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renegotiated aircraft and other leases and earned $220 million in the second quarter of 2013 while in
Chapter 11, its first profit in that quarter in 6 years. It was proposing to lease hundreds of new planes upon
exiting bankruptcy.
To make this deal happen, it was clear that it took the behind the scenes negotiating skills of Horton to
line up creditor support for the merger and Parker’s ability to garner union support. Together they were
On December 9, 2013, American and US Airways announced the completion of their merger to form
American Airlines Group. Challenges remain. The task of creating the world’s largest airline requires
combining two carriers with vastly different operating cultures and backgrounds, as well as their own
strained labor histories. It can take up to 2 years for airlines to merge fleets, repaint planes, plan new routes,
and to seamlessly tie together complex computer systems. United learned the hard way in 2012 when its
has extensive experience in the challenges of integrating airlines. In 2005, when American West acquired
US Airways the pilots from each of these firms have yet to agree on a common contract and seniority rules
and to this day cannot fly together.
The new company expects to incur $1.2 billion in one-time transition costs spread over the next 3 years
to pave the way for anticipated increases in revenue and cost savings. One billion dollars in annual net
pruned. While the agreements with the Justice Department and Department of Transportation require the
new airline to maintain all hubs and expand service to some new cities, history shows merging airlines tend
to make fewer flights in the years following the merger. After all, the driving force behind consolidation is
the elimination of redundant capacity. One area of growth for American may be on Pacific routes, where
capacity could increase as much as 20% in the coming years. Almost all capacity reductions in American
and US Airways will be on domestic routes where there is more competition from Southwest and smaller
carriers such as JetBlue Airways Corp and Virgin American Inc. Indeed, regulatory approval of the
American and US Airways merger appears to have shaped the competitive landscape in the airline industry
for years to come.
Discussion Questions
1. Whose interests do you believe antitrust regulators represent? What trade-offs do antitrust
regulators face in making decisions that impact the groups whose interests they represent? Be
specific.
Answer: Antitrust legislation was passed with the objective of ensuring that firms could not
engage in what were viewed as anticompetitive practices. These included gaining excessive
market share such that they could effectively set prices or collude with competitors to restrain
2. Speculate as to why the share prices of American and US Airways increased sharply on the day
that the agreement with the Justice Department had been reached? Why did the share prices of
other major airlines also increase?
3. Why do you believe the regulators approved the deal despite the large increase in industry
concentration and their awareness that historically increases in concentration would likely result
in a further reduction in industry capacity?
Answer: The airline industry is among the most capital intensive and cyclical industries in
existence. Preserving the ability of airlines to raise capital to maintain and modernize their
airports.
4. How does the approval of a merger involving a firm in Chapter 11 complicate decision making for
regulators?
Answer: Presumably, the firm was in Chapter 11 because it was failing. The objective of
Chapter 11 is to give the debtor firm a respite from its creditors to remake itself into a viable
5. How did the delay in filing the Justice Department lawsuit impact the economic viability of
American Airlines?
Answer: The delay created an unnecessary amount of uncertainty for all stakeholders to the
process including investors, creditors, workers, suppliers, and communities. The uncertainty
Regulatory Challenges in Cross-Border Mergers
______________________________________________________________________________________
Key Points
Such mergers entail substantially greater regulatory challenges than domestic M&As.
Realizing potential synergies may be limited by failure to receive support from regulatory agencies in
the countries in which the acquirer and target firms have operations.
______________________________________________________________________________________
European Commission antitrust regulators formally blocked the attempted merger between the NYSE
Group and Deutsche Borse on February 4, 2012, nearly one year after the exchanges first announced the
deal. The stumbling block appeared to be the inability of the parties involved to reach agreement on
European market or a global market.
The NYSE Group is the world’s largest stock and derivatives exchange, as measured by market
capitalization. A product of the combination of the New York Stock Exchange and Euronext NV (the
European exchange operator), the NYSE Group reversed the three-year slide in both its U.S. and European
Exchange, on the electronic Euronext Liffe Exchange in London, and on the stock exchanges in Paris,
Lisbon, Brussels, and Amsterdam.
