Saturday, August 1, 2009

Calling All FTC and DoJ Antitrust Lawyers. . . . "Clean-up, on [Clayton Act] Aisle 7!"

Several comments, to this earlier post of mine, have been extremely helpful, in sharpening my focus -- the focus of my concern -- about the granting, or the mere existence of Sanofi/Merial's 100 day option to acquire all of Intervet, post the Schering-Plough/Merck reverse merger (should it ultimately occur). I'll reprint my answers, on this score, below.

If any of this seems confusing (without the context), readers may always go review the relevant comment-thread:

. . . .Okay -- as to the last Anonymous comment: Let's get the figures agreed, first.

Schering-Plough's Intervet (alone) was, according to several financial press sources, likely to fetch $8 to $9 billion, while the auction was proceeding "in secret" -- in June and July of 2009. Next, and importantly -- as an arms'-length bargain -- Sanofi has ALREADY agreed to pay $9.25 billion, for Intervet, if it exercises the option.

Finally, Sanofi has agreed to pay $4 billion for HALF of Merial -- the half it does not already own.

So, ALL of Merial is at least $7 billion, in value, even if we liberally assume that $1 billion of the $4 billion represents the "control premium/synergy value" of owning the whole Merial enterprise, rather than just a half of it.

That -- the $7B plus $9B is actually $16 billion -- is where (I think) the other commenter's figures originate (at "$15 billion"). The general point remains the same -- it is (and would be) a mammoth force in Animal Health.

With me so far? Good.

Now, Section 7 of the Clayton Act prohibits any company (of a certain size) from acquiring another company (in any transaction of a certain size) when the deal might reasonably result in "a substantial reduction in competition" -- it is an "effects" test.

While you are right, the FTC/DoJ will certainly get a chance to review this deal, should Sanofi ultimately elect to exercise the option, my concern is about what happens between now and then. There is a fairly high probability that the Schering-Plough Merck reverse merger will not close in 2009. It may well close in January or February of 2010. That means these current contractual "tie-ups" (or prohibitions, on acts of outright competition) will exist until June of 2010, as the 100 day option sorts itself out.

That amounts to almost one full year -- a year during which Sanofi/Merial is assured that it can effectively veto any action of any real size (of more than one-percent of Intervet's size), that might hurt Merial's emerging positions. Of course, it is all dressed up, with the lipstick of ostensibly not hurting the value of Intervet's business -- but Sanofi/Merial need not explain itself -- it need only say "no".

Next, an arbitration would ensue, about whether the refusal to consent was "unreasonable". Net, net -- it will allow Merial to delay Intervet's proposed action, essentially running out the clock -- until the game is over, and the Sanofi option is then fully-exerciseable. [Even if Sanofi never exercises the option, it may effectively hobble Intervet's ability to compete against Merial.]

This could be something as simple as New Merck/Schering voting a pay increase, or incentive compensation enhancement, to all Intervet sales people -- to drive penetration by Intervet, into Merial territories.

It could be something as serious as Intervet deciding to go head-to-head against Merial, in any one of about 40 product categories.

All Sanofi/Merial need do, is cite Section 10.4, waggle its finger, and "poof(!)" -- New Merck's Intervet (or old Schering's Intervet) will have to take a seat on the bench -- rather than compete -- in the game.

By June 30, 2010, Merial may have cemented enough of a lead in its core markets, that Intervet will never be a serious threat.

That is the arguable Clayton Act Section 7 effect of letting this deal putter along, as is -- blithely relying on a future Hart Scott review -- to sort out the effect of the EXERCISE of the option -- as opposed to the effect of the EXISTENCE of it.

The sheer size of these businesses, plus the very tight guardrails on permitted actions by Schering-Plough's Intervet, for what may amount to nearly a year, lead me to see a clear Clayton Act "anti-competitive effect" -- in the mere GRANTING of this option. . . .



. . . .I [was] saying "the loud part softly" [before -- but no longer].

Look at what an FTC/DoJ staff-lawyer might see: these agreements -- fairly construed, together -- begin to look like an attempt to carve up the Animal Health market, by what are now direct-competitors.

And those are attempts the Sherman and Clayton Acts generally frown upon.

Yes, on this post, my audience is the hard-working, but overworked, career staff lawyers -- of the FTC's (and DoJ's) Antitrust divisions. . . .


Anonymous said...

Where’s Teddy Roosevelt when you need him?

The company by company global animal health sales chart fits nicely into a one page well spaced bar chart. And this is before the Schering/Intervet merger.

