How to Navigate Antitrust Complexities in M&A

Let's face it, too many deals happen because they can happen, not because they should. Buyer led M and A flips that approach. It's about starting with intention and asking why at every step. Why does this deal make sense? Why will it create value? Why is now the right time? Instead of chasing reactive opportunities, Buyer led M and A is about leading with strategy. It's about being proactive, going after the right companies, finding the vision and building the plan to make the deal successful. Before the ink dries on the LOI at dealroom, we've worked with hundreds of M and A teams to adopt this approach, helping them align their M and A strategy with long term goals and avoiding common pitfalls. And now we've made it even more accessible with a simple framework for implementing Buyer led M and A. This framework gives your team the tools to line, execute and deliver real value. You Every time Bioled M and A isn't about working to close a deal, it's about working to make the deal successful. Visit dealroom.net to learn more about the Buyer led M and A framework and transform your M and A process into a value driving powerhouse.

Here's to the deal. I'm Kisan Patel and you're listening to.

M and A Science where we talk with deal professionals and learn valuable lessons from their experience.

This podcast focuses on stories, strategies and what actually happened during M and A deals.

Hello M and A Scientists. Welcome to the M and A Science podcast where we learn from the best in M and A to uncover proven techniques for enterprise value creation. And if you're interested in learning more about how to optimize your M and.

A practice or want to get involved.

With our community of forward thinking M and a practitioners, visit massachusetts.com and subscribe to our free weekly newsletter.

You want to keep up with us.

On the go, check out LinkedIn and follow M and A Science. I'm your host Kisam Patel, Founder and CEO at dealroom and Chief Scientist at M and A Science. Joining me today is is Kai Razka, Senior Antitrust Counsel at abb. ABB is a multinational corporation headquartered in Zurich, Switzerland, specializing in electrification, robotics, automation and motion technologies. ABB is known for its innovative technologies including smart grids, electric vehicle charging infrastructure and industrial robots traded on both the Swedish exchange under Abbas and the Swiss exchange under abbn. Today we're going to talk about how to navigate antitrust complexities and think strategically about antitrust and M and A. Kai, how you doing today?

Hi Kisan, thanks for having me. I'm doing well.

We're here live in New York in VRC's office, valuation research Corporation.

So quick, plug for them for sponsoring our recording location today. Hey, before we kick off, I know you're an attorney. Let's get our disclaimers out of the way. Nothing here is advice that you should take or act on like a media. You could do it.

Thank you. Yeah, I'm an attorney and an employee. Just want to be clear. Anything I say here today is in my own capacity, my personal capacity. Nothing I say today is on behalf of my employer or any clients I've represented in the past. I'm here to speak from my own perspective.

Nothing to be construed as investment advice, legal advice. By continuing to listen to this podcast, you agree not to sue anybody for anything that's associated with this podcast.

That sounds like a good start.

Can we kick things off a little bit about your background?

I'm an antitrust specialist, but within that I'm a bit of a generalist, so that means I've done a little bit of it all. I started in the government doing enforcement side work at the ftc, investigating litigating merger challenges. And then I went into private practice where I have over a decade of experience representing clients in all matters of antitrust. So that can be litigation, that can be investigations, that can be transactional, that can be M and A advisory compliance. Anything touching antitrust, I've done it at some point, pretty much. So I was in private practice for most of my career in law firms and then recently went in house where I am now at ABB and have a sort of US Canada focused role at ABB supporting all things antitrust related, including, as we'll talk about today, mergers and acquisitions.

You've done it all. In fact, you were one of the FTC attorneys that everybody complains about. Most of the people on this podcast.

Probably, but it gives me a nice perspective on what it's like to be in the government. I like to think that it gives me a better approach to thinking like a government attorney thinks and being empathetic as well, which I think is always a good tool to have.

I was going to say to your advantage because now you get the perspective from both sides.

Yeah, I agree.

Can we walk through some of the.

Key antitrust trends that business leaders might.

Be aware of at a high level but not fully appreciate?

It's always nice to level set that kind of question with the fact that most deals get minimal, if any scrutiny or review. Even those that get reviewed, most of those will get cleared without conditions and there's some small fraction of deals that receive really close scrutiny and have ultimately get challenged by the government. So it's always important just to keep that in mind. And because as lawyers, we can always sound very cautious and risk averse because the climate out there is an aggressive one. But putting on the practical sort of business cap, I always remind myself of what the statistics show in terms of deal clearance, et cetera. But there's also, of course, a deterrence effect to always be thinking about. And there's always a cost, burden and delay of going through a difficult merger clearance process. So for those two reasons alone, even if you don't think your deal is getting challenged, you definitely want to know what are the trends, what are the landmines, et cetera. I break it up into three categories about it as the government really has three levers that it can pull to make your deal more challenging. The first is of course, the most obvious one. It's the substantive lever. That's the ability of the government to legally challenge a deal, try to block it, or impose some kind of remedy as a condition for the deal to go through. The other lever they can pull is more of a soft power. It's messaging. It's how they talk about enforcement, how do they message to the community, business community, what their priorities are. And there the motivation might be to see a deal stop at the boardroom, as I've heard it put, meaning deter borderline deals from even going forward. And then the third lever the government can pull is process. And that means if you have a deal that's reportable, meaning you have to submit a filing to the government to secure some kind of clearance, that process is one where the government agencies have some flexibility in how they go through that process. And they can make that easier or they can make it difficult, depending on what their thoughts are about the deal, et cetera. So that's how I think about it. Happy to go into some specific trends that we've seen in those three areas. But the bottom line would be in all three of those. So the substantive challenges, the messaging we get from the agencies and how they go through the process of reviewing a merger, and all of those have seen more aggressive positions taken from the antitrust agencies in the US and in many major jurisdictions around the world. And that is why your listeners will probably heard that this is a more difficult climate for getting a deal cleared cleanly and swiftly and than in the past.

Let's break them down. Maybe also correlate the trend that you're seeing within Each of those, yeah. Starting with our substance of challenge.