In recent years, most of the world’s major exchanges have gone public and pursued acquisitions. Before
this 2007 deal, the NYSE merged with electronic trading firm Archipelago Holdings, while NASDAQ
Stock Market Inc. acquired the electronic trading unit of rival Instinet. This consolidation is being driven
by declining trading fees, improving trading information technology, and relaxed cross-border restrictions
on capital flows and in part by increased regulation in the United States. U.S. regulation, driven by
reflect the true underlying value of the security because of more competition. The cross-border mergers
also should make it easier and cheaper for individual investors to buy and sell foreign shares.
Before these benefits can be fully realized, numerous regulatory hurdles have to be overcome. Even if
exchanges merge, they must still abide by local government rules when trading in the shares of a particular
company, depending on where the company is listed. Companies are not eager to list on multiple exchanges
worldwide because that subjects them to many countries’ securities regulations and a bookkeeping
nightmare. At the local level, little has changed in how markets are regulated. European companies list their
shares on exchanges owned by the NYSE Group. These exchanges still are overseen by individual national
Discussion Questions:
1. What are the key challenges facing regulators resulting from the merger of financial
exchanges in different countries? How do you see these challenges being resolved?
Answer: Despite the merger, the exchanges are still subject to local government securities’
regulations when trading in a particular company’s shares. The rules that apply depend on where
2. In what way are these regulatory issues similar or different from those confronting the SEC and
state regulators and the European Union and individual country regulators?
Answer: In the U.S., state securities’ laws can be more onerous than federal laws. Moreover, they
may differ from state to state. Consequently, an issuer seeking exemption from federal
3. Who should or could regulate global financial markets?
Answer: The potential for rivalry exists among regulatory bodies within a country. This potential
often is compounded when markets cross national boundaries as nationalistic concerns emerge. In
4. In your opinion, will the merging of financial exchanges increase or decrease international
financial stability?
Answer: Disparate regulations and trading expenses inhibit the free flow of capital internationally.
To the extent the merging of the exchanges harmonize applicable national regulations and reduce
The Importance of Timing: The Express Scripts and Medco Merger
______________________________________________________________________________________
Key Points
• While important, industry concentration is only one of many factors antitrust regulators use in
investigating proposed M&As.
• The timing of the proposed Express Scripts–Medco merger could have been the determining factor
in its receiving regulatory approval.
______________________________________________________________________________________
Following their rejection of two of the largest M&As announced in 2011 over concern about increased
industry concentration, U.S. antitrust regulators approved on April 2, 2012, the proposed takeover of
pharmacy benefits manager Medco Health Solutions Inc. (Medco) by Express Scripts Inc., despite similar
misgivings by critics. Pharmacy benefit managers (PBMs) are third-party administrators of prescription
drug programs responsible for processing and paying prescription drug claims. More than 210 million
Americans receive drug benefits through PBMs. Their customers include participants in plans offered by
Co.
The Federal Trade Commission’s approval followed an intensive eight-month investigation and did not
include any of the customary structural or behavioral remedies that accompany approval of mergers
resulting in substantial increases in industry concentration. FTC antitrust regulators voting for approval
costs because of their greater leverage in negotiating drug prices with manufacturers and their ability to cut
operating expenses by eliminating overlapping mail-handling operations. The FTC investigation also found
that most of the large private health insurance plans offer PBM services, as do other private operators. Big
private employers are the major customers of PBMs and have proven to be willing to switch PBMs if
another has a better offer. For example, Medco lost one-third of its business during 2011, primarily to CVS
own PBM services competing for managing drug benefits covered under Medicare Part D. With the loss of
UnitedHealth’s business, Express Script–Medco’s share dropped from 34% in early 2012 to 29% at the end
of that year.
Critics of the proposed merger argued that smaller PBM firms often do not have the bargaining power
and data-handling capabilities of their larger competitors. Moreover, benefit managers can steer health plan
Discussion Questions:
1. Why do you believe the U.S. antitrust regulators approved the merger despite the large increase in
industry concentration?
Answer: While market concentration often is a necessary condition for firms to engage in
monopolistic pricing practices, it is by no means sufficient. Highly concentrated industries such as
autos, airlines, steel, and aluminum often are highly price competitive due to the commodity-like
2. Did the timing of the proposed merger between Express Scripts and Medco help or hurt the firms
in obtain regulatory approval? Be specific.
Answer: Escalating healthcare expenses represent in increasingly burdensome expense for both
public (e.g., Medicare and Medicaid) and private insurers in the U.S. PBMs offer a potential
3. Speculate as to how the Express Scripts-Medco merger might influence the decisions of their
competitors to merge? Be specific.
