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the repos were undertaken just prior to the end of a calendar quarter, their financial statements looked better
than they actually were.
The firm’s outside auditing firm, Ernst & Young, was aware of the moves but continued to pronounce
the firm’s financial statements to be in accordance with generally accepted accounting principles. The SEC,
the recipient of the firm’s annual and quarterly financial statements, failed to catch the ruse. In the weeks
When all else failed, market forces uncovered the charade. It was the much maligned “short-seller” who
uncovered Lehman’s scam. Although not understanding the extent to which the firm’s financial statements
were inaccurate, speculators borrowed Lehman stock and sold it in anticipation of buying it back at a lower
price and returning it to its original owners. In doing so, they effectively forced the long-insolvent firm into
bankruptcy. Without short-sellers forcing the issue, it is unclear how long Lehman could have continued
the sham.
A Federal Judge Reprimands Hedge Funds in their Effort to Control CSX
Investors seeking to influence a firm’s decision making often try to accumulate voting shares. Such
investors may attempt to acquire shares without attracting the attention of other investors, who could bid up
the price of the shares and make it increasingly expensive to accumulate the stock. To avoid alerting other
investment bank to give dividends paid on and any appreciation of the stock of a target firm to the hedge
fund in exchange for an interest payment made by the hedge fund. The amount of the interest paid is
hedge fund does not actually own the shares prior to taking possession, it does not have the right to vote the
shares and technically does not have to disclose ownership under Section 13(D). However, to gain
significant influence, the hedge fund can choose to take possession of these shares immediately prior to a
board election or a proxy contest. To avoid the appearance of collusion, many investment banks have
refused to deliver shares under these circumstances or to vote in proxy contests.
hedge funds could subsequently vote their shares in the same way with neither fund disclosing their
ownership stakes until immediately before an election.
The Children’s Investment Fund (TCI), a large European hedge fund, acquired 4.1 percent of the voting
shares of CSX, the third largest U.S. railroad in 2007. In April 2008, TCI submitted its own candidates for
the CSX board of directors’ election to be held in June of that year. CSX accused TCI and another hedge
convey voting rights to the swap party over shares acquired by its counterparty to hedge their equity swaps.
Shortly after the SEC’s ruling, a federal judge concluded that the two hedge funds had deliberately avoided
the intent of the disclosure laws. However, the federal ruling came after the board election and could not
reverse the results in which TCI was able to elect a number of directors to the CSX board. Nevertheless, the
ruling by the federal court established a strong precedent limiting future efforts to use equity swaps as a
means of circumventing federal disclosure requirements.
Discussion Questions
1. Do you agree or disagree with the federal court’s ruling? Defend your position.
2. What criteria might have been used to prove collusion between TCI and 3G in the absence of
signed agreements to coordinate their efforts to accumulate CSX voting shares?
Google Thwarted in Proposed Advertising Deal with Chief Rival Yahoo!
A proposal that gave Yahoo! an alternative to selling itself to Microsoft was killed in the face of opposition
by U.S. government antitrust regulators. The deal called for Google to place ads alongside some of
Yahoo!'s search results. Google and Yahoo! would share in the revenues generated by this arrangement.
The deal was supposed to bring Yahoo! $250 million to $450 million in incremental cash flow in the first
Yahoo!'s efforts to invest in its own online search business. The regulators feared this would limit
innovation in the online search industry.
On November 6, 2008, Google and Yahoo! announced the cessation of efforts to implement an
advertising alliance. Google expressed concern that continuing the effort would result in a protracted legal
battle and risked damaging lucrative relationships with their advertising partners.
The Justice Department's threat to block the proposal is a sign that Google can expect increased scrutiny
in the future. High-tech markets often lend themselves to becoming "natural monopolies" in markets in
search capability.
Discussion Questions
1. In what way might the Justice Department's actions result in increased concentration in the online search
business in the future?
2. What are the arguments for and against regulators permitting "natural monopolies"?
BHP Billiton and Rio Tinto Blocked by Regulators in an International Iron Ore Joint Venture
The revival in demand for raw materials in many emerging economies fueled interest in takeovers and joint
ventures in the global mining and energy sectors in 2009 and 2010. BHP Billiton (BHP) and Rio Tinto
(Rio), two global mining powerhouses, had hoped to reap huge cost savings by combining their Australian
iron ore mining operations when they announced their JV in mid-2009. However, after more than a year of
regulatory review, BHP and Rio announced in late 2010 that they would withdraw their plans to form an
Trade Commission, the Korea Fair Trade Commission, and the German Federal Cartel Office all advised
the two firms that their proposal would not be approved in its current form. While some regulators
indicated that they would be willing to consider the JV if certain divestitures and other “remedies” were
made to alleviate concerns about excessive pricing power, others such as Germany said they would not
approve the proposal under any circumstances.