The substantive part of this is an important one. Maybe it's a little bit of the nerdier one, it's the more legaleasy one, but it's an important one. And the bottom line here is the government authorities are taking a wider view of the potential ways that a merger can be harmful to competition, and they're taking a narrower view of the ways that it can be beneficial to competition. What does that mean? That means in the course of conducting an investigation of a merger or in deciding what kinds of mergers to challenge, the agencies are bringing a wider set of theories to the table about how that merger can hurt competition. So whereas maybe traditionally we've focused on the presence of a direct head to head competition between two companies, now we have to look beyond that. That might include, for example, vertical relationships. So if you have two companies that are vertically positioned in the supply chain, but they're not competing head to head, that can be something that raises competition problems. To the extent that there's a potential, for example, for a competitor to feel like it's going to get locked out of a key input or a key distribution channel, et cetera. There's the notion of looking at future or potential competition, not just looking at what is the competition that exists today, but what competition might exist a year from now, two years from now that the merger might eliminate. So here your listeners may be familiar or run into a lot of build versus buy situations. Those are the kinds of situations where an agency could look at a build versus buy dynamic and say maybe it's better off if the company acquiring the target has to build on themselves instead of buying someone that's already in the market. That's the kind of situation where we could see novel extensions of theories of how competition can be hurt by deals. There's an expanded deal horizon. And by that I mean the agencies are very clear that they want want to use their call in powers, which is to say that they want to look at prior deals, maybe the ones that have already closed, maybe even ones that have already been reviewed and they have the ability to go back and look at that again and look at it from the perspective of what's happened in the market since that deal closed. Industry rollups is a big one. We're seeing a lot from the agencies looking at private equity in particular, roll ups of industries. And how can a series of transactions, not just one individual transactions, but how can a series of transactions looked at combined potentially create competition problems? The last one I would Flag is the agencies are not as keen to accept efficiency arguments as being reasons for why a deal should go through. What that means is if they have a competition concern about your deal, it's going to be tougher to walk them back from that and allow the deal to be cleared on the basis of cost savings. Efficiency synergies that you may feel very convinced are going to be passed on to customers in the form of better products, cheaper products, that kind of thing is tougher to argue. Now those are all ways in which substantively the law hasn't changed. It's the same words on the paper, but the way the agencies interpret those laws, it adapts, it grows over time, subject to court review. And those are some of the ways where the agencies are looking to expand out and have expanded out how they view mergers as potentially problematic. So that's the substantive one.

Vertical competition, future competition, expanded deal horizon, industry roll ups and then the efficiency arguments. These are all sound like good things, I feel like, except for the expanded deal horizon, which I don't understand how you would go back to a deal, especially if you've already integrated the company and saying, oh, this isn't the deal you should do.

It definitely raises practical challenges for the government to go after a deal that's already closed. What's the remedy? There's a case right now the FTC has a case against Meta. That part of the theory is has to do with their acquisition of Instagram and WhatsApp and that those historical acquisitions were something that prevented competition from blossoming in the social media space. The doj, the other enforcer of the antitrust laws, has a case against Google targeting their ad tech stack. Also part of that theory of that case has to do with prior acquisitions they made, doubleclick, et cetera. These are cases that the agencies are bringing. And what that means for practitioners is you always want to be mindful of the fact that deal risk from a regulatory perspective does not go away just because you closed on the transaction. Keep your lawyers in the loop, keep your sophisticated deal counsel involved going forward through integration and afterwards, and especially if you're doing more deals that follow on in the same area in the same sector. Make sure you're looking at the holt horizon of transactions when you're assessing deal risk.

Rollups are popping up everywhere. I thought they were doing a good thing. You start creating your nice consistent brands and then build more consistency. And everybody loves franchises. I feel like that's what always like iconic of America. It's just you name it as a franchise for every business, but they can be deemed as anti competitive.

The theory there is, if you look at each individual transaction, maybe it's a minnow, but if you look at a series of transactions, 10, 15 transactions, maybe the cumulative effect of that is that you're creating a whale. There's still to be seen how the courts adapt to these sorts of theories. But there are challenges in the courts right now. The FTC has a case in Texas against a private equity owned or funded group of anesthesiologists on the theory that a series of what they call industry roll up transactions has consolidated the market for anesthesiologists in a local market in Texas and that this overall created a problem for competition. The question here becomes can you point to those efficiencies or the benefits of all those roll ups combined? And I think it's more difficult to do that in this climate because the agencies are more skeptical of those efficiency arguments. From their perspective, they think that those don't always play out the way that the parties expect them to.

These are like tough parents that just don't want to hear any excuses.

There's been a default, a change in the agency's sort of default being that it's not presumed that a deal is going to be pro competitive. You have to have compelling argument that it's going to be pro competitive. But again, we always have to come back to that baseline. The baseline is most deals that you put forth in front of the agencies are not going to receive scrutiny. This is going to be the fraction that do. And we can talk about it in the course of today. But there are also ways to prepare yourself and try to avoid getting yourself in a situation where you fall into one of these categories while still creating those value added deals that you're talking about.

I know it depends on the governing body, but is there like a percentage of deals that go through secondary review?

Yeah, there are some great reports on this. There are law firms that put out reports giving you statistics on how many deals receive a detailed inquiry, how many receive a challenge. I don't have the numbers off the top of my head, but safe to say north of 90% are going to get through. Now a lot of those deals are ones that are very small. They're ones that have no competitive overlap. There's minimal vertical overlap. These are deals that on a quick sort of first blush, the agencies can conclude don't require any sort of further inquiry. But your in house lawyers and your outside counsel are the ones that are going to be helpful in Flagging for you the few that might raise those issues so that you can plan in advance.

The other pillar of messaging, this is.