Merck had their backs against the wall and I don’t think they want the Super-Merial to ever come into existence (but they obviously can’t lobby against it). They need some type of hedge against their often misguided human business.

Let’s not forget that animal health is a major factor in the safety of our food supply. Check out Intervet’s New Circovirus, and Bluetongue products for an example. By the way, this statement does not reference the small animal or equine teams).

Less/No competition, diminished research, lost jobs in an already lean market. God help us all if this crackpot deal goes through.

Anonymous said...

Can you please explain how Sanofi-Aventis could be allowed to wholly own both animal health units? I thought the whole reason that SP-Merck had to divest was so that they did not control too much of the animal health market. How is Sanofi owning both companies any better than Merck owning both?

Condor said...

Two observations: the theory holds that Sanofi will divest anything the EC or FTC tells it to. The reality -- I think -- will be that Sanofi will NOT get all of Intervet, either because it just hobbles Intervet, as above, and moves on --or, the antitrust authorities force major divestitures.

Second, in any event, IF Sanofi exercises its $9.25 billion option, New Merck will get HALF of whatever remains after the antitrust authorities have their say.

Even so, the larger point you make is solid: why should this be okay?

I wonder whether "the auction" essentially generated no other viable options -- for Merck/Schering-Plough.

Namaste -- do stop back.

Anonymous said...

The auction did have other viable options -- there was a potential purchaser of ISP "in the wings" if Sanofi walked. But clearly the divestiture of Merck's interest in Merial was the path of least resistance in getting FTC approval. And if Sanofi insisted on an option that -- in my opinion -- has little or no chance of being approved, there's really no skin off Merck's nose.

To Namaste's point about control. I'm cautiously optimistic that with the Merial piece gone, the overall transaction will close sooner than he expects. Perhaps as early as late October/early November. That will greatly reduce the period of time that Merial will have "de facto control" ISP.

But then again I've been wrong all over this deal before.

Anonymous said...

I just don't understand Merck's position on not selling all of intervet outright to a third party. that would have been the path of least resistance and the way to preserve competition. But does anyone at Merck care?

Anonymous said...

Merck can sell their Merial interest and that's pretty much done. If they had sold Intervet, there would have been much more work required post-closing, because Intervet would have to transition the business to the buyer.

Anonymous said...

Just FYI, you're using an old Intervet logo. The swoosh is no more. Nor is the green color scheme.

Condor said...

Um, well, a "logo that is, no more" -- I guess that's particularly apt, no?

I mean returns the familar Schering-Plough crimson over cream logo, at present. . . . which, by mid 2010, will likewise "be, no more".

Seriously, thanks.

I didn't know. But the varying greens still appear in Merial/Merck's logos -- and a pale blue dominates the logo of Sanofi-Aventis. . . .

So, in the words of Tim Gund, "I made it work" -- as best I could.

Do stop back.


Anonymous said...

Considering how little the FTC required SP to divest in combining the SP and Intervet animal health businesses -- and it was essentially nothing, which surprised even the insiders -- perhaps bodes well for Merck and Sanofi to pull-off their scheme with minimal divestiture. Absolutely nothing good for the consumer is coming out of any of these deals -- less competition, less innovation, fewer choices (as similar products are eliminated), poorer customer service, and (probably) higher prices are the results. The FTC has not been doing its job.

Anonymous said...

The overlap in the US and EU between Merial and Intervet/SPAH is huge. This was not the case with Intervet and SPAH prior. This combo would destroy 3,000 jobs in the US/EU and allow one company to control 38% of the AH market.

When will the FTC just say "NO"?

Anonymous said...

There was considerable overlap of products between SP and Intervet -- poultry, cattle, dog and cat bio lines, swine vaccines, cattle implants. Problems with the FTC were anticipated; did not happen in the US -- had to divest a couple poultry vaccines. SP has now discontinued most of the over-lapped products. Will be even more if a SP/Intervet/Merial merger happens. If forced to divest, will cherry-pick from the lines, which makes the divested products less viable in the marketplace. Think anybody at the FTC actually knows anything about real-world business?

Anonymous said...

OK, my best Tonto.

Comp-et-ition between BI, Merial, Intervet, Bayer, Elanco, Pfizer - good! Comp-et-ition between Merial/Intervet, Pfizer - bad.

Think the FTC can figure that out?

Condor said...

Sorry -- I just realized this thread has been offline -- lost in the drafts stack, for a while.

'Tis back -- Great "Tonto", BTW!


Anonymous said...

What is up with this situation?

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Condor said...

My latest speculation, here.