Discussion Questions:
1. A “remedy” to antitrust regulators is any measure that would limit the ability of parties in a
business combination from achieving what is viewed as excessive market or pricing power. What
remedies do you believe could have been put in place by the regulators that might have been
acceptable to both Rio and BHP? Be specific.
2. Why do you believe the antitrust regulators were successful in this instance but so unsuccessful
limiting the powers of cartels such as the Organization of Petroleum Exporting Countries (OPEC),
which currently controls more than 40 percent of the world’s oil production?
Justice Department Approves Maytag/Whirlpool Combination
Despite Resulting Increase in Concentration
When announced in late 2005, many analysts believed that the $1.7 billion transaction would face heated
anti-trust regulatory opposition. The proposed bid was approved despite the combined firms' dominant
market share of the U.S. major appliance market. The combined companies would control an estimated 72
by paying a "reverse breakup" fee of $120 million to Maytag (the target). Breakup fees are normally paid
by targets to acquirers if they choose to withdraw from the contract.
U.S. regulators tended to view the market as global in nature. When the appliance market is defined in a
global sense, the combined firms' share drops to about one fourth of the previously mentioned levels. The
number and diversity of foreign manufacturers offered a wide array of alternatives for consumers.
Discussion Questions:
1. What is anti-trust policy and why is it important?
Answer: Anti-trust policy is a government policy intended to prevent firms from achieving
excessively pricing power, i.e., the ability to raise prices to levels much higher than could
2. What factors other than market share should be considered in determining whether a potential
merger might result in an increased pricing power?
Answer: Other factors include the availability of substitute products and services, ease of
entering the market, customer price sensitivity, the impact on employment, and the potential
FCC Uses Its Power to Stimulate Competition in the Telecommunications Market
Oh, So Many Hurdles
Having received approval from the Justice Department and the Federal Trade Commission, Ameritech and
SBC Communications received permission from the Federal Communications Commission to combine to
Satisfying the FCC’s Concerns
SBC, which operates under Southwestern Bell, Pacific Bell, SNET, Nevada Bell, and Cellular One
brands, has 52 million phone lines in its territory. It also has 8.3 million wireless customers across the
United States. Ameritech, which serves Illinois, Indiana, Michigan, Ohio, and Wisconsin, has more than 12
million phone customers. It also provides wireless service to 3.2 million individuals and businesses.
The combined business would control 57 million, or one-third, of the nation’s local phone lines in 13
states. The FCC adopted 30 conditions to ensure that the deal would serve the public interest. The new SBC
must enter 30 new markets within 30 months to compete with established local phone companies. In the
A Costly Remedy for SBC
SBC has had considerable difficulty in complying with its agreement with the FCC. Between December
2000 and July 2001, SBC paid the U.S. government $38.5 million for failing to provide adequately rivals
Discussion Questions:
1. Comment on the fairness and effectiveness of using the imposition of heavy fines to promote
social policy.
Answer: The use of fines to achieve social objectives assumes that the government can provide a
better solution than the free market. In general, the imposed solution will be less efficient that
2. Under what circumstances, if any, do you believe the government should relax the imposition of
such fines in the SBC case?
Exxon and Mobil Merger—The Market Share Conundrum
Following a review of the proposed $81 billion merger in late 1998, the FTC decided to challenge the
Exxon–Mobil transaction on anticompetitive grounds. Options available to Exxon and Mobil were to
challenge the FTC’s rulings in court, negotiate a settlement, or withdraw the merger plans. Before the
merger, Exxon was the largest oil producer in the United States and Mobil was the next largest firm. The
combined companies would create the world’s biggest oil company in terms of revenues. Top executives
After a year-long review, antitrust officials at the FTC approved the Exxon–Mobil merger after the
companies agreed to the largest divestiture in the history of the FTC. The divestiture involved the sale of
15% of their service station network, amounting to 2400 stations. This included about 1220 Mobil stations
from Virginia to New Jersey and about 300 in Texas. In addition, about 520 Exxon stations from New York
Discussion Questions:
1. How does the FTC define market share?
Answer: The market is generally defined by the regulators as a product or group of products
offered in a specific geographic area. Market participants are those currently producing and
2. Why might it be important to distinguish between a global and a regional oil and gas market?
Answer: The value chain for a fully integrated oil and gas company consists of the following
segments: exploration, production, transmission, refining, and distribution. Oil and gas
3. Why are the Exxon and Mobil executives emphasizing efficiencies as a justification for this
merger?
Answer: Current antitrust guidelines recognize that the efficiencies associated with a business
4. Should the size of the combined companies be an important consideration in the regulators’
analysis of the proposed merger?