One that the current agencies under the Biden administration have really used to their maximum force, which is to the extent that government agency leadership is out there doing speeches, they're at conferences, to the extent that the agencies are putting out policy documents, guidelines, blogs, all those things, those are all opportunities for the government to message how they view their role as merger enforcers. And the themes have been quite consistent in my view. The view has been that too many mergers have been cleared, too many industries got too consolidated, merger efficiencies don't manifest the way that parties expect them to. And the remedies that the government has worked in the past to clear deals conditionally have not worked. You combine all those themes and you can imagine quickly that the conclusion from that will be a certain skepticism that a transaction which might look potentially anti competitive should be let through. That kind of messaging is important because it just plays that role of deterrence, which I can't overstate how significant that is. From the boardroom down. That deterrence effect is real and deals will be squashed early in the process because of concern about antitrust regulatory clearance. And deals may get killed at the boardroom level because of companies not wanting to expose themselves to the deal risk, to the reputational harm, to the extreme costs of going through a difficult process. That deterrence effect is real and probably difficult to measure. To the extent that those baseline statistics sound super comforting, I always want to caution that you always have to look at the deal in front of you because it may fall into a category of deals that is maybe not captured in those statistics because deals might be getting basically squashed earlier in the process because of the perception of the risk.

Just a broad messaging and it sounds like it comes from the government's position, but then also just how it's read by the general perception of the market.

I think that's absolutely true. And you will hear different levels of panic or concern about antitrust depending on who the audience is and who the speaker is. But that's why you need sophisticated support along the way to give you a really well balanced view of these risks because it's never as extreme as anyone thinks it is, and it's always nuanced and always requires looking at the specifics of the deal in front of you.

Then the actual process has been changing and evolving and from what I hear, it getting more expensive.

Yeah, this is a big one. I've heard this called the merger tax. And here the way I think about this is it's almost like a war of attrition, trying to use the process to slow a deal to make it more difficult, to make it more costly. And again, this isn't going to be every deal. It's not going to be most deals even. But if there's a borderline deal that the agencies have a concern about, and they may be more likely to issue a very large request for information, they may be less likely to negotiate with you over the scope of how you comply with that request. There are a lot of ways in the process, the regulatory process of a merger, that the agencies have the ability to slow it down to create burdens and costs. That can be again, a big deter of pursuing a borderline deal. It can even kill a deal if it gets dragged out for too long. You could blow a closing date, outside date and the transaction documents. And then there's always for anyone that represents works with a global company, there's always the risk that you have review outside of the us so you might have a regulator in the eu, or you might have a regulator in the UK reviewing the same transaction. And that process might be slower, it might be longer. The agency in the US might slow down its process and see what happens abroad first. All these create uncertainty for parties that are pursuing a borderline deal. And we'll talk about ways to kind of anticipate that and deal with it. But the bottom line is you take all these sort of three aspects, these three levers that the agencies have and unibody. If you have a borderline deal, if you've got a deal that your lawyers are telling you is a borderline deal, you really have to think very carefully about how long it's going to take to close. If there is regulatory risk, what is going to be the distraction and burden and cost on your company during that process, if you're a target, might be particularly vulnerable to the uncertainty of a long closing date. And it also of course feeds into how the parties negotiate and allocate risk in the course of negotiating their transaction documents. Because if you anticipate that a transaction might receive all of this scrutiny, then that's going to inform how you approach allocating that risk between the parties to the deal. That might be things like what are the two sides obligations to litigate or can they walk away if there's just a earlier stage in a process triggers a walkaway point. What is the outside date and what are the conditions for extending the outside date for closing we have instances now where it can take 12 to 18 months for agency review to be concluded. Those are long periods and they have to be anticipated when you negotiate the deal documents.

I want to take apart this process because we've already outlined that it's been getting more complicated and whatnot. But who should be really concerned about it? Can we profile that company? Does it only apply to public companies? Is it more specific to the real nature of the deal? When do I need to start really being concerned? Or do you need to be paranoid about every deal?

No, should not be paranoid about every deal. You should absolutely make sure you know which deals require a filing, a merger notification. It could be in the US it could be somewhere abroad. But you absolutely have to make sure if your deal requires a filing that you prepare to make that filing.

So mandatory filings is number one.

That's the number one step. First you have to figure out, is your merger the kind that needs to be reported to the government, and if it does, what is the timing of that? What does that look like? If it is reportable, then you know the agency is going to see it. So that means that's a deal that you should already view as being something that at least will be coming across someone's desk who's going to be looking at some of these issues we're talking about. And then beyond that, if it's a reportable deal, you really have to look at the profile of the acquirer. There are certain acquirers that are out there. The names probably won't surprise folks who receive a lot more scrutiny. No matter what deal comes across, if you're a target being acquired by, let's say, one of these repeat players in front of the agencies, then that's a profile of a deal that I would flag as being a yellow flag. After you've looked at the profile of the parties involved, you have to look at what sector are we in, what industry are we in? There are industries and sectors that are clearly more on the radar. Now, the agencies are very active in trying to establish that they enforce the merger laws across the entire economy and they bring cases across the entire economy. But agencies are people and the agencies have limited resources. They can't bring every case and go after every industry. In equal. You looked at the agency's recent history, you would see a lot of technology cases. You'd see a lot of cases involving technology companies. You would want to look at the industry sector profile. And beyond that, that's when you really get into the weeds of what are the competitive Dynamics of this, this transaction. And is there a way where one of these theories of substantive concern that we flagged earlier in this deal fall into one of these theories? And that requires really going through and understanding the markets and the competition that exists and the relationships that exist between the parties. And what you get out back end of that analysis is some notion of, was this a low risk deal, medium risk deal, high risk deal, Is there a way to fix this deal, to turn it from a high risk to a low risk deal? For example, can you carve out some asset that creates a competition concern? You can react to that and lower the risk profile of your deal. But on the front end, what goes into the process, I would say are those factors.

Sounds good. And then for mandatory filing, should I be paying attention to the entity of the target where it's based out of, I. E. If the company's based in Germany, that is, or where the employees are based, like if the employees are in Poland or something, is that more a bigger factor?

Conducting a merger filing screening across the world is quite complicated. There are, you know, well over 100 jurisdictions that have some sort of merger control regime, which means 100 jurisdictions where you could potentially have a filing. Now, most of those jurisdictions are going to require some nexus to that jurisdiction from the business, meaning the business has to have some presence there that could be turnover, could be sales revenue generated in that country. Some jurisdictions, presence of assets, presence of people, business registration, et cetera, that can factor in to whether or not there's an adequate connection to that jurisdiction so that a filing might be required. Your outside counsel, and with more sophisticated organizations, your inside counsel will have the ability to conduct a quick screen and basically be able to check off what are the 98% of jurisdictions that are clearly not an issue. And then you drill down on the 2% and 1% and you look closely at what the requirements are to see if a filing is required there.

