Mattress Firm stores. The customer foreclosure theory focuses on the likelihood of a vertically integrated firm’s ability to restrict upstream rivals’ access to a downstream customer base. The decision by the FTC to deploy the customer foreclosure theory, a theory of harm that has not been used to block a vertical merger in recent decades, is representative of the antitrust regulators’ recent penchant for relying on novel theories of antitrust harm.
According to the FTC, the merger – which would combine the “world’s largest mattress manufacturer and supplier,” Tempur Sealy, with “the nation’s largest mattress retailer,” Mattress Firm – would foreclose Tempur Sealy’s rivals from access to Mattress Firm stores. Tempur Sealy, the FTC alleges, could limit rival mattress manufacturers’ access to prospective customers by excluding their products from the retail floor space available for mattresses at Mattress Firm’s brick-and-mortar stores. This would be competitively devastating for Tempur Sealy rivals, the FTC argues, because “[t]o reach the vast majority of consumers, premium mattress suppliers must have access to brick-and-mortar retail floor space to showcase their products” and Mattress Firm is “by far the most significant route to market for premium mattress suppliers.” In addition to restricting floor space, the FTC alleges that Tempur Sealy could harm rivals by awarding Mattress Firm employees with higher commissions for the sale of Tempur Sealy products. Customer foreclosure was a popular tool of the DOJ in vertical merger cases from 1950 to 1970, but it remains to be seen whether this decades-old theory of harm will achieve similar success in court today.
- The Biden Administration’s Diminished Tolerance for HSR Act Violations
The Biden administration has increasingly cracked down on HSR Act violations. Recent enforcement actions serve as a reminder that the current administration has little tolerance for HSR Act violations – even when it comes to first-time, individual offenders. Two recent examples of HSR Act violations are representative of this low-tolerance approach.
On September 18, 2024, the government filed an enforcement action against GameStop CEO Ryan Cohen. Cohen acquired 562,077 shares of Wells Fargo voting securities in an open market purchase. According to the complaint, this acquisition – when added to Cohen’s total Wells Fargo holdings – exceeded the HSR filing threshold and triggered Cohen’s obligation to file an HSR notification and abide by the mandatory waiting period before consummating the acquisition. Cohen, according to the complaint, failed to do so. Additionally, Cohen did not qualify for the HSR Act’s “solely for the purpose of investment” exemption because his emails to Wells Fargo’s CEO advocating for a board seat demonstrated to the government that he wasn’t a passive investor. Cohen agreed to pay a $985,320 civil penalty to resolve the claims. In another matter, the government alleged the merging firms began to operate collectively before the HSR Act waiting period expired.
These examples are strong reminders that the antitrust regulators under the Biden administration are focusing on gun-jumping violations, meaning merging parties must exercise caution to ensure they maintain their independence during the post-signing and pre-closing stage.
- The US Government Continues to Advance Novel Arguments to Block Retail Mergers
In addition to the customer foreclosure theory of harm described above, in Tapestry/Capri the FTC argued that it does not need to show high market share levels to obtain a preliminary injunction against the transaction. Rather, the FTC argued that showing head-to-head competition between Tapestry and Capri brands in the market for “accessible luxury” handbags is sufficient. The FTC defined “accessible luxury” handbags as handbags sold at prices between $100 and $1,000, which, according to the FTC, includes most of Tapestry’s Coach and Kate Spade lines and Capri’s Michael Kor’s line. To argue closeness of competition, the FTC relied, in part, on the parties’ internal emails, which showed that each side monitored the other’s pricing and marketing decisions. This theory and evidentiary approach are encapsulated within the new 2023 Merger Guidelines, which place an emphasis on evaluating merging parties’ strategic deliberations or decisions, including monitoring each other’s pricing. On October 24, 2024, the FTC prevailed in blocking the merger with Judge Rochon adopting the FTC’s product market definition. However, Judge Rochon neither adopted nor rejected the FTC’s closeness of competition theory. Instead, the Judge found that the FTC had established high market shares under a traditional analysis. However, Judge Rochon did agree with the FTC that a 30% market share and the 2023 Merger Guidelines’ HHI thresholds are sufficient to show a presumption that a transaction is likely to substantially lessen competition. Therefore, this decision demonstrates that the government must still establish a relevant product market and market shares, but potentially lowers the concentration levels necessary for the government to prevail.
