The legal issues that relate to mergers and acquisitions (M&A) of businesses.

Companies are getting sloppy--and it's costing them. Take Qualcomm's merger agreement with Flarion Technologies. As originally drafted, the agreement required Flarion to obtain Qualcomm's written consent before presenting business proposals to any customer or prospective customer. The parties subsequently amended this provision of their agreement, but, as it turned out, the damage was done.

The parties had already reported their deal to the federal antitrust agencies pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act). The Justice Department investigated the transaction, cleared it, and then prosecuted Qualcomm and Flarion for gun jumping.

Gun jumping occurs when merging parties effectively close a reportable transaction before expiration of the statutory waiting period. There are many ways companies can get into trouble for gun jumping. Requiring a merger partner to get permission just to sell its products is one of the really, really obvious ones.

According to the government's complaint, the merger agreement itself was just the tip of the iceberg. The complaint alleges that Flarion regularly requested permission from Qualcomm to do what one Qualcomm executive called "pretty routine things." It asked Qualcomm for consent to market products and services; indeed, Qualcomm once denied Flarion's request for consent to offer a discount to a customer.

Included with the complaint was a settlement agreement.  As the Justice Department announced, the settlement agreement requires Qualcomm and Flarion to pay a civil penalty of $1.8 million for their alleged gun jumping activities.

Defying all of the pundits, the Justice Department announced its decision to close its investigation of Whirlpool's proposed acquisition of Maytag. The agency concluded that the acquisition is unlikely "to reduce competition substantially" due to the presence of "strong rival suppliers with the ability to expand sales significantly" and the "large cost savings and other efficiencies that Whirlpool appears likely to achieve."

According to the government's announcement, it concluded that Sears' Kenmore brand competes against Whirlpool and Maytag even though Whirlpool manufactures Kenmore appliances for Sears. If the government had concluded otherwise, the market share attributed to Whirlpool would have significantly increased—perhaps exceeding 70 percent. Even so, the government found that Whirlpool and Maytag combined would have a "relatively high share of laundry product sales in the .”

Demonstrating that high market shares alone don’t necessarily lead to a merger challenge, the Justice Department’s press release reveals the other factors considered by the government. The government emphasized what appears to be a critical factor—the excess capacity of existing manufacturers. Also significant was the recent success enjoyed by foreign manufacturers in the with key appliance retailers, including Best Buy and Home Depot. Finally, the government considered “the detailed analyses” provided by the parties to substantiate their claimed efficiencies.  According to the government, “[t]hese efficiencies further reduce the likelihood that the transaction might harm consumer welfare.”

The Department of Justice and the Federal Trade Commission (FTC) today jointly released a Commentary on the Horizontal Merger Guidelines, which explains how the agencies have applied the Guidelines in the context of actual merger investigations. The release of this commentary is part of the agencies’ “ongoing efforts to increase the transparency of their decision-making processes.”

In the commentary’s introductory chapter, the agencies describe the fundamental legal principles that govern their merger analysis. The remaining chapters address market definition and concentration; the potential adverse competitive effects of mergers, including coordinated interaction and unilateral effects; entry conditions; and efficiencies. Throughout the commentary there are short summaries of actual merger investigations that are used for illustrative purposes.

The commentary highlights the "integrated approach to merger review" that the agencies apply in each case. That is, the investigating agency will not engage in a mechanical step-by-step analysis of a merger that begins with defining the relevant market and ends with efficiencies or the failing company defense. Rather, the agency focuses on the key inquiry—the likely competitive effects that will result from the merger under review—at every step of its investigation.

The Justice Department announced that Japanese firm, CMET Inc., has agreed to plead guilty and to pay a $100,000 criminal fine for conspiring to obstruct justice in connection with the settlement of a 2001 merger case. The government charged CMET and its co-conspirators with carrying out the conspiracy by, among other things:

• Concealing from the Department of Justice (DOJ) the full extent and nature of the contemplated business relationship between CMET and its co-conspirators and CMET's principal motivation for bidding on a technology license being offered under the terms of the consent decree in the merger case;

• Procuring CMET's bid for the technology license offered in the consent decree proceedings based on covert understandings between CMET and its co-conspirators concerning future business dealings and the settlement of a patent dispute which, if known to the DOJ, could have disqualified CMET's technology license bid;

• Altering the translations of documents which CMET submitted to DOJ in connection with its application to acquire the technology license; and

• Making misrepresentations, in writing and orally in meetings with representatives of the DOJ, concerning CMET's intent to vigorously compete in the United States if granted the technology license.

In Whirlpool/Maytag deal, investors in limbo, awaiting DOJ decision, I gave a quick assessment of my take on the antitrust issues raised by Whirlpool's proposed acquisition of Maytag. We still don't know whether DOJ will challenge the deal, but it's clear that the staff investigating the deal doesn't like it.

According to this Reuters article, DOJ lawyers against Maytag takeover: source, staff has "'made it clear' to the antitrust chief, Thomas Barnett, that they believe the $1.7 billion deal would hurt competition." The article states that "it was not clear whether the staff lawyers had given him a formal recommendation." Given my own experience at DOJ, I can pretty much guarantee that a formal recommendation has in fact been made.

I'm equally confident that staff is preparing for a court challenge. Think about it--Barnett only has until March 30 to decide whether he's going to challenge the deal. That's just over two weeks away. If Barnett decides to ask a court to enjoin the transaction, DOJ will have to race--not walk--to the courthouse to prevent the parties from closing the deal. It stands to reason that while staff awaits a decision from Barnett, it must prepare for litigation.

According to Maytag, Whirlpool Shares Drop on Theory, it sounds like staff has plenty of fodder for a complaint. The article has this interesting tidbit: 

Prudential Equity Group analyst Nicholas Heymann said he believes the DOJ will oppose the merger "based on the potential for anticompetitive pricing by the merged entity."

In a March 17 research note to investors, he speculated that the merger only makes economic sense for Whirlpool if the company increases the price of some washers and dryers to help boost profits.

The big losers here? Maytag and its shareholders, of course. While the rest of us speculate about how all of this will play out, Maytag's financial position continues to deteriorate at its shareholders' expense. So, in the end, even if Whirlpool doesn't get to acquire Maytag, Whirlpool will leave Maytag even weaker than it was when it first bid for it. Ironic, isn't it?