So we got to go check screen out the deal in general, which is probably goes back to why you need a good attorney to help with some of this stuff. And then you mentioned the sales of the business or countries we're doing sales in, assets that we have in different countries where the people are. And then if we're registered. So let's go back to the US the main stuff here, HSR, a little familiar with 2R. I have no idea. Can we talk through some of these in terms of the actual procedural process here?

Domestically, the process in the US Is if a filing is required, you have to submit the filing before you close. So that merger filing has to go in and then that means the clock starts running on the government's ability to engage in a process to review the merger. Maybe ask you for more information, maybe not. Maybe conduct a full blown detailed investigation, maybe not. And then once that process runs its course, the parties can close the transaction, assuming it's not challenged by the government. And the two main steps in that process are the filing itself. It's called the HSR form. That is a regulatory form that you submit to notify the government about your transaction if it crosses certain thresholds. Not all deals are reportable. They have to be above a certain value. And if your deal is above that value and it needs to be reported, you have to submit this HSR form to notify the government. And then after that, the next big step to be aware of is whether the government comes back and asks you for more information. And that can come in the form of sort of a gentle ask. That could be an informal ask that's almost like a request they call a voluntary request for information, or it could be a full blown subpoena, A document that is enforceable in court and obligates you to produce documents in response to that request. And that is called a second request. That's just a term of art in the antitrust space. And that second request is really the biggest driver of delay and cost and burden for clearing a deal in the.

US So you might have a follow up is just a pure clarification, hey, can you send this or clarify this little piece of information? Or it goes to this whole second request which basically is like a big audit.

That's exactly right. It really is a spectrum that you're inquiries will fall on. And you could receive no requests. And 30 days after you submit the filing, you can just close. Or you might receive a limited request for information, or you might receive something like a second request. That is a full blown, highly intrusive process. We're talking about requests that have now gone up to 50, even 100 custodians, meaning people whose documents have to be pulled in response to that request. These second requests seek data, sometimes terabytes of database files from the company's records. The scope of the documents that have to be collected can be massive in the millions. And by the way, increasingly includes messaging platforms, ephemeral messaging, data on personal devices that are used for work. These are things that surprise people in a company. Companies expect a regulatory process. They might expect a regulatory review. But when you tell them that a senior leadership Member needs to provide their personal phone to our ediscovery vendor because their work, emails or text messages on that phone might need to be produced to the government. That can come as a shock and surprise. You really can't be overstated.

Everything messages to girlfriends and mistresses and everything on those personal devices.

If you talk to junior associates and big law firms, they all probably have some confidential story with on anonyms basis where they've seen some document or some email in one of these reviews. Obviously everyone's extremely professional in how they handle that, but. And you're always extremely careful in using vendors that protect that kind of information. But try telling that to the person who's handing over their phone.

This is why you need a burner phone.

It's why no matter how many times you hear it, you really have to try to separate your personal devices as much as possible.

Separate business and personal. Duly noted. And then feel like you don't want the trail. Sometimes you just say things that are. Let's talk about that. Like the language that is going to raise the red flags. Where it's like, oh, we're going to burn this company down or obviously that's an extreme, but what are general red flag languages if they're going to use their AI tool to start pulling up stuff?

This is a tough question because there's different schools of thought. My view is you instill the right kind of business culture at a company and you rely on that business culture to prevail in how documents are created and how people talk about their dealings in the market, et cetera. I don't know if I'm personally a fan of words you should or shouldn't use. Business people need to be able to talk and converse and make informed decisions at the same time. You have to advise business people that there's a risk involved in saying things in documents or emails or text messages, which later can be taken out of context, which later can look like something maybe they're not, which later can take on a whole different meaning during a review of a merger that no one may be even thinking about. When they say those words, all those risks come up because we have a process in the US in particular, that's a adversarial process. When you submit a filing, if the government believes that your merger is problematic, they take you to court and they're going to try to block your deal. And that's an adversarial process. Now you're litigating with the government. What that means is the government is going to Put forth the strongest case that they can. And part of that they're going to be looking at all the documents and they're going to look at everything people said and they're going to ask questions during depositions and maybe at trial about what those things meant and what they didn't mean. And they're going to be doing it in an effort to build their case and win their case. All that means that same advice you receive from lawyers and other advisors about always taking care of what you put in writing applies just as much in my context, sort of the M and A antitrust legal context. You want to take care because when you're talking about competition, when you're talking about market shares, when you're talking about product roadmaps and build versus buy and moats and barriers to entry, these are things that can be commonplace terminology that's used across your sector or within your business. But they may have 15 different meetings depending on how they're being used. Or they might have completely different meaning depending on who the audience is. You could have a small startup engaging in puffery to raise money. You could have a target trying to put their best foot forward in a confidential information memorandum. The motivations that drive that may not be the same motivations that drive being the clearest and most objective presenter of what the facts are. And later that is all going to get lost in the adversarial process.

They're building a case so that they can win in court against you from doing the deal and that they're going to take things and build around that position, depending on what it is to support it and have some facts they can reference.

Exactly. They're going to do within ethical limitations and moral limitations. I've worked with a lot of government lawyers. They're really good people, intention people, hardworking people. But their job is if they have a merger challenge, their job is to develop the facts in a way that supports their view of the market that they have gained from their investigation. And you may disagree with that view, but that's not going to be a reason for an email to be thrown out of the evidential record. What's going to happen is you, as the company will present your view of what that email means, the government's going to present their view of what the email means, and then the judge is going to decide who they believe or don't believe. That's why if you work backwards from there, the starting point is just be very careful how you talk in emails. And to me that means instilling A business culture around document creation, irrespective of legal implications, that focuses on clarity, accuracy, context and avoid the kinds of things that you wouldn't otherwise want to have put in front of you five years later.

Do the right thing. I think that's what it comes down to, do the right thing on these deals. And two are, what is that?

That's second request.

That's 2R. 2R.

Second request.

