M&A Deals of the Year
The Department of Justice scored its first courtroom victory in a merger case in nearly three years when U.S. District Court Judge Beryl Howell on Oct. 31 granted the agency's request for a permanent injunction against H&R Block Inc.'s proposed $287 million acquisition of 2nd Story Software Inc., known as TaxAct, a rival provider of tax preparation software by the same name.
H&R Block, which abandoned the deal after the ruling and watched InfoSpace Inc. end up buying TaxAct, had argued that its buyout would better position it to compete with Intuit Inc., the leading provider of tax preparation software. The DOJ said the deal would eliminate an upstart competitor that had constrained prices in the do-it-yourself tax preparation market.
The win over H&R Block was the first in court over a merger case since a federal judge in December 2008 ordered the military semiconductor maker Microsemi Corp. to hold separate the recently acquired assets of rival Semicoa Inc. To settle the DOJ's challenge to the $25 million deal, Microsemi divested Semicoa eight months later.
But the victory in the TaxAct case was more than just a return to the winner's circle for the DOJ. It was also the first major case to address many of the changes the agency and the Federal Trade Commission implemented in 2010 when they revised their horizontal merger guidelines. And while a district court opinion has no formal value as precedent, Howell's ruling is the first to address the guidelines in a broad way, and is thus likely to be influential among judges as well as attorneys trying to advise merging parties.
"The TaxAct case will be cited repeatedly in future merger cases," says Baker Botts LLP antitrust partner Sean Boland. "It was a well-tried case that will be important when counseling clients about potential mergers."
The revisions Howell endorsed included changes to how regulators define the market relevant to a merger; the regulators' assertion that the government has an interest in preventing a "maverick" competitor from being acquired; and the formal incorporation of new economic modeling techniques into merger analysis.
In the realm of market definition, Howell's opinion demonstrated that merger lawyers were wrong to complain that the regulators tried to do away with the government's obligation to outline a relevant market being harmed by a challenged merger. She also endorsed some new tools regulators gave themselves to help define the affected market.
Sharis Pozen, the DOJ's assistant attorney general for antitrust, noted soon after the ruling that Howell accepted the regulators' refinement of the "hypothetical monopolist" test used to determine whether the government has properly define the relevant market. According to the test, a market is deemed to exist if a monopolist would be able to profitably impose a "small but significant" price increase. Under the new guidelines, regulators can define the relevant market as the smallest product market that will satisfy the hypothetical monopolist test. Howell cited the revised test when she accepted the DOJ's argument that the relevant market in the TaxAct case was limited to do-it-yourself tax preparation software and not all forms of tax assistance, as H&R Block argued.
Howell also largely accepted regulators' enhanced ability to argue that the combined company will have the power to raise prices regardless of what its remaining competitors do, known as unilateral effects cases. The new guidelines eliminated a requirement that unilateral effects cases be brought only when the merged firm would have a combined 35% share in the relevant market and the merging parties' products be each other's next-best substitutes for a large fraction of consumers.
Howell went on to say that the government has an interest in ensuring that maverick competitors in concentrated markets aren't taken over. She took the DOJ to task for not setting a clear standard -- based on "functional or economic considerations" -- for determining whether a firm is a maverick. In her view, the key issue is whether the company "plays a role within the competitive structure of this market that constrains prices."
Joseph Wayland, the DOJ attorney who litigated the case, said Howell's ruling provided welcome judicial affirmation that a maverick doesn't necessarily need to deliver technological innovation but can bring other types of disruption. "TaxAct ... wasn't producing a secret sauce," he told the American Bar Association's antitrust section in November. "They were innovative in marketing, product development and pricing in ways that other competitors were not. The principle Judge Howell recognized will be very important going forward when analyzing transactions in which an innovative competitor is eliminated."
One district judge's opinion isn't enough to establish definitively how well the new guidelines will hold up over time. The DOJ's challenge to AT&T Inc.'s planned takeover of T-Mobile USA Inc. was supposed to be another big test, but the T-Mobile case is now dead. The TaxAct ruling may be all antitrust lawyers can rely on in the foreseeable future.