Answer: The approval of regulators of this transaction could serve as a “green light” for other
PBMs to feel that they would also receive merger approval if they were to pursue this strategy. In
Gaining Regulatory Approval Often Requires Concessions By Merger Partners
Key Points:
• Regulators often consider market concentration when determining whether an M&A will drive up
prices and reduce consumer choice and product/service quality.
• To gain regulatory approval, acquirers often are compelled to sell assets to another firm to either
strengthen that firm’s competitive position or to create another viable competitor.
What may seem to make good business sense on paper often takes years to complete. First, Anheuser-
Busch InBev (ABI) had to reach an agreement with the highly reluctant takeover target, Grupo Modelo
(Modelo). Second, ABI had to convince regulators that the deal would not reduce competition in the US
beer market. Consequently, this deal from start to finish took almost 5 years.
Modelo’s other Mexican brands around the world, particularly in Europe and South America. Furthermore,
ABI believed that it could generate annual cost savings of as much as 1 billion dollars but only if it could
gain management control of the combined firms.
It took almost 2 years for ABI to resolve its differences with Modelo that started with ABI’s takeover of
any remaining Modelo shareholder resentment of ABI.
The US Justice Department sued to block the deal in January 2013 on the grounds that the deal as
structured would reduce competition in the US beer market. The deal would give ABI, the largest brewer in
the United States which controlled 39% market share prior to the merger, 46% of the US beer market. That
would essentially make the US beer market a duopoly with MillerCoors, the second largest US brewer,
controlling 26% of the market. The next largest company is Heineken USA with a 6% share.
The Justice Department argued that the proposed combination of these two firms would exacerbate price
coordination within the industry. ABI would raise its prices in the fall and shortly thereafter MillerCoors
would allegedly follow suit, often by the same amount. In certain geographic areas, Modelo accounts for as
much as 20% share giving it the opportunity to gain market share by not matching the price increase. This
The Mexican Competition Commission approved the deal with Constellation in April 2013.
The agreement gives Constellation, one of the US’s largest wine producers, full and permanent rights to
make and sell Corona, Corona Light, Modelo Especial, Pacifico and six other brands in the United States.
Constellation paid $5.5 billion for Modelo’s share of Crown Imports and for the Piedras Negras brewery.
Constellation has never brewed beer before making the deal a new direction for the firm. It currently
produces and distributes wine and spirits, including Robert Mondavi and Clos du Bois and Svedka vodka.
AT&T/T-MOBILE DEAL
SHORT-CIRCUITED BY REGULATORS
______________________________________________________________________________________
Key Points
Regulators often consider market concentration when determining whether an M&A will drive up
prices and reduce consumer choice and product/service quality.
What is an acceptable level of concentration often is difficult to determine.
Concentration may be an outgrowth of the high capital requirements of the industry.
Attempts to limit concentration may actually work to the detriment of some consumers.
______________________________________________________________________________________
United States antitrust regulators have moved aggressively in recent years to block horizontal mergers (i.e.,
those involving direct or potential competitors) while being more lenient on vertical deals (i.e., those in
which a firm buys a supplier or distributor). These actions foreshadowed the likely outcome of the deal
proposed by telecommunications giant AT&T to acquire T-Mobile for $39 billion in cash in early 2011.
Despite the unfavorable regulatory environment for horizontal deals, AT&T expressed confidence that it
could get approval for the deal when it accepted a sizeable termination fee as part of the agreement if it did
not complete the transaction by March 2012. However, the deal would never be completed, as U.S. antitrust
changes to the deal, arguing that the merger would raise prices to consumers and reduce both choice and
service quality. Instead, the Justice Department opted to keep a “strong” fourth competitor rather than allow
increased industry concentration.
But T-Mobile’s long-term viability was in doubt. The firm’s parent, Deutsche Telekom, had made it
clear that it wants to exit the mature U.S. market and that it has no intention of investing in a new high-
speed network. T-Mobile is the only national carrier that does not currently have its own next-generation
during 2011.