Okay, so 2R and second request for filing HSR. Who has to file HSR?

So in the US both parties, everybody.

For every deal has to do this.

If it's a reportable deal. So if the transaction exceeds a certain value, which is now approximately almost $120 million, and then subject to other requirements and carve outs and exceptions. But if you trigger the monetary threshold for a filable transaction, then both parties to the transaction must submit an HSR form. This sometimes comes as a surprise to targets, especially smaller ones. That's a good tip for everyone to be mindful that just because you're the target doesn't absolve you from having to think about the implications of submitting a form, which by the way would be a huge mistake. Not to mention that HSR form is changing. We have a major change in a form going into effect in February of 2025 and that form that requires significantly more information, more documents, and that means not only from the acquirer submitting the form, but the target submitting the form will have to enclose documents that they've created about the deal. Some ordinary course corporate development documents may have to be created. All of which by the way leads back to document control. Document management. Good document management. Good document control practices will help mitigate any risks associated with submitting a broader HSR form.

Okay, HSR filings are increasing, hence merger taxes going up. Earlier when you mentioned the deal horizon.

Can you help me understand that the.

Whole perspective of looking beyond the single transaction, but like the whole landscape, how does that work?

The way it works is if you're looking at a deal today, if you are a serial acquirer, if you're a company that does many transactions, if you're looking at a transaction today and trying to understand what is the legal risk associated with this transaction, you need to look back and understand what the history of other transactions you've done in the same sector are to understand whether or not this particular deal may create a problem when you're looking at the cumulative effect of all those deals. So we talked about that earlier today in thinking about industry roll ups and Just thinking about not just one deal in isolation, but looking at the impact of all of them combined. Another element to that is the government authorities are increasingly looking at markets more broadly and looking at how competition occurs in a market more broadly. The way that plays out in practice is theories of competitive harm that have to do with ecosystems or market agencies. What I mean by that is you may have a transaction that involves acquiring a company that is not an immediate competitor, but maybe they're somewhere else in the vertical stack. They might be upstream, downstream, whereas traditionally that might have been viewed as the kind of deal that is presumed to be efficient or competitive. Create synergies, create cross selling opportunities, help the acquirer enter new verticals, all those sorts of things. You have to look at those kind of transactions now with a little more careful eye because there are ways that the government authorities are viewing those as a way to consolidate an entire ecosystem. They may be looking at a transaction that is vertical in nature, but looking at whether it's creating a consolidation of an entire ad stack or an adjacent market that would allow, for example, other competitors to have a difficult time reaching market distributing products. We've had some interesting cases like this in Europe. Booking had its acquisition of E Travellee blocked by the European Commission. This is under appeal. Kisan, I know you had a great conversation about this case.

Yeah, we got to interview Todd. He got a vent about the whole situation. It was great to hear his story.

That's exactly the kind of case I'm thinking of is one where Booking, his hotel, Etravoli, his flight. The government is increasingly looking at, okay, combining those sorts of different parts of a vertical stack. Is there some way that disadvantages other players in the market, other competitors who may not get the same access to E Travel distribution channels, et cetera? Those are the kinds of theories that what that means is companies of all sizes could be in the crosshairs, especially if the acquirer is a large one and if that acquirer has a big position somewhere in a stack. If you're being acquired by that kind of company, you need to think about these sorts of ecosystem theories that the government could be thinking about locking.

That deal in itself was anti competitive because how are they supposed to compete with Expedia anyways?

We'll see how the appeal plays out.

Teach me risk mitigation around all this. I know you mentioned getting involved attorneys early and just can you help me explain how do I manage my risk?

I kind of break this down into the phases. So before a deal even exists, let's call that the ordinary course now, especially with the new HSR form, this is even more important. I think. Your ordinary course, strategic planning, ordinary course, corporate development documents, ordinary course, competition market analysis. When you're scoping out what pond to go fishing in in advance of a specific deal, all those sort of ordinary course efforts are going to be creating documents, they're going to be creating spreadsheets and data emails, all those things. To the extent that those are resulting in sort of high level summary documents, bottom line documents, et cetera, you have to be mindful of the fact that again going back to those best practices around document control, whatever's in those documents is potentially going to be produced through a regulator in the future. So then the next stage would be, let's call it the pre deal phase. Maybe you are already have identified some potential targets or you're a seller and you're identifying some potential buyers. Here document control becomes even more important because as we get closer to a specific deal, the chances of the document being produced in a subsequent review of that deal goes up. Document control, still a big issue here. And the other one I would add is once you're in the sort of pre deal phase, this is when you have to start thinking about conducting a feasibility analysis. And what that means is going through that checklist we went through earlier, Kisan, which is what does a borderline deal look like? What does a risky deal look like? You have to understand the risk profile of the potential targets you're looking at or the potential suitors you're looking at. What you're trying to do is you're trying to. First of all, you don't want to waste time on a bad deal. If you spend all your resources pursuing a deal and then at the last step the lawyers come in and tell you this is going to get significant scrutiny by the regulators. It's going to take 12 months to clear if it gets cleared at all, and then be pulling the rug off from underneath it. You want to avoid that. The purpose of the feasibility analysis is to avoid wasting time on bad deals and to identify the borderline deals so that you have your eyes wide open about that deal, that you're not entering the process completely blind to the fact that this is a deal that's going to require a lot of effort to secure regulatory clearance. So that's the sort of pre deal tasks that you can perform. And again, all that is almost like a funnel. You want to make sure that by the time you get to the deal you're not going to be surprised by Lurking deal risk from a regulatory perspective. And then once you get into the deal. So once, let's say you've identified a target, you've identified the suitor, you've started engaging in some sort of discussions, you're working towards an MBIO document control becomes even more important. Again, the closer you get to a specific deal, the more likely those documents are to surface as part of some sort of regulatory process later on. And now you really, your antitrust lawyer in house, outside counsel starts to play a more pivotal strategic role, which is you really need to start thinking about what are the relative strengths of potentially different parties like potential buyers that you're looking at or potential targets you're looking at. You may be considering whether it comes to a particular target. Engage in some sort of fix it first strategy. So that's the scenario I described earlier, which is one where you might carve something out of a deal in order to make it a lower risk deal from a regulator's perspective, maybe that's not the core asset, maybe it's not the key value proposition of that deal. And so you say, look, why undermine the ability to clear this deal? Let's just get this asset out of this deal and then we won't have challenges to deal with later. That's sort of a strategic role that I think you could see played by your lawyers. And then of course, you have to do the screening for merger filings. We talked about that. And then you have.

