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. . . .