In response to these developments, T-Mobile announced a merger with its smaller rival MetroPCS on
October 3, 2012, creating the potential for a stronger competitor to Verizon and AT&T and solving
regulators’ concerns about increased concentration. However, it creates another issue by reducing
competition in the prepaid cell phone segment. MetroPCS’s low-cost, no-contract data plans and cheaper
phones brought cellphones and mobile Internet to millions of Americans who could not afford major-
carrier contracts. While T-Mobile announced the continuation of prepaid service, it has an incentive not to
Justice Department Requires VeriFone Systems to Sell Assets
before Approving Hypercom Acquisition
Key Points:
• Asset sales commonly are used by regulators to thwart the potential build-up of market power
resulting from a merger or acquisition.
• In such situations, defining the appropriate market served by the merged firms is crucial to
identifying current and potential competitors.
______________________________________________________________________________
In late 2011, VeriFone Systems (VeriFone) reached a settlement with the U.S. Justice Department to
acquire competitor Hypercom Corp on the condition it sold Hypercom’s U.S. point-of-sale terminal
business. Business use point-of-sale terminals are used by retailers to accept electronic payments such as
credit and debit cards.
1 Roaming agreements are arrangements between wireless companies to provide wireless service to each
other’s subscribers in areas where a carrier’s coverage is spotty.
The Justice Department had sued to block the $485 million deal on concerns that the combination would
limit competition in the market for retail checkout terminals. The asset sale is intended to create a
significant independent competitor in the U.S. The agreement stipulates that private equity firm Gores
Group LLC will buy the terminals business.
maker of card-payment terminals. The Justice Department had blocked a previous attempt to sell
Hypercom’s U.S. point-of-sale business to rival Ingenico, saying that it would have increased concentration
and undermined competition.
VeriFone will retain Hypercom’s point-of-sale equipment business outside the U.S. The acquisition will
Discussion Questions
1. Do you believe requiring consent decrees that oblige the acquiring firm to dispose of certain target
company assets is an abuse of government power? Why or why not?
U.S. antitrust regulators are required to promote the smooth functioning of interstate commerce.
The sale of assets to create a viable competitor to the combined firms requesting regulatory
2. What alternative actions could the government take to limit market power resulting from a business
combination?
Answer: Regulators could require the combined firms to submit to price controls or to subject price
The Legacy of GE's Aborted Attempt to Merge with Honeywell
Many observers anticipated significant regulatory review because of the size of the transaction and the
increase in concentration it would create in the markets served by the two firms. Most believed, however,
that, after making some concessions to regulatory authorities, the transaction would be approved, due to its
perceived benefits. Although the pundits were indeed correct in noting that it would receive close scrutiny,
combination of the two firms' aerospace businesses. Revenues from these two businesses alone would total
$22 billion, combining Honeywell's strength in jet engines and cockpit avionics with GE's substantial
business in larger jet engines. As the largest supplier in the aerospace industry, GE could offer airplane
2 BusinessWeek, 2000b
manufacturers "one-stop shopping" for everything from engines to complex software systems by cross-
selling each other's products to their biggest customers.
Honeywell had been on the block for a number of months before the deal was consummated with GE.
Its merger with Allied Signal had not been going well and contributed to deteriorating earnings and a much
"conglomerate effects" or the total influence a combined GE and Honeywell would wield in the aircraft
industry. He was referring to GE's perceived ability to expand its influence in the aerospace industry
through service initiatives. GE's services offerings help differentiate it from others at a time when the prices
of many industrial parts are under pressure from increased competition, including low-cost manufacturers
overseas. In a world in which manufactured products are becoming increasingly commodity-like, the true
On May 3, 2001, the U.S. Department of Justice approved the buyout after the companies agreed to sell
Honeywell's helicopter engine unit and take other steps to protect competition. The U.S. regulatory
authorities believed that the combined companies could sell more products to more customers and therefore
could realize improved efficiencies, although it would not hold a dominant market share in any particular
market. Thus, customers would benefit from GE's greater range of products and possibly lower prices, but
years. The GE–Honeywell deal has been attacked by their European rivals from Rolls-Royce and Lufthansa
to French avionics manufacturer Thales. Although the European Union imported much of its antitrust law
from the United States, the antitrust law doctrine evolved in fundamentally different ways. In Europe, the
main goal of antitrust law is to guarantee that all companies be able to compete on an equal playing field.