5. How do the divestitures address perceived anti-competitive problems?
FTC Prevents Staples from Acquiring Office Depot
As the leading competitor in the office supplies superstore market, Staples’ proposed $3.3 billion
acquisition of Office Depot received close scrutiny from the FTC immediately after its announcement in
September 1996. The acquisition would create a huge company with annual sales of $10.7 billion.
Following the acquisition, only one competitor, OfficeMax with sales of $3.3 billion, would remain.
Staples pointed out that the combined companies would comprise only about 5% of the total office supply
market. However, the FTC considered the superstore market as a separate segment within the total office
markets in which its concentration would be the greatest following the merger, the FTC could not be
persuaded to approve the merger.
Staples continued its insistence that there would be no harmful competitive effects from the proposed
merger, because office supply prices would continue their long-term decline. Both Staples and Office
Depot had a history of lowering prices for their customers because of the efficiencies associated with their
competition, than they would have been had the merger not taken place. The FTC relied on a study
showing that Staples tended to charge higher prices in markets in which it did not have another superstore
as a competitor. In early 1997, Staples withdrew its offer for Office Depot.
Discussion Questions:
1. How important is properly defining the market segment in which the acquirer and target
companies compete to determining the potential increased market power if the two are
permitted to combine? Explain your answer.
Answer: Whether a company is able to engage in anticompetitive practices is heavily dependent
on how the market is defined. If the market is defined narrowly to include superstores only, the
2. Do you believe the FTC was being reasonable in not approving the merger even though?
Staples agreed to divest 63 stores in markets where market concentration would be the greatest
following the merger? Explain your answer.
Answer: While the FTC study did provide support for the notion that pricing power was higher in
areas not having another superstore, the results may have been skewed in that areas without
Justice Department Blocks Microsoft’s Acquisition of Intuit
In 1994, Bill Gates saw dominance of the personal financial software market as a means of becoming a
central player in the global financial system. Critics argued that, by dominating the point of access (the
individual personal computer) to online banking, Microsoft believed that it may be possible to receive a
small share of the value of each of the billions of future personal banking transactions once online banking
copies of Quicken and had about 300,000 bank customers using Quicken to pay bills electronically. In
contrast, efforts by Microsoft to penetrate the personal financial software market with its own product,
Money, were lagging badly. Intuit’s product, Quicken, had a commanding market share of 70% compared
to Microsoft’s 30%.
In 1994 Microsoft made a $1.5 billion offer for Intuit. Eventually, it would increase its offer to $2
billion. To appease its critics, it offered to sell its Money product to Novell Corporation. Almost
immediately, the Justice Department challenged the merger, citing its concern about the anticompetitive
effects on the personal financial software market. Specifically, the Justice Department argued that, if
innovate and limit its role in promoting standards that advance the whole software industry. Only a
Microsoft–Intuit merger could create the critical mass needed to advance home banking. Despite these
arguments, the regulators would not relent on their position. On May 20, 1995, Microsoft announced that it
was discontinuing efforts to acquire Intuit to avoid expensive court battle with the Justice Department.
Discussion Questions:
1. Explain how Microsoft’s acquisition of Intuit might limit the entry of new competitors into the
financial software market.
Answer: The proliferation of the use of online financial software creates links between the vendor
and the home/small business user. These links constitute distribution channels through which
2. How might the proliferation of Internet usage in the twenty-first century change your answer
to question 1?
3. Do you believe that the FTC might approve of Microsoft acquiring Intuit today? Why or why
not?
How the Microsoft Case Could Define Antitrust Law in the “New Economy”
The Microsoft case was about more than just the software giant’s misbehavior. Antitrust law was also on
trial. When the Justice Department sued Microsoft in 1998, it argued that the century old Sherman Antitrust
Act could be applied to police high tech monopolies. This now looks doubtful. As the digital economy
evolves, it is likely to be full of natural monopolies (i.e., those in which only one producer can survive, in
for antitrust policy.
Although the proposed remedy did not stand on appeal, the Microsoft case had precedent value because
of the perceived importance of innovation in the information-based, technology-driven “new economy.”
This case illustrates how “trust busters” are increasingly viewing innovation as a central issue in
enforcement policy. Regulators increasingly are seeking to determine whether proposed business
combinations either promote or impede innovation.
in their proposal to divide the firm.
Antitrust watchdogs are likely to pay more attention in the future to the impact of proposed mergers or
acquisitions on start-ups, which are viewed as major contributors to innovation. In some instances, business
combinations among competitors may be disallowed if they are believed to be simply an effort to slow the
rate of innovation. The challenge for regulators will be to recognize when cooperation or mergers among
competitors may provide additional incentives for innovation through a sharing of risk and resources.
