Analysis

Mergers During COVID-19 Create New 'Failing Firm' Paradigm

By Bryan Koenig
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Law360 (May 11, 2020, 4:42 PM EDT) -- Despite COVID-19's economic fallout, antitrust agencies continue to insist they're sticking to their normal playbooks when reviewing mergers, but as more companies struggle to survive, merging parties are likely to rely more frequently on the "failing firm" defense to convince regulators that deals that enforcers might otherwise challenge should be permitted.

Given that the fallout from the pandemic will be long-lasting, enforcers around the globe are likely to face requests to permit failing firm mergers for months and perhaps years to come.

United Kingdom antitrust officials have issued two failing firm decisions that were just weeks apart and went in opposite directions on whether the pandemic's financial impacts overrode traditional concerns about a deal's anti-competitive effects. In the U.S., antitrust officials have yet to indicate that the outbreak has directly impacted their decision-making on a particular merger and insist they will continue to hold failing firm defenses to a high standard.

Even with traditional standards firmly in place, however, experts say the novel coronavirus and it's economic harm could prove an important part of agency considerations, including as the U.S. Department of Justice and the Federal Trade Commission weigh market forces that are now far harder to predict.

"I don't know that the DOJ or FTC want to face a headline that they're responsible for more closings and layoffs during this pandemic than are necessary," said Joel Mitnick, a partner at Cadwalader Wickersham & Taft LLP and a former FTC trial attorney.

A High Bar and a Dire Crisis

The pandemic, experts say, is relevant for two defenses of mergers that antitrust officials would otherwise consider anti-competitive: failing firms that would exit the market if not for the particular transaction, and "flailing firms" that lack the economic clout their traditional market share implies. Both defenses typically face high hurdles for winning approval, practitioners say.

"It's a very high bar," said R. Mark McCareins, a Northwestern University professor and former head of Winston & Strawn LLP's global competition practice.

Despite the difficulty, Mitnick says that failing firms are a real result of the epidemic and not just an argument concocted to persuade regulators to let a deal close. And Mitnick says he's made the case of COVID-19's economic impacts in several recent merger reviews.

"Those reviews might have gone to a second request. But they didn't," Mitnick said, referring to the more in-depth probe beyond FTC and DOJ reviews of initial merger notification disclosures.

Only the enforcers themselves know why they choose not to take a closer look at any given deal, Mitnick says. But it's possible the pandemic was a factor.

COVID-19's economic impacts were weighing on agency considerations as early as mid-April, when the U.K.'s Competition and Markets Authority provisionally cleared Amazon's planned minority investment in Deliveroo after the British food delivery company said it needed the infusion to help survive turmoil in the restaurant industry.

In announcing the provisional approval, the CMA said it originally had been concerned that after investing in Deliveroo, Amazon would be discouraged from pushing as a standalone player into the online restaurant and convenience grocery markets in the U.K.

But then the pandemic happened, customer-facing businesses shuttered en masse and the global economy sputtered. And the agency ultimately concluded that an exit from the market by Deliveroo would be "inevitable without access to significant additional funding, which the CMA considers that only Amazon would be willing and able to provide at this time."

The head of the CMA's independent inquiry group, Stuart McIntosh, put COVID-19's influence even more directly.

"These wholly unprecedented circumstances have meant reassessing the focus of this investigation, reacting quickly to the impact of the coronavirus and deciding what it would mean for the businesses involved in this transaction and, in turn, for customers," McIntosh said in a statement in April.

Despite its importance to tilting Deliveroo's fate, however, the pandemic did not stop the CMA from going in the opposite direction weeks later. On May 6, the agency stepped in to break up the completed £90 million ($112 million) union of leading U.K. athletic fashion retailer JD Sports and an up-and-coming former rival, Footasylum.

According to the CMA, it's "obvious" that the pandemic has created "uncertain and challenging trading conditions" for retailers that it had to consider. But despite the outbreak's significant effect on the sector, the agency said it has "not found evidence that the impact of coronavirus would remove its competition concerns." The pandemic did convince the agency to give JD Sports "sufficient time" to sell off Footasylum.

Timing may prove a critical factor for agencies navigating failing and flailing firm defenses attributed to the pandemic, according to D. Bruce Hoffman, the FTC's most recent competition bureau chief, who left the agency late last year and is now a partner with Cleary Gottlieb Steen & Hamilton LLP.

