1. Merger Antitrust Law Fundamentals Dale Collins Shearman & Sterling LLP April 18, 2013

2. Section 7 of the Clayton Act The FTC uses Section 7 as the antitrust standard to test acquisitions: Simple summary: Prohibits transactions that—  may substantially lessen competition or tend to create a monopoly  in any line of commerce (product market)  in any part of the country (geographic market) April 18, 20132 No person engaged in commerce or in any activity affecting commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital and no person subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of another person engaged also in commerce or in any activity affecting commerce, where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.

3. What does all mean? The purpose of merger antitrust law is to prevent the creation or facilitation of market power to the harm to some identifiable group of customers in the market as a whole through—  Increased prices  Decreased product or service quality  Decreased rate of technological innovation or product improvement The deal’s likely effect on prices is key  This is where the FTC is likely to focus almost all of its attention April 18, 20133 If the FTC concludes that one of these bad effects—especially an increase in price—is likely occur as a result of the transaction, they will challenge the deal

4. What does all mean? Threat of harm to customers  Does not have to be to all customers  Sufficient if some identifiable group of customers  Some common groups  Customers in a particular geography  Customers of a particular type of product  Customers of a particular type of product in a particular geography April 18, 20134 The FTC believes that no group is too small not to be protected

5. Antitrust 101: Raising prices to customers Five ways the FTC thinks a transaction can raise price: 1. Eliminate competition between two uniquely close and intense competitors (“unilateral effects”) 2. Reduce significant output in the market—creating an artificial scarcity— and so raise prices 3. Reduce significant capacity in the market, reducing the incentive of suppliers to aggressively chase business 4. Reduce the number of bidders, resulting in higher bid prices 5. Reduce the number of competitors, permitting the remaining firms to raise their prices even without express coordination (“coordinated effects”) April 18, 20135

6. Antitrust 101: Raising prices to customers April 18, 20136 Price Output A reduction in output raises price Reduction in OutputReduction in Bidders/Competitors* 5 → 4Usually clears 4 → 3Usually clears if no complaining customers 3 → 2Usually challenged in the absence of a strong procompetitive business rationale, strong customer support, and insignificant customer complaints 2 → 1Always challenged The chances of success improve if there are demonstrable powerful forces that constrain price increases beyond the mere number of players * Critically, these must be meaningful and effective alternatives form the perspective of the customer; “fringe” firms that customers do not regard as feasible alternatives do not count The idea is that when supply becomes limited the customers who value the product the most bid up the prices Downward-sloping demand curve

7. Critical questions that the FTC staff are asking Do the parties have an increased ability to increase prices as a result of the merger? Is output (or capacity) likely to decrease postmerger? Are the merging companies strong and close competitors with one another? How many other effective competitors does each merging party have? Do customers play the merging parties off of one another to get better prices or other deal terms? Is one of the merging party likely to enter into competition in the future with the other merging party in the absence of the transaction? Is the rate of innovation or product improvement likely to decrease postmerger? April 18, 20137

8. The best defense starts with a good offense The offense: The deal is a win-win for the company and the customers: The defense: Customers have alternatives to protect themselves:  Note: If the merged companies knows that customers will switch to alternative suppliers if threatened with harm, the merged company will have no incentive or ability to harm customers April 18, 20138 We make money by providing more value to customers, improving productive efficiency, and reducing costs without reducing product or service quality (not raising their prices) Customers have alternatives, so that they can go to these alternatives to protect themselves in the event the combined company threatens to raise price or otherwise harm them

9. Menu of defenses in horizontal transactions In decreasing order of strength: 1. Parties do not (and cannot) compete with one another 2. Parties compete, but only tangentially, and there are other, more significant competitors Plants producing competitive products are too far apart geographically to compete effectively with one another Plants located close to one another do not (and cannot cost-effectively) produce competitive products In every case, there are third-party firms (including nonglass alternatives) that provide stronger competition 3. Parties compete head-to-head but have enough significant other close any effective competitors* April 18, 20139 * See Slide 6 for how many is enough.

10. Menu of defenses in horizontal transactions A helpful fact: Powerful buyers  BUT usually not a complete defense—what about smaller customers?  AND the FTC insists on a carefully reasoned explanation of the mechanics of how powerful buyers can protect themselves in bargaining with the combined company An unhelpful (but by no means fatal) fact: High barriers to entry April 18, 201310

11. 11 Assessing the defense—Exacerbating factors “Hot” company documents  Suggest that a strategy of the merged firm will be to raise prices, reduce production or capacity, or reduce the rate of innovation or product improvement  Suggest the merging companies are close competitors of one another in some overlapping product  Suggest that customers have few realistic alternatives to merging firm  Suggest that the competitors pay attention to each other’s prices and are careful not to destabilize high prices  Suggest that the target company is a “maverick” that does not go along with the higher prices that other companies want to charge April 18, 2013

12. 12 Assessing the defense—Exacerbating factors Customer complaints  The merging companies are close competitors of one another in some overlapping product  Customer “plays” the companies off one another to get better prices  Insufficient number of realistic alternatives to preserve price competition post-merger  Customer conclusion : Customer will pay higher prices as a result of the merger April 18, 2013

13. 13 Synergies Types of synergies enabled by the deal  Customer value-enhancing synergies  Make existing product better or cheaper, or  Create new products or product improvement better, cheaper, or faster  Cost-saving synergies  Reductions in duplicative costs  Increases in the productive efficiency of the combined operation (e.g., through best practices, transfer of more efficient production technology) Synergies play two roles in an antitrust merger analysis  They provide an explanation why the acquiring firm is pursuing the deal (and probably paying a significant premium) that does not depend on price increases to customers  In close cases, large synergies can tip the FTC into not challenging the deal April 18, 2013