MERGER WAVE STRAINS FEDS’ ANTITRUST COPS: BACKLOG COULD SLOW MEGADEALS

With merger activity at record levels and antitrust authorities pursuing such high-profile targets as Microsoft Corp., the federal bureaucracies charged with reviewing corporate combinations are being stretched thin.

That could mean delays for proposed mergers in such complex industries as financial services, tele-communications and technology — and delays for investors who hope to see rich returns from mergermania.

“Time is the enemy of doing deals,” notes Joe Sims, an antitrust lawyer in the Washington office of Cleveland-based Jones Day Reavis & Pogue. “Stock prices change; something happens in the marketplace.”

Something certainly is happening in the M&A arena: The value of U.S. mergers and acquisitions was $655.7 billion as of May 12 — a 148% increase from the year-earlier period, according to Securities Data Co. in Newark, N.J.

Likewise, the number of merger investigations initiated by the U.S. Department of

Justice’s antitrust division more than doubled between 1995 and 1997, to 277 cases from 134, according to the agency’s workload statistics.

Last year, 31 of the investigations resulted either in court action or the restructuring or abandonment of mergers. That’s up from 18 in 1995.

“I don’t remember any time in recent history when so many major investigations were ongoing simultaneously” at antitrust agencies, says Barry Nigro, a lawyer in Washington with Collier Shannon Rill & Scott.

“I think our resources are greatly stretched,” agrees John Nannes, a deputy assistant attorney general with the antitrust division. “This merger wave seems to be different from others.”

Unlike the 1980s, today’s mergers often are “driven by strategic buyers rather than financial buyers,” Mr. Nannes explains. “So, a large number of transactions that we are reviewing today involve parties with a substantial competitive relationship” — which leads to more antitrust scrutiny.

The industries that get the most attention: telecommunications, financial services and airlines, he says. In many banking cases, the Justice Department has required banks to sell local branches so that small business and consumers would not be left with too few competing lenders.

Mr. Nannes would not comment directly on what stance the agency will take on the announced Citicorp-Travelers Group merger, but he says it “will consider whether there are any special issues presented by combinations between banks and other finance service companies.”

Observes one Washington antitrust lawyer who asked not to be identified: “Citicorp and Travelers have significant overlaps in a few product lines, such as credit cards. But if you did a straight antitrust analysis of credit cards, (the two companies’ market shares) wouldn’t blow your socks off. There are some other wholesale lines of business mixed in there, certain kinds of commercial lending, but again, it wouldn’t be huge in the market.”

The latest M&A wave is a response to competitive demands for cost-cutting through elimination of duplicative production or marketing efforts, says Michael Sohn, an antitrust lawyer with Arnold & Porter in Washington.

promoting competition

“That provides a lot of value to the shareholder,” he says, “but you’re able to achieve that value because you’ve got businesses that are closely related and competing — that’s merger activity which needs to be looked at.”

The economy actually would benefit from federal antitrust agencies having more resources, Mr. Sohn adds. “You get to the point where the agencies are stretched very thin.”

The result: Some mergers are being delayed as the agencies ask for more information from companies and competitors. “That takes more time than is optimal from the shareholders’ point of view,” he says.

Mr. Sims of Jones Day points to the aborted takeover of MCI by British Telecom after the Federal Communications Commission delayed the deal while it studied it. After MCI reported surprisingly poor earnings, British Telecom revalued the agreement, giving WorldCom Inc. an opportunity to step in to snatch up MCI. Now, antitrust agencies are looking hard at the WorldCom-MCI merger — “and are taking a long time to do that,” Mr. Sims adds.

While some say the Clinton administration has been tougher on merger proposals than the Bush or Reagan administrations, Mr. Nannes of the Justice Department notes that political support for the 800-employee antitrust division (up from 600 in 1993) traditionally has been bipartisan. “Republicans have often seen antitrust as a more desirable alternative to direct regulation, because antitrust does allow the widest range of free-market forces to operate,” he says. “Democrats support it because of their populist concerns of aggregation of wealth and power.”

Many antitrust lawyers say the wave of financial institution mergers is resulting in less scrutiny than other industries’ mergers because there is more competition among financial companies.

“The dollar deposits of merging banks are sometimes eye-popping numbers, but that doesn’t necessarily mean there’s a lack of competition,” says Steven Kuney, a lawyer with Williams & Connolly in Washington who has represented American Express Co. in its bid to get antitrust action against Visa and MasterCard.

Antitrust authorities, he adds, “probably do approach the financial markets with a lower expectation of finding a problem than they do in some of these other markets.”

In addition, banks and other financial mergers often are between companies that are not in each others’ markets, says Robert Litan, director of economic studies at the Brookings Institution and deputy assistant attorney in the antitrust division from 1993 to 1995. But Mr. Litan thinks the current crush has delayed the division’s long-standing investigation of the credit card business, the one area of the financial industry where he says there are problems with too little competition.

stones get left unturned

In some cases, the merger wave may mean the government does not investigate cases, says Kevin Arquit, an antitrust lawyer with Rogers & Wells law firm in New York: “It will cause them to be somewhat more selective in the acquisitions that they take a hard look at.”

But that’s probably a benefit, says Mr. Sims. “Because they are so much more aggressive (than previous Republican administrations), if the workload causes them to pass on something, all that does is get them back to sort of a normal phase.”

While the antitrust agencies may be more aggressive than they have been under Republican administrations, “I don’t think antitrust is going to get much thrust,” says James Paulsen, chief investment officer of Norwest Investment Management Inc., an affiliate of Norwest Corp., the Minneapolis bank. “What’s driving M&A activity is the quest to lower unit costs.”