In March, the Federal Trade Commission settled its legal battle over natural and organic grocer Whole Foods Market Inc.'s acquisition of rival Wild Oats Markets Inc., based on the company's willingness to divest 32 store locations around the country, 19 of which were already closed.
After six months and conversations with 248 prospective buyers, none of the locations have since been sold, though the divestiture trustee now has 14 offers on nine properties and six more months to resolve sales of those nine locations. The shaky track record of the Whole Foods settlement begs the question: How effective are merger settlements at restoring lost competition?
The Justice Department's antitrust division has had its difficulties enforcing merger agreements, too. Signature Flight Support Corp. had asked a federal district judge to allow it to delay the sale of an Indianapolis flight service business it had agreed to unload to obtain government permission to buy assets from Hawker Beechcraft Corp.
In March, U.S. District Court Judge Richard Roberts ruled that Signature would have to follow through on the sale despite the company's complaint that bidders reduced their offers after the economy tanked.
Are divestiture packages really worth the hassle when it comes to protecting competition? In most cases, there's no way to know how much consumers benefit from a merger divestiture order. Because merging parties are eager to move forward, the agencies can usually persuade them to give up some asset without proving that consumer prices will stay down.
One fix, according to antitrust lawyers, could be to conduct a serious divestiture study that evaluates the benefit of selling assets off, including whether requiring up-front sales before mergers are closed is better at preserving more competition than alternative conditions. Addressing that question would help answer the question of whose approach is more effective: the FTC's, which typically requires divestitures before a merger is consummated, or the DOJ's, which usually gives parties a few months after the deal to honor their commitments.
A recent European Union study concluded that remedies were successful -- as the EU defined success -- in about two-thirds of the cases. But there's been no serious study in the U.S. of the necessary scope of divestitures or the value of pre-merger settlements.
A divestiture study "would be helpful because there are a lot of assumptions built into negotiations with staff at the agencies that need to be re-evaluated," says Dave Wales, a partner at law firm Jones Day and former acting director of the Bureau of Competition at the FTC.
The FTC completed a merger study in 1999, although it was more a quick survey than a full-blown analysis of the benefits of divestitures and other remedies."There were some flaws in that study," Wales acknowledges, "so what they really need is more empirical work."
Antitrust lawyers know the goal in a merger case is to preserve -- or restore -- competition, but the competitive concerns must be balanced against the economic realities, Wales says. But officials at the DOJ have argued the agency lacks the research capabilities of the FTC, which would be necessary to do a thorough assessment of the efficacy of various types of divestitures. And at a recent American Bar Association event, Bureau of Economics Director Joe Farrell said a divestiture study would strain scant resources at the agency. Instead, Farrell suggested, a divestiture study might best be done by academics with an interest in antitrust regulation, ignoring that such a data-intensive project would be ineffective without access to sensitive corporate information of the type the FTC easily collects.
But, Wales says, the agencies having agreed to study the value of updating the 17-year-old merger guidelines could give some hope that a divestiture study will be conducted. "One of the questions being asked is whether to include a section on remedies in the merger guidelines," Wales says. "That will tee up the issue of a divestiture study."
Cecile Kohrs Lindell covers antitrust for The Deal.