However, until the effects on innovation of a firm’s actions or a proposed merger can be more readily
should be allowed and which firms with substantial market positions should be broken up.
Discussion Questions:
1. Comment on whether antitrust policy can be used as an effective means of encouraging
innovation.
Answer: Regulation almost always is reactive rather than proactive. Efforts to promote
innovation through regulation may be particularly inappropriate in that the conditions that give
operating system as they have done in the past.
2. Was Microsoft a good antitrust case in which to test the effectiveness of antitrust policy on
promoting innovation? Why or why not?
Answer: No. While there may be merit in the notion that most innovative ideas emerge from
smaller, more nimble companies, there is little empirical evidence that punishing larger firms that
Anthem-Well Point Merger Hits Regulatory Snag
In mid-2004, a California insurance regulator refused to approve Anthem Inc’s (“Anthem”) $20 billion
acquisition of WellPoint Health NetWorks Incorporated (“WellPoint”). If allowed, the proposed merger
would result in the nation’s largest health insurer, with 28 million members. After months of regulatory
review, the deal had already received approval from 10 state regulators, the Justice Department, and 97% of
the shares outstanding of both firms. Nonetheless, California Insurance Commissioner, John Garamendi,
denounced the proposed transaction as unreasonably enriching the corporate officers of the firms without
improving the availability or quality of healthcare. Earlier the same day, Lucinda Ehnes, Director of the
Department of Managed Healthcare in California approved the transaction. The Managed Healthcare
previously run unsuccessfully for governor. Moreover, two week’s earlier he announced that he will be a
candidate for lieutenant governor in 2006.
Mr. Garamendi had asked Anthem to invest in California’s low income communities an amount equal to
the executive compensation payable to WellPoint executives due to termination clauses in their contracts.
Estimates of the executive compensation ranged as high as $600 million. Anthem immediately sued John
Garamendi, seeking to overrule his opposition to the transaction. In the lawsuit, Anthem argued that
Garamendi acted outside the scope of his authority by basing his decision on personal beliefs about
uninsured residents.
Following similar concessions in Georgia, Anthem was finally able to complete the transaction on
December 1, 2004. Closing occurred almost one year after the transaction had been announced.
Discussion Questions:
1. If you were the Anthem CEO, would you withdraw from the deal, initiate a court battle, drop the
Blue Cross subsidiary from the transaction, agree to regulators’ demands, or adopt some other
course of action? Explain your answer.
Answer: While Anthem was ultimately successful, it was able to do so only after agreeing to a
2. What are the risks to Anthem and WellPoint of delaying the closing date? Be specific.
Answer: The risks of delay are significant and can be measured in terms of loss of key employees
3. To what extent should regulators use their powers to promote social policy?
Answer: The answer to this question depends on whether one believes that competitive market
forces will provide both the most efficient as well as the fairest outcome. The fact that the merger
The Bear Stearns Saga—When Failure Is Not an Option
Prodded by the Fed and the U.S. Treasury Department, J.P. Morgan Chase (JPM), the nation's third largest
bank, announced, on March 17, 2008, that it had reached an agreement to buy 100 percent of Bear Stearns's
outstanding equity for $2 per share. As one of the nation's larger investment banks, Bear Stearns had a
reputation for being aggressive in the financial derivatives markets. Hammered out in two days, the
With investors fleeing mortgage-backed securities, the Fed was hoping to prevent any further
deterioration in the value of such investments. The fear was that the financial crisis that beset Bear Stearns
could spread to other companies and ultimately test the Fed's resources after it had said publicly that it
would lend up to $200 billion to banks in exchange for their holdings of mortgages.
Interestingly, Bear Stearns was not that big among investment banks when measured by asset size.
and the panic could have spread.
With Bear Stearns's shareholders threatening not to approve what they viewed as a "fire sale," JPM
any shareholder vote, effectively discouraging any alternative bids. Under the new offer, JPM assumed
responsibility for the first $1 billion in asset losses, before the Fed's guarantee of up to $30 billion takes
effect..
Discussion Questions:
1 Why do you believe government regulators encouraged a private firm (J.P. Morgan Chase) to acquire
Bear Stearns rather than have the government take control? Do you believe this was the appropriate
course of action? Explain your answer.
Answer: In a free market economy, the government is often ill-suited to managing
2 By facilitating the merger, the Fed sent a message to Wall Street that certain financial institutions are
"too big to fail." What effect do you think the merger will have on the future investment activities of
investment banks? Be specific.
Answer: The facilitation of the merger communicates to other investment banks that the government
stands ready to take over institutions deemed too big to fail. While the Dodd-Frank bill purports to