What is the NBIO stand for?

Indicative offer? Okay, so a non binding offer of interest or a non binding indicative offer.

Letter intent or letter of intent term sheet terms. Yeah, bunch of words. Yeah.

And the idea is as you get closer to negotiating the actual deals of the acquisition of transaction, as you get closer to that, you're going to start really having to get into the weeds of how to allocate any risk associated with that deal when it comes to securing antitrust clearance. As you get through due diligence, you're going to need to consider what kind of risks are present in the target from an antitrust perspective and then be able to negotiate around that risk through your deal documentation.

This doesn't end. It's like from the beginning, you want to be aware early so you can try to mitigate risk. But then as you continue the process, it sounds like there's still stuff you got to look out for. But between sign and close, like how big does that get looked into? Customers I've worked with are pretty aware about it. Is that like a real concern or.

Is that Just it is throughout the process, once you have a say, you get through the term sheet phase, you get into due diligence, you're going to be managing the flow of information. And that's just a critical risk from a legal perspective, because the presence of a transaction, of an M and a transaction is not an excuse to exchange and discuss anything and everything with the other side. You always have to be mindful of what kind of information is being exchanged, because if companies to the deal have a competitive relationship, then they can create legal risk by talking about pricing and other sensitive topics. That's why you set up clean teams and other procedures to manage the flow of information. Now, a related point to that is gun jumping, which is that the mere exchange of sensitive information with a company that, even if it's post signing, can create a standalone violation of competition laws which have to do with gun jumping. And gun jumping laws are there to prevent companies from prematurely integrating, from prematurely implementing a transaction. Meaning they're there to require that the companies continue to operate independently separately until closing, so that the government has the opportunity to review the transaction if they need to. And customers benefit from sort of full competition during that period before closing. Gun jumping can come about because of engaging in exchanges of commercially sensitive information that shouldn't be exchanged, that can't be justified, for example, by integration planning. But more often the way it comes up in an advisory context is that the parties are very anxious to start preparing for closing, they're very anxious to integrate, they're very anxious to start telling customers, suppliers, they're very anxious to develop their brand, they're very anxious to think about what does operations look like post closing. How do we make sure that there's a continuous flow of orders and customer support from day zero to day one? All those things are extremely valid concerns and there's a lot of flexibility to engage in those sorts of activities. As long as you're not coordinating your market activities, you're not out there jointly selling to the customers, you're not out there renegotiating supplier contracts, you're not out there tearing signs off the wall and changing your branding and marketing. You're maintaining the separateness of the companies, but you're planning for integration on day one. That's a safe place to be. And that's how you avoid gun jumping risk.

I was going to say because I feel like when you're doing proper planning, you're really getting a lot of information. Is there sort of a balance of, or is it more of just you're not actually executing anything. You're just really getting information for planning. But it sounds like there's information that you shouldn't have that's not related to planning integration.

Exactly. No, that's perfectly put. The information you're exchanging needs to have a good reason for that exchange. Before signing, you're exchanging information as part of confirmatory due diligence. You're trying to agree on the terms of the transaction. You're exchanging information to help you understand the risks you're acquiring and the benefits and potential benefits of the transaction you're acquiring. But after signing, you're no longer engaged in that kind of confirmatory due diligence. So at that point, the scope of the exchanges of information should be driven by integration planning by day one planning. And it is very common for companies to engage in extensive integration planning. And that is permissible from the perspective of antitrust lawyers and enforcers. But the big but is that the information exchange needs to be limited to what's necessary for that integration planning. And that information exchange may need to go through clean teams and appropriate procedures and protocols. Because from the regulator's perspective, their main concern is going to be what if your deal does not close? That could happen for business reasons, it could happen for economic reasons, it could happen for legal reasons. But if your deal does not close, the regulator wants to know what happens then. Have you now exchanged all this sensitive information? And now you're supposed to go back to competing like you were before to prevent or to help mitigate that concern? The agencies might expect that you put in place clean teams and other procedures to make sure that that information maybe sits in someone's head, but that person is not responsible for pricing, is not responsible for sales, and marketing, is not responsible for decision making on the strategic direction of the company. So there's ways that you can put in place protections, but as long as you do that, and as long as you only exchange what's needed for the integration planning, you're in a safe spot. And at that point, it's pretty common sense generally to how you view yourself in independent competitors and independent companies, because that's what you've been up until now. That's just a matter of educating the business up and down that, hey, we've signed, but that we haven't closed. We still need to clear regulatory clearances, et cetera. You need to make sure you continue to operate like you are today. If you've been tasked to be on an integration planning team, then here's some additional obligations you're subject to and you're going to have access to more information, but you can't use that information for.

Anything else during this stage. We talked about the filings that you got to do and then there's a bunch of comms component because you got to have PR folks reaching outwards about the deal itself to the market and then internal communication.

Yeah, that's a big one. It's all part of a structured M and a process inside of an organization. Not all companies have the scale and the resources to do this, but especially a company that is engaged in multiple acquisitions and has an M and A strategy, they're going to have an M and A procedure set up. And part of that will be ideally a cross functional role for lawyers to have input into communication plans internally, communication plans externally to make sure that people are not exchanging information they shouldn't be exchanging prior to closing, make sure that there's no gun jumping. And by the way, to make sure that all those sound document control practices are continuing to be emphasized all the way up to closing and ideally after that as well.

Let's talk about after close. Is there any risk after close?

