January 16, 2014
Antitrust: DOJ Might Unwind Merger – More Than One Year After Closing!
The Wachtell Lipton memo below describes a pretty amazing case – as the DoJ is seeking to unwind the merger over a year after it was completed. Apparently the company’s own internal documents were particularly bad. Another reminder of smart people doing stupid things with a computer. Antitrust ain’t my bag – but I would think the concept that the judge was so dismissive of customer testimony will cause many in the antitrust bar to shake their heads. Here’s the Wachtell Lipton memo:
In a significant victory for the Department of Justice, the U.S. District Court for the Northern District of California last week held that Bazaarvoice, Inc.’s completed acquisition of rival PowerReviews violated the antitrust laws. The court found that the government would be entitled to an injunction requiring the divestiture of PowerReviews, but acknowledged that “that is not a simple proposition 18 months after the merger” and scheduled a hearing to discuss potential remedies.
Bazaarvoice acquired PowerReviews in June 2012, in a $160 million transaction that was exempt from the Hart-Scott-Rodino Act’s reporting and waiting period requirements. Days after the acquisition closed, the DOJ opened an investigation that led to the filing of a complaint in January 2013. After a three-week trial, and relying heavily on the parties’ internal documents, the court found that PowerReviews was Bazaarvoice’s closest and only serious competitor in the market for “rating and review” platform services sold to e-commerce businesses.
The court’s opinion cites dozens of internal documents showing that, prior to the merger, “Bazaarvoice considered PowerReviews its strongest and only credible competitor, that the two companies operated in a duopoly, and that Bazaarvoice’s management believed that the purchase of PowerReviews would eliminate its only real competitor.” More than 100 Bazaarvoice customers testified at trial that the acquisition had not harmed them, but the court found their testimony “speculative at best,” and therefore “entitled to virtually no weight.” Similarly, the court gave little weight to post-acquisition evidence regarding the transaction’s effect on pricing, holding that, since Bazaarvoice was aware of the DOJ’s pending investigation, such evidence was subject to manipulation. With its focus on the parties’ internal documents, the opinion is an important reminder of the critical role such documents play in antitrust merger review. Parties must be ever mindful of what their documents say about industry competition and their rationale for the transaction.
Just a few days before the court issued its opinion in Bazaarvoice, the DOJ challenged another consummated acquisition by Heraeus Electro-Nite, requiring a clean sweep divestiture of the acquired assets, an action that brings the number of consummated deals challenged by the antitrust agencies during the Obama administration to more than 20. These actions highlight the increased scrutiny of non-reportable transactions and underscore the antitrust risks buyers assume in these deals.
As discussed in our August 1, 2013 memo, while parties to HSR-exempt mergers sometimes operate under the misimpression that antitrust concerns are moot, ignoring the issue effectively transfers all antitrust risk to the buyer at closing. Before entering into such transactions, buyers should consider the substantive antitrust issues raised by the acquisition just as they would in a reportable deal, including the feasibility of remedies short of clean sweep divestitures, the practicality of unscrambling assets post-integration, and the impact on their business in the event of a future mandated divestiture.