The implication is that the European Union is just as concerned about how a transaction affects rivals as it
The EU authorities continued to balk at approving the transaction without major concessions from the
participants—concessions that GE believed would render the deal unattractive. On June 15, 2001, GE
submitted its final offer to the EU regulators in a last-ditch attempt to breathe life into the moribund deal.
GE knew that if it walked away, it could continue as it had before the deal was struck, secure in the
knowledge that its current portfolio of businesses offered substantial revenue growth or profit potential.
components and services at a single price) its products and services when selling to customers. Another
stumbling block was the GE Capital Aviation Services unit, the airplane-financing arm of GE Capital. The
EU Competition Commission argued that that this unit would use its influence as one of the world's largest
purchasers of airplanes to pressure airplane manufacturers into using GE products. The commission seemed
3 Murray, 2001
to ignore that GE had only an 8 percent share of the global airplane leasing market and would therefore
seemingly lack the market power the commission believed it could exert.
On July 4, 2001, the European Union vetoed the GE purchase of Honeywell, marking it the first time a
proposed merger between two U.S. companies has been blocked solely by European regulators. Having
transaction, although the ruling partly vindicated GE's position. The European Court of First Instance said
regulators were in error in assuming without sufficient evidence that a combined GE–Honeywell could
crush competition in several markets. However, the court demonstrated that regulators would have to
provide data to support either their approval or rejection of mergers by ruling on July 18, 2006, that
regulators erred in approving the combination of Sony BMG in 2004. In this instance, regulators failed to
coordination among antitrust regulatory authorities in different countries has improved. For example, in
mid-2010, the U.S. Federal Trade Commission reached a consent decree with scientific instrument
manufacturer Agilent in approving its acquisition of Varian, in which Agilent agreed to divest certain
overlapping product lines. While both firms were based in California, each has extensive foreign
operations, which necessitated gaining the approval of multiple regulators. Throughout the investigation,
FTC staff coordinated enforcement efforts with the staffs of regulators in the European Union, Australia,
and Japan. The cooperation was conducted under the auspices of certain bilateral cooperation agreements,
the OECD Recommendation on Cooperation among its members, and the European Union Best Practices
on Cooperation in Merger Investigation protocol.
Discussion Questions
1. What are the important philosophical differences between U.S. and EU antitrust regulators?
Explain the logic underlying these differences? To what extent are these differences influenced by
political rather than economic considerations? Explain your answer.
Answer: In Europe, the main goal of antitrust policy is to ensure that all companies are able to
compete on a level playing field. The impact of a merger on competitors is just as important to
regulators as its impact on consumers. Consequently, complaints about impending mergers from
2. This is the first time that a foreign regulatory body has prevented a deal involving U.S. firms only
from occurring. What do you think are the long-term implications, if any, of this precedent?
3. What were the major obstacles between GE and the EU regulators? Why do you think these were
obstacles? Do you think the EU regulators were justified in their position? Why/why not?
Answer: European regulators have accepted a legal concept called “portfolio power” which
argues that a firm may achieve an unfair advantage over its competitors by bundling goods and
4. Do you think that competitors are using antitrust to their advantage? Explain your answer.
Answer: Since EU regulators have made it clear that protecting European firms from “unfair”
5. Do you think the EU regulators would have taken a different position if the deal had involved a
less visible firm than General Electric? Explain your answer.
The Lehman Brothers Meltdown
Even though regulations are needed to promote appropriate business practices, they may also produce a
false sense of security. Regulatory agencies often are coopted by those they are supposed to be regulating
due to an inherent conflict of interest. The objectivity of regulators can be skewed by the prospect of future
employment in the firms they are responsible for policing. No matter how extensive, regulations are likely
to fail to achieve their intended purpose in the absence of effective regulators.
In the months leading up to Lehman’s demise, there were widespread suspicions that the book value of
the firm’s assets far exceeded their true market value and that a revaluation of these assets was needed.
However, little was known about Lehman’s aggressive use of repurchase agreements or repos. Repos are
widely used short-term financing contracts in which one party agrees to sell securities to another party (a
so-called counterparty), with the obligation to buy them back, often the next day. Because the transactions
are so short-term in nature, the securities serving as collateral continue to be shown on the borrower’s
from the books, and the proceeds generated by the repo were booked as if they had been used to pay off an
equivalent amount of liabilities. The resulting reduction in liabilities gave the appearance that the firm was
less levered than it actually was despite the firm’s continuing obligation to buy back the securities. Since