You know, increasingly I think there are. This is an area where you have to be very nimble as an advisor and as an M and a practitioner. I know in your podcast you spend a lot of time talking about integration and how that can be the key to a successful M and A strategy is having a successful integration. And that includes, by the way, legal integration and compliance integration. What that means is when you have a company that you're integrating into yours, you're going to need to make sure you train them to be up to date on your legal policies, your antitrust procedures, protocols and policies. You may, as part of the integration, have to update their contracts to make sure that they follow the template or form that you have that make sure that they're legally compliant. As part of due diligence, you will flag these contracts. Ideally, then you'll know as of day one, you need to call up the following six vendors, maybe exercise a termination clause and renegotiate the terms to make sure that they're compliant post deal. There's also the call in risk. We've talked about this. This is sort of a scary notion, but it is out there. There's always the possibility the government comes and asks about a deal after it's closed. Anything you're doing, the best practices that you're doing in the run up to the deal and during a deal, I would continue to follow post deal as well. There's no reason not to have a good communication plan and to have good document control practices all the time. You might have transition services. You might, for example, need to continue to provide some sort of support to the acquirer as a seller to help transition them over in integration of a production or operations, et cetera. And there you have to be careful in managing that those transition services don't turn into an opportunity to be talking to your competitor about things you shouldn't be talking about that are outside the scope of that agreement and that transition. And then you know, you might have non complete obligations. This is one that's easy to miss. You might have a transaction that as part of that transaction, maybe you're the seller and you've agreed to a non compete that says you're not going to reenter the same space in the next two years. Let's say don't forget that a year and a half later when you're thinking about acquiring someone in that space, make sure you have a process internally that tracks those obligations so they don't pop up at the last minute when you're thinking about signing a transaction and someone comes up and says hey, we have a non compete that prevents us from entering that space. So there's a lot of post deal considerations to me. That's why we'll talk about this shortly. But it's why your lawyers should be strategic thinkers. They should have a strategic role on your team, on your deal team and they should be plugged in ideally throughout the entire life cycle of not just the deal but your corporate development timeline.

More and more podcasts I do it's like how diligence and integration are and should be very intertwined. If you click into the diligence part, I was getting to this question about influencing the strategic deal of rationale. When you are in that diligence part, is it just beyond looking at agreements and what things are obligated but how you approach diligence that influences the actual rationale of doing the deal based on what we're trying to mitigate in terms of risk of anti competitive?

Absolutely. To me bad due diligence is the rote check of the box cya. It's almost like doing homework. You look at a contract, you check off things. That's bad due diligence and that's bad due diligence from I think the business perspective and also is trying to be a value added lawyer as well. Good due diligence is of course strategic. To me it's tailored to the deal hypothesis. I need to Understand, as a lawyer, what are we trying to do with this deal so that as I'm conducting due diligence as a lawyer, I'm not flagging risks that may be not core to the deal hypothesis in the same way that I'm flagging a risk that is core the deal hypothesis. For example, if an acquisition is driven by improving a go to market strategy, leveraging a target's go to market channels, you best believe that due diligence on the target's distributor contracts can have a key strategic impact on the deal's valuation and potential. It's always about understanding what is the goal here, what is the value that we're trying to create. Then that can tailor my advice as a lawyer to make sure that I'm targeting the risks that are really core and treating them appropriately and then helping feed that back into the rest of the deal team that needs to maybe reassess the purchase price. That may need to reassess some synergies that they're expecting. Because if it turns out that a key supplier contract is subject to a exclusivity provision that might be problematic under the antitrust laws, you have to let the deal team know that because the deal team may then need to discount the value of that contract, they may need to rethink what that contract means for the overall synergies expected from the deal. To me, it's always a feedback loop between understanding the deal, why we're doing the deal, and then mapping that to my role as a lawyer to look at risk from a perspective of what's the strategic sort of imperative here.

Due diligence, real diligence. Can you tell me how companies use regulatory timing to their advantage when planning a deal? Are there particular regulatory signals like elections or policy shifts that businesses should be mindful of when considering M and A?

I wouldn't try to time the market and so I also wouldn't probably try to time a regulator either. Agencies are people. Their actions are difficult to predict and often slow to change. So it's difficult to tactically time your filing, for example, to achieve a particular outcome with the regulators, they have a lot of tools at their disposal to respond to any sort of tactics you might be engaging in. It's almost like countermeasures that the agencies can. They can kick a HSR form as being non compliant, they can ask you to pull and refile the form if they want to extend the review. Don't forget they can issue that massive second request for information, which is a looming threat always. I don't think you can be too cute when it comes to how you interact with the government agencies. You have to play it straight and you have to just play it according to procedures that are in place. And I don't know that you can time things. Certainly you have to be aware of what's happening at the agencies and who's in the leadership role at the agencies and what they're saying. This goes back to the messaging point we talked about earlier. You cannot understand the profile, the risk profile of a deal without understanding who's going to be looking at that deal and what are they motivated by and what are they concerned about. I always leverage the expertise of good outside counsel because they work on a lot of deals and they're in front of the agencies all the time. And one of their best value adds from my perspective, is as someone who can tell me what's going on on the ground, what's going on at the agencies at the moment that has them interested in particular sectors or has them focusing in one area, not another. They're always a good piece of intelligence, almost like a benchmark for what's happening in the agencies. As far as the election is concerned, this is the big topic right now is what impact does the election have on enforcement in the US and that's a difficult one. And there's a lot of different opinions on it. There's a lot that has changed under the Biden administration that will stick around that aggressive antitrust enforcement is probably here to stay overall because there is some consensus we've seen emerge from both political parties in the US around antitrust enforcement. Now, which industries are the focus of that enforcement, that's up for debate. And there's also broader headwinds that might conflict with that goal. Deregulation and downsizing, federal workforces, et cetera. How do those end up playing out in practice? And from a perspective of someone working on deals, it's difficult to predict. But you have to be plugged into what's happening at the agencies and what's happening around you in the enforcement space. Because no matter what you might gather from going to the FTC website, that's not going to be a replacement for talking to someone who is engaging in regular contact with them.

Tbd but you shouldn't time the market or the political market on your deal. Let's say we do a deal, really clearly there's going to be anti competitive issues. What are alternative ways of structuring a deal? Thinking of minority investments, joint ventures, is that a solution? How does that fit into it, it.