EUROPEAN UNION
- Illumina/GRAIL: The Rise and Fall of Article 22 EUMR and the Path Forward
The Illumina/Grail saga has finally come to an end, with the European Court of Justice (ECJ) overturning the ruling of the General Court (GC) and annulling the EC decisions, concluding that Article 22 does not in fact allow for the EC to review concentrations below the thresholds in Member States. This judgment is a significant decision that should end the EC’s practice of accepting referrals under Article 22 EUMR for transactions that do not meet the filing thresholds of a Member State of the EU.
For more detailed analysis of the ECJ’s judgment, see our client alert here.
This outcome will frustrate the EC’s plan to increasingly tackle “killer acquisitions,” i.e., those that could hamper innovation through small companies/teams, particularly in the tech and pharma sectors, as well as halt its aggressive stance in other significant mergers.
The Illumina/Grail decision has already impacted the EC’s ability to review smaller transactions. In March 2024, Microsoft announced the hiring of the two co-founders of a US tech startup developing machine learning and generative AI hardware and apps, Inflection AI Inc., along with most of its staff, including a waiver of any legal rights by Inflection in connection with the hiring of its staff. Additionally, Microsoft entered into associated arrangements with Inflection (including a non-exclusive licensing deal to use Inflection IP in a range of ways).
Although the transaction did not meet the notification thresholds of the EUMR and was not notified in any Member State, seven Member States submitted a referral request upon invitation from the EC. However, following the ECJ’s judgment in the Illumina/Grail case, all member states withdrew their referral requests, resulting in the end of this procedure.
- New Remedies Under the FSR
Following the entry into force of the Foreign Subsidies Regulation (FSR) on July 12, 2023, several in-depth investigations have been initiated in the public procurement area by the Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs (DG GROW).
However, on the M&A side, the Directorate-General for Competition has only opened one in-depth Phase II investigation. This involves a state-controlled telecommunication operator based in Abu Dhabi, Emirates Telecommunications Group (e&), acquiring parts of European telecommunication operator PPF Telecom Group B.V. for approximately €2.2 billion. The EC investigated whether e& may have been granted foreign subsidies that distort the internal market and approved this transaction subject to remedies on September 24, 2024. These remedies include a 10-year commitment not to take advantage of an unlimited guarantee, that the bidder’s articles of association do not deviate from ordinary United Arab Emirates (UAE) bankruptcy law, a prohibition of any financing from e& owner the Emirates Investment Authority (EIA) to PPF’s activities in the EU, and a requirement that e& inform the EC of future acquisitions. It is important to note that it took the parties a little more than one year from deal announcement to acquire FSR approval.
- Teresa Ribera to Lead the Future of EU Competition Policy
On September 17, 2024, Spanish politician Teresa Ribera was appointed by EC President Ursula von der Leyen to oversee competition policy for the next five years, succeeding Margrethe Vestager. She will also serve as the executive vice president on climate change and decarbonization. She played a key role in initiatives to reduce carbon emissions and in negotiating major gas and power market reforms. Von der Leyen instructed Ribera to review merger control guidelines to “give adequate weight” to Europe’s needs and to respect “resilience, efficiency and innovation.” In the context of the EC’s recent failure before the ECJ in the Illumina/Grail case, Von der Leyen also instructed Ribera to “focus on the particular challenges facing SMEs and small midcaps, notably to address risks of killer acquisitions from foreign companies seeking to eliminate them as a possible source of future competition.” We will need to see if these instructions change the way the EC analyzes mergers in the future.
