Tue 05/07/2019 12:47 PM
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  • Sprint and T-Mobile’s recent extension of their merger agreement’s termination date came at around the same time that DOJ antitrust chief Makan Delrahim acknowledged their failing firm argument in a television interview. Despite these recent events, though, the companies are likely to have a difficult time convincing the DOJ of their failing firm argument, according to five antitrust practitioners with experience in mergers reviewed by the DOJ.
  • According to one practitioner who recently worked for the DOJ on telecom transactions, the agency more often than not finds little merit in the failing firm defense, frequently viewing it as a “desperation move” by merging parties.
  • In Sprint and T-Mobile’s case specifically, according to a second practitioner, it will be difficult to convince the DOJ that Sprint is a failing firm, particularly given recent statements made by Sprint rejecting the idea that the company is failing. Another practitioner did note, however, that arguments made by the companies’ economists will also factor heavily into the agency’s ultimate conclusion.
  • When assessing the failing firm defense, the DOJ will examine whether the target company has an alternative buyer as a backup option in case the original deal falls through.

Although Sprint and T-Mobile’s recent extension of their merger agreement’s termination date to July 29 allows more time to talk with regulators, the companies are likely to face a difficult time convincing the DOJ to accept arguments related to Sprint’s financial health, according to five antitrust practitioners with experience in mergers reviewed by the DOJ.

Speaking with the media last week, DOJ antitrust chief Makan Delrahim stated that the agency was considering arguments related to the financial health of Sprint as part of its antitrust review of the merger. “The number of carriers and the competition that any potential merger will lead to is a factor that we consider,” Delrahim said in an interview with Fox Business News. He further noted that the DOJ will consider arguments related to whether a company “is failing or will go out of business” without the merger.

The merging parties have long argued that they needed the merger to compete with rivals AT&T and Verizon in 5G. For example, in a financial disclosure made by Sprint in April, the company stated that it was “unlikely to play a meaningful competitive role as a standalone company in the years to come” and that any review of its merger with T-Mobile should “account for its diminished ability to be an effective competitor absent the transaction.”

According to one antitrust practitioner, however, the failing firm argument is a tough case to make at either the DOJ or FTC, particularly when the reviewing agency finds the transaction to be otherwise anticompetitive.“That has always been a sort of last-ditch effort made by the parties,” said the practitioner, who previously worked at the DOJ on telecom mergers. “It’s worked in some hospital cases, but it’s more common for the agencies to view it as a desperation move more than anything else.”

According to this same practitioner, there is a “tremendously high bar to clear” when presenting such a defense. “It’s pretty rare that it actually holds up. The only case in recent memory that I can think of was a hospital case in recent years,” the practitioner said, referring to CentraCare Health’s purchase of St. Cloud Medical Group in 2017. The practitioner acknowledged, however, that there likely have been several deals that were cleared where there was no public knowledge of a failing firm defense.

Similar to a failing firm defense is a “flailing firm” argument, wherein the merging parties argue that the target company needs the merger due to an expected lessening of competitive strength in the future, and not necessarily complete failure. While one could argue that this carries a “slightly lower standard” of proof, it is also a difficult case to prove, according to the same practitioner.

During his interview with Fox, Delrahim cited the DOJ’s recent merger case in 2016 against nuclear waste disposal company Energy Solutions’ purchase of Waste Control Specialists as a reference point for the factors looked at by the agency when assessing a company’s failing firm argument.

“Energy Solutions was a recently litigated case where there were some pronouncements about what the standards are that we look at,” Delrahim told Fox. “Whether or not [Sprint/T-Mobile’s failing firm argument] meets the legal standards that we have to consider is a different story.”

The DOJ examined several questions when considering the “business reality” of Waste Control Specialists’ argument that it would fail if not for its takeover by Energy Solutions. A key question for the agency was whether Waste Control would exit the relevant marketplace if the merger did not go through.

Applied to the context of Sprint/T-Mobile, a second antitrust practitioner said it is unlikely that Sprint would exit the wireless marketplace if its merger with T-Mobile did not come to fruition. “It’s really telling that the companies have been making this argument, while at the same time Sprint has been telling its shareholders the opposite,” said the practitioner, who until recently represented a third party in the Sprint case. “That’s likely to be a big factor against them at the agency.”

The companies have also made contradictory statements to regulators. In one instance, Sprint’s chief commercial officer, Brandon Draper, testified in February before the California Public Utilities Commission that Sprint was not a failing firm, saying that Sprint is “a stable company” that “is not going bankrupt.”

The first practitioner said that such comments belie Sprint’s failing firm argument. “When you look at it for what it is, Sprint is one of only four options for customers right now,” the first practitioner said. “I don’t think they’re going anywhere.”

But according to a third practitioner, who previously served as an attorney advisor to an FTC commissioner, such comments do not necessarily determine the fate of the companies and their argument. “They also have economists who will have put together models and analyses for why the failing or flailing firm argument is legitimate,” this third practitioner said. “Although those public statements definitely don’t help.”

Also considered by the DOJ in Waste Control/Energy Solutions was whether Waste Control would seek out an alternate buyer if its deal with Energy Solutions fell through. While it is unclear what Sprint’s plans are if its deal with T-Mobile fails, the second practitioner noted that the company’s only other real options are AT&T and Verizon, both of which would likely present similar antitrust concerns if either company sought to acquire Sprint.

According to a fourth practitioner, who has represented companies in several deals where the failing firm defense has been argued, companies will often present this argument early in the agencies’ review of the deal. “It’s usually a point of the discussion upfront,” said the fourth practitioner. “They’re going to present it as part of the efficiencies defense.”

A fifth practitioner noted, however, that the point in the investigation at which companies will present a failing or flailing firm defense varies based on the specifics of the case. For example, if the companies are at first confident in deal approval, they may choose not to present the argument until late in the review, when an agency indicates the possibility of challenging the deal. “It really does depend on the specifics of each case,” the fifth practitioner said.

Reorg M&A’s previous coverage of this transaction can be found HERE.

--Matt Tracy
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