Can be a solution in the sense that you can still try to extract the value without creating the competitive concern. But it's not always going to be an easy fix because even minority deals are reportable in the US and any deal can be called in by the agencies in the US which means even if a deal is not reportable, if it gets on the agency's radar, they can review it and see if they have competitive concerns about that deal. That extends to minority acquisitions of any size. Engaging in a minority deal is not going to somehow make your deal disappear, but if it's structured in the right way, it can be a way for you to still extract value that you want, for example, from some of those cross selling opportunities. We talked about other revenue synergies. There might be contractual relationships you're trying to enter into with a target. And you might think that a minority investment is a good way to formalize that and to really put some meat around it. That might be a valid way to achieve that value, but not integrate the business and not create the concerns that might cause an agency to challenge a deal. Minority deal can be one way, meaning an investment. Joint ventures can be another. Joint ventures that do not eliminate all competition, but create some collaboration in one area will generally be seen as lower risk because they're preserving some level of competition. So that can be the best of both worlds option as well is to think about ways to structure a joint venture where you maintain the competition that you think is the kind of competition the agencies are most concerned about. And then you engage in collaboration, value add, partnership on another part of the business. And then the last version of that would be short of a joint venture. We have something we call competitor collaborations. In a trust space, think about any sort of joint R and D effort, joint development, maybe even licensing agreements. There are ways to even short of having a joint venture which might involve integration, it might involve sharing risks and benefits. Short of that, you may be able to engage in some sort of competitor collaboration to extract some of that value. And again, because you're maintaining your competitive, hopefully in the process, you're removing that risk that the antitrust agencies might have if you were to instead do a full blown combination.

Form a partnership.

Yeah, you do form a partnership that can be as formalized as you want it to be, or informal. Now all those things would be still subject to regulatory scrutiny. So you can never use any of these tools as a pretext to engage in a full blown merger. You can't use them as a way to try to consolidate A market. But if you use them appropriately, then you can still achieve a lot of those efficiencies without creating the problems for yourself to consider.

Can you teach me how to use antitrust considerations as a negotiating tool, whether using it as a sword or shield?

Yeah, sure. I think this is one of the strategic roles that good antitrust lawyers can play, which is beyond just negotiating standard sort of antitrust provisions in an agreement. There are aspects of the deal documents, and there are terms that are negotiated over where antitrust can provide a benefit to one side or the other. And so I think the most common one, I'm sure you've heard of reverse breakup fees. This is a payment made to the target in the event that a deal does not secure regulatory clearance. Reverse breakup fees have gone up significantly in recent years. There's a lot of statistics out there on this. The size of these fees has gone up in parallel with the perceived risks of deals not closing. Another thing you could consider is if you're a target and you may want to avoid highly expansive due diligence or intrusive due diligence, antitrust can be a reason to provide. You could say that. Look, if I give you the following information, not only do I think it doesn't add value to what you're trying to do, not only do I think it's unnecessary to the due diligence process, it also exposes both of us to legal risk. Because if I give it to you, then I've provided you this commercially sensitive information, and if I can't justify it as being necessary to the deal, then we might create antitrust problems for each other. That's another way where you might have a little bit of leverage from pointing to the antitrust risk. And then there's always the ability to use the price to calibrate around. Antitrust risk is an important one. Which means if you're a seller and you see a buyer as being a higher risk buyer because you've checked off those boxes and you think, wow, this buyer has a bigger chance of running into problems with antitrust authorities if this deal gets filed. That could be a basis for seeking a price premium. You're taking on risk by partnering up with this buyer. You could ask for some sort of premium in return. The same can apply in reverse. So if you're a buyer and in the course of your due diligence, you have found some risks that are core to the deal hypothesis. Let's say you might request a price discount. You might just ask for a lower price to accommodate that Risk that you're now taking on as the buyer. The sort of price adjustments there's always can be something utilized and they can come out of the antitrust risks or considerations that you're seeing.

These are all new things for me. How they can leverage this whole scenario for negotiating price breakup fees. We're past our time, man. I got to ask you though, before we head off, what's the craziest thing you've seen in M and A?

When I was in the government, we were litigating a hospital merger. We investigated and challenged a hospital merger. The theory of the case was that insurers would no longer have the ability to play these hospitals off each other during negotiations. This would cause the rates that they negotiate with the hospitals to go up and then these higher rates would be passed on to the insurance company's members in the form of higher health care costs, higher premiums, etc. This is the sort of standard model for challenging hospital merger. And in the course, and this is all public because there was a trial, I'm not revealing anything that isn't in the public record. In the course of the trial, one of the documents presented was due diligence notes from one of the target's deal teams talked about how going with this particular suitor could stick it to employers. And then it kind of actually quote goes on to explain exactly what's meant by that. And the interesting thing about that is this was someone on the deal team. This is not a senior leadership team member. This is not someone in the C suite, this is not someone in the steering committee. Then there was a prolonged cross examination at trial about whether that person considered themselves a middle manager or not. Obviously with the goal of trying to indicate that these were notes from someone whose views were not necessarily indicative of leadership's views. All this is playing out in front of a judge. Needless to say, I'm sure everyone on the the side representing the hospitals would have preferred that that kind of document wasn't being discussed in the middle of the trial. The takeaway from there, a lifelong career maybe lesson is about the risks that can come from poor document control. Going back to one of our themes.

Dirty laundry is going to get aired is what's going to happen. That's so funny, Kai. This has been a great conversation. I've learned so much about this whole nature of anti competitive regulation. I might start a little consulting practice on the side or something.

Let me get in on that if you do.

Yeah, I probably would love to work with you on that.

Thanks.

So much for helping me learn more become a better M and A scientist.

Thank you for having me.

Those of you fellow M and A scientists, you got this far. Bless you. Reach out to me. Tell me how I did. Give me some feedback. I'm on LinkedIn. I welcome the criticism. I'm trying to get good at this so give you a better experience in the next interview. Till next time. Here's to the deal.

Thank you for taking the time to explore the world of MA with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcasts. We'd love to hear from you. If you need help standing up an M and A function or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email Kisan K I S o n a science.com or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter. Again, that's mascience.com here's to the deal. Views and opinions expressed on M and A Science reflect only those individuals and do not reflect the views of any company or entity mentioned or or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.