UNITED KINGDOM
- The CMA Is Closing in on Big Tech
With the new Digital Markets, Competition and Consumers Act (DMCC Act), passed in May 2024 and becoming effective this quarter, the CMA has a new formidable legal tool and is expected to become more aggressive in its enforcement in the tech sector. The bill provides the CMA with the power to oversee digital markets and to “catch” more mergers for review (for more details on the DMCC, see our previous Antitrust M&A Snapshot, Q2 2024, here). In the meantime, its focus has been on small artificial intelligence (AI) companies/startups and their partnerships with big-tech companies.
The CMA recently cleared Microsoft’s hiring of certain former employees of Inflection AI, Inc., and several agreements, including a non-exclusive licensing deal. The CMA found that the transaction did not give rise to a realistic prospect of a substantial lessening of competition as a result of horizontal unilateral effects from a loss of competition in the development and supply of consumer chatbots and foundation models. The CMA concluded that Inflection AI does not impose a substantial competitive constraint for chatbots now or in the future because competitors could easily replicate Inflection AI’s technology. In addition, the CMA found that Inflection AI’s AI-studio business for enterprise customers was still in its early stages and thus did not present a significant competitive challenge to its rivals in the market for foundation models.
- The “Failing-Firm Defense”: A Now-Realistic Option in the Eyes of the CMA?
The CMA cleared T&L Sugars Limited’s acquisition of Tereos UK & Ireland’s retail sugar business on September 3, 2024, under a “failing-firm defense” theory. The CMA opened an in-depth investigation into the deal in March 2024 because Tereos and T&L were two of only three businesses supplying the vast majority of sugar to restaurants and supermarkets in the UK. Nevertheless, the CMA cleared the transaction because it found that Tereos’s UK retail business had been consistently unprofitable and that, without this transaction, Tereos would likely close its UK retail business and there was no other viable alternative buyer. As a result, the CMA concluded that the parties were able to establish a failing-firm defense. This is one of the few transactions where companies have been able to meet the failing-firm defense.
ENFORCEMENT IN KEY INDUSTRIES
SNAPSHOT OF SELECTED ENFORCEMENT ACTIONS
NOTABLE US CASES
| PARTIES | AGENCY | CASE TYPE (CLEARED, CONSENT, CHALLENGED, ABANDONED) | MARKETS / STRUCTURE (AS AGENCY ALLEGED) | SUMMARY & OBSERVATIONS |
| Tempur Sealy / Mattress Firm | FTC | Challenged | Relevant market is “premium mattresses” sold in the United States; FTC alleged that the premium mattress market is concentrated with three companies, led by Tempur Sealy | On July 2, 2024, the FTC filed an administrative complaint to block Tempur Sealy’s proposed $4 billion acquisition of Mattress Firm. On the same day, the FTC filed a complaint seeking a temporary restraining order and preliminary injunction blocking the deal in the US District Court for the Southern District of Texas.
According to the FTC, Tempur Sealy is the “world’s largest mattress manufacturer and supplier” and Mattress Firm is “the nation’s largest mattress retailer.” “With over 2,300 brick-and-mortar stores, Mattress Firm’s overall mattress sales volume dwarfs every other mattress retailer,” the FTC claims. The FTC’s theory of competitive harm is premised on “customer foreclosure.” Specifically, in a statement, the FTC explained that “[t]he combined firm could limit present and future rivals’ access to Mattress Firm’s floor space, award sales associates higher commissions on Tempur Sealy products sold, or otherwise take steps designed to steer customers away from competitors’ products and toward Tempur Sealy’s mattresses.” The preliminary injunction hearing is set to begin in federal court on November 14, 2024. Meanwhile, on September 23, 2024, Tempur Sealy announced that it plans to sell 176 stores and seven distribution centers to Mattress Warehouse in a bid to appease the FTC. |
| WillScot Holdings Corp. / McGrath RentCorp. | FTC | Abandoned | Modular and portable storage rental companies; national and local geographic markets | On September 18, 2024, temporary modular space solutions provider WillScot Holdings Corp. (WillScot) and business-to-business rental company McGrath RentCorp (McGrath) abandoned their $3.8 billion proposed merger that was announced on January 29, 2024, after an FTC second request and months of antitrust scrutiny.