While companies making that argument still need to show they've exhausted all other competitively acceptable options to stay open, Hoffman said traditional assessments take a lot of time. But the coronavirus and it's economic damage, are moving fast. And one potential argument for companies: "That kind of time is a luxury that doesn't exist," Hoffman said.

The difficulties of finding another buyer without the same competitive overlap during the pandemic likely makes it very hard for agencies to be "excessively punctilious or aggressive in assessment of the facts," said Abbott "Tad" B. Lipsky Jr., an FTC and DOJ alum who now heads up the competition advocacy program at the Global Antitrust Institute at George Mason University's Antonin Scalia Law School.

Finding other buyers, he said, "may be impossible just because of the numbers of businesses that are hurt."

The pandemic also makes it less likely that firms would be able to successfully reorganize on their own, according to Stephen Calkins, a former FTC general counsel and now professor at Wayne State University Law School. And he says the uncertainty of predicting outcomes is certain to weigh on agency decision-making.

"The standards are unchanged and the standards are extremely demanding. But this is such an extremely different world that agencies and courts are going to be more reluctant to block a merger," Calkins said.

The CMA, like its peers, has tried to make clear that its standards remain unchanged despite the pandemic, issuing guidance last month asserting that it will consider COVID-19 in merger decisions "where appropriate," while arguing it will not base decisions on "speculation." Failing firm defenses must be assessed "in a fair and transparent way that appropriately protects the interests of consumers," according to the guidance, which maintained that such deals will be assessed case by case.

"They are very astutely expecting it to be raised," said Caroline Thomas, a London-based partner with Norton Rose Fulbright.

The message from the CMA and its peers at the European Commission has been very consistent, according to Thomas.

"They're both saying standards have not dipped because of the crisis," she said.

Merger reviews, however, have taken a back seat generally for the European Commission, which has asked companies to hold off on deal notifications where possible as the agency prioritizes the approval of state aid regimes aimed at combating the pandemic.

The virus' U.S. impacts on merger reviews have also been more muted. The head of the DOJ's Antitrust Division did mention the crisis in announcing a deal that will allow cooperative Dairy Farmers of America to move ahead with its $433 million purchase of assets from bankrupt milk producer Dean Foods, after the co-op agreed to shed several plants.

Antitrust chief Makan Delrahim said the dairy industry's struggles have intensified in recent weeks as the coronavirus pandemic has caused milk demand by schools and restaurants to collapse.

"In the face of these challenges and Dean's worsening financial condition, the department conducted a fast but comprehensive investigation," Delrahim said in the May 1 announcement.

The FTC is also aware that failing firm defenses will likely be more prevalent because of the pandemic. Commissioner Noah J. Phillips noted in a videocast released late last month that the defense is a difficult argument to make, and enforcers are "always skeptical" of such claims.

McCareins says U.S. skepticism may make for a still-cool reception for failing firm defenses made in front of the FTC or DOJ, whom he said may not have been as receptive to the Deliveroo deal as the CMA.

One reason the bar may remain high, McCareins said, is a fear of a "slippery slope." If agencies start making exceptions for the pandemic, he said, "where and when do you stop?"

Making the Grade

Getting past the agencies' skepticism, attorneys say, requires opening the books to show that a company's traditional market power is belied by the realities it now faces.

"You can't just chant COVID-19," said Richard G. Parker, a Gibson Dunn & Crutcher LLP partner.

Instead, according to Parker, companies have to explain how the pandemic has undercut their financial viability.

Hoffman echoed a similar sentiment.

"A lot of it is fact development and putting it into an advocacy context," Hoffman said.

One potential pre-outbreak merger fight may give courts an example to rely on, some attorneys say. In his decision to reject a challenge from a coalition of state attorneys general to T-Mobile's purchase of Sprint, U.S. District Judge Victor Marrero found in part that Sprint was on shaky financial footing. As a result, he rejected state arguments that the company would have remained a viable national wireless competitor without the tie-up.

So-called weakened competitor arguments have been getting increasing consideration in recent years, according to Mitnick. And the pandemic is likely to add further weight on the scale of the defense, he said.

If tipped slightly by the pandemic, however, attorneys say the scales remain weighted against failing and flailing firm defenses.

"Simply flailing is not going to cut it," McCareins said. You have to prove that the immediate and near-term financial forecast for this entity is not only bleak, it is dire."

--Additional reporting by Matthew Perlman and Nadia Dreid. Editing by Orlando Lorenzo.

For a reprint of this article, please contact reprints@law360.com.

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