WillScot’s and McGrath’s overlaps mainly center around the companies’ modular building and storage containers businesses. The two companies both provide temporary office spaces to construction customers and portable classrooms for education customers. A press release from the FTC following the abandonment indicated that the FTC was examining competitive harm at both the national and local levels. Some reporting indicates that the companies’ main defense was tied to the availability of leased space. The market definition, the companies likely argued, should include nearby commercial real estate instead of being confined to modular building and storage containers. On a January 29, 2024, call, WillScott President and CFO Tim Boswell told analysts that “in the context of the broader commercial real estate market, we’re a drop in the bucket in terms of the overall availability of space alternatives for our customers.” In a September 18, 2024, statement, the FTC said “strong competition in the markets for modular and portable storage solutions is essential to ensuring low prices and high levels of product quality and customer service for businesses and school districts nationwide” and that it “found that customers in the construction, retail, education, and many other industries will benefit from continued competition between these two companies in markets across the country.” McGrath will receive a $180 million termination fee. |
NOTABLE EUROPEAN & UK CASES
| PARTIES | AGENCY | CASE TYPE (CLEARED, CONSENT, CHALLENGED, ABANDONED) | MARKETS / STRUCTURE (AS AGENCY ALLEGED) | SUMMARY & OBSERVATIONS |
| Lufthansa / ITA | EC | Conditional clearance, Phase II | Passenger air transport | On January 23, 2024, together with the Italian Ministry of Economy and Finance (MEF), the EC opened an in-depth Phase II investigation into the proposed acquisition of joint control of Italia Trasporto Aereo (ITA) Airways by Lufthansa AG.
On March 25, 2024, the EC sent a Statement of Objections to the parties. Its concerns were that the transaction would:
Following multiple proposals of remedies packages, on July 3, 2024, the EC approved the Lufthansa Group’s planned acquisition of 41% of ITA Airways. The accepted remedy package included the following commitments:
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| IAG / Air Europa | EC | Phase II investigation; abandoned | Passenger air transport | On August 2, 2024, following an in-depth investigation due to the EC’s concerns about its proposed deal, International Airlines Group (IAG, which owns, inter alia, British Airways, Aer Lingus, and Iberia) dropped its planned acquisition of Air Europa for the second time. IAG already owns 20% of Air Europa and wanted to acquire the remaining 80% for approximately €400 million. In fact, IAG had already tried to acquire Air Europa in 2023, but this proposed merger was deserted after objections raised by the EC. Since then, Air Europa has gotten commercially stronger, rendering the search for adequate remedies even harder than in 2021. The EC opened an in-depth investigation for the second attempt in January 2024, as it was concerned that the deal would:
Even though one of IAG’s proposed commitments was ceding 52% of Air Europa’s take-off and landing slots to its rivals (almost half of its business), the EC still did not seem convinced that the deal would not reduce competition. The deal was subsequently dropped, for the second time, as no longer being in the interests of IAG’s shareholders. |
| Juniper / HPE | CMA and EC | Phase I investigation; unconditionally cleared | EC defined relevant markets as: (i) the worldwide market for the supply of wireless local area network (WLAN) equipment; (ii) the worldwide market for the supply of wireless access points (WAPs); (iii) the EEA-wide market for the supply of Ethernet campus switches; and (iv) the worldwide market for the supply of data center switches | On August 7, 2024, the CMA, following the EC’s direction, cleared the $14 billion acquisition by Hewlett Packard Enterprise Company (HPE) of Juniper Networks, Inc. HPE offers open and intelligent technology solutions as a service while Juniper Networks delivers automation, security, and AI solutions, including cloud services, high-performance computing and AI, intelligent edge, software, and storage. The DOJ and the Canadian Competition Bureau are still reviewing the transaction.
The EC had already cleared the deal on August 1, 2024, finding that the deal would not significantly reduce competition on the relevant markets. In particular, concerning the horizontal overlaps between the companies’ activities in the market for WLAN equipment, WAPs and Ethernet campus switches, the EC found that in the EEA:
The EC also did not see any issues regarding the conglomerate links between Juniper’s switches and HPE’s activities in the global market for supply of high-performance computing systems and mid-range servers, the merged entity not having the ability to engage in anticompetitive bundling or tying practices. |
| Emirates Telecommunication Group Company PJSC / PPF Telecom Group | EC | FSR Phase II investigation (first remedies package under the FSR) | Telecommunications | The acquisition by Emirates Telecommunications Group Company PJSC (e&) of PPF Telecom Group B.V, a European telecommunication operator active in Bulgaria, Hungary, Serbia, and Slovakia, which was notified on April 26, 2024, to the EC, is subject to an in-depth investigation under the Foreign Subsidies Regulation (FSR).
The EC was concerned that loans from UAE-controlled banks and an unlimited guarantee from the UAE granted to e& may have improved its capacity to execute the deal and the competitive position of the target company in the EU post-closing (as it was able to improve its capacity to finance its activities at preferential terms). During its in-depth investigation, the EC assessed whether:
To address the EC’s concerns, e& offered a remedy package on July 25, 2024, that included a 10-year commitment with significant behavioral remedies, including amending e&’s own articles of association to remove the alleged benefit and notifying the EC of any acquisitions it makes going forward involving an EU-active company, even if these fall below the notification thresholds under the FSR. On September 24, 2024, the EC approved the remedy package and cleared the acquisition conditional upon full compliance with the offered commitments. |
| Alphabet Inc. (Google LLC) / Anthropic | CMA | Phase I; ongoing | Electronics | On July 30, 2024, the CMA began a preliminary investigation into a partnership between Alphabet Inc. (Google LLC) and the AI R&D startup Anthropic. Anthropic is developing the Claude large-language model and chatbot. Google had invested approx. $2 billion into Anthropic in 2023, shortly after signing a cloud computing agreement with the startup agreeing to make Google its preferred cloud provider and to co-develop AI computing systems.
The CMA is currently considering whether the partnership has “resulted in the creation of a relevant merger situation” warranting a formal investigation. |
| Amazon / Anthropic | CMA | Phase I; ongoing | Electronics | Amazon has taken up a $4 billion stake in Anthropic and signed a deal to become one of the startup’s cloud computing providers (Amazon Web Services is set to become Anthropic’s primary cloud provider for mission-critical workloads).
Having been picked up by the CMA’s merger intelligence committee, and after four months of pre-notification, on August 8, 2024, the CMA initiated a preliminary investigation with the same question: whether the partnership has “resulted in the creation of a relevant merger situation.” On September 27, 2024, the CMA concluded that the deal did not constitute a relevant merger situation. The CMA found that through the deal Amazon was not able to exercise control over Anthropic. Moreover, the CMA did not conclude whether the deal resulted in Amazon being able to exercise “material influence” (i.e., the lowest level of control that can constitute a relevant merger situation) because the UK thresholds for jurisdiction were found not to be met. |
| Microsoft / Inflection | CMA | Phase I; clearance | Electronics | The CMA has cleared Microsoft’s hiring of certain former employees of Inflection AI, Inc., and several agreements, including a non-exclusive licensing deal.
It had previously opened a Phase I investigation on July 16, 2024, emphasizing the strategic importance of key personnel and expertise in the technology and AI sector. Microsoft not only hired, from Inflection, key staff responsible for development, but also gained access to the company’s IP rights. The CMA determined that these combined factors enabled Microsoft to capitalize on Inflection’s technological advancements and. therefore, the acquisition of said assets was concluded to fall within the merger control jurisdiction of the CMA. |
