Department of Justice continues aggressive scrutiny of mergers - International Law Office

International Law Office

Competition - USA

Department of Justice continues aggressive scrutiny of mergers

January 31 2013

Introduction
A new focus

The bigger picture

Introduction

On January 10 2013 the US Department of Justice (DOJ) filed a lawsuit against Bazaarvoice Inc, challenging the company's acquisition of PowerReviews Inc.(1) The DOJ's complaint argues that the acquisition eliminates competition in the market for product ratings and review platforms, and asks the court to order Bazaarvoice to divest assets sufficient to "replace PowerReview's competitive significance in the marketplace". The DOJ challenged the transaction despite its relatively small size and the fact that the parties completed it over six months ago in June 2012.(2) The lawsuit underscores the heightened scrutiny of completed mergers and acquisitions in recent years, as well as the significance of so-called 'hot' documents to agency investigations.

The complaint relies heavily on a number of excerpts from company documents that allegedly show Bazaarvoice's intent to raise prices and exclude its only competitor, PowerReviews, from the market. For example, a Bazaarvoice executive allegedly said that acquiring PowerReviews would "(e)liminat(e) (Bazaarvoice's) primary competitor" and provide "relief from...price erosion". Other executives allegedly said the acquisition was an opportunity to "tak(e) out (Bazaarvoice's) only competitor, who … suppress(ed) (Bazaarvoice) price points...by as much as 15%", and would enable the combined company to "avoid margin erosion" caused by "tactical 'knife fighting' over competitive deals". It remains to be seen whether these alleged statements were made and in what context. That, of course, is what trials are for.

A new focus

The Bazaarvoice complaint is also notable because it makes no allegations about market share or market concentrations. Although plaintiffs typically allege high market share and/or concentration levels when challenging mergers, the Bazaarvoice complaint may reflect a trend at the agencies towards greater emphasis on allegations of competitive effects instead. For example, the Federal Trade Commission (FTC) also took this approach by not alleging market shares in its 2011 challenge of Graco Inc's proposed $650 million acquisition of ITW Finishing LLC from Illinois Tool Works Inc.(3) Instead of focusing on market shares, the key allegation in the Bazaarvoice complaint appears to be that:

"PowerReviews was routinely the only significant competitive threat that Bazaarvoice faced in U.S.-based sales opportunities. As a result of the transaction, Bazaarvoice will be able to profitably impose price increases on retailers and manufacturers based in the United States."

Both the DOJ and the FTC have aggressively investigated and challenged completed mergers in recent years, including both those reportable under the Hart-Scott-Rodino Act and those that are not reportable. For example, in 2012 the FTC challenged Renown Health's acquisition of two cardiology groups(4) and Magnesium Elektron's acquisition of Revere Graphics Worldwide, Inc.(5) In 2011, the DOJ challenged George's Inc's acquisition of Tyson Food Inc's poultry processing facility in Harrisonburg, VA;(6) the deal was valued at a mere $3 million.

Bazaarvoice has announced that it intends to contest the DOJ's lawsuit. The company said that DOJ's alleged product market is incorrect because "(r)atings and reviews are but one of many tools that brands and retailers can use to engage with their customers". The company also stated that the complaint was based on excerpted statements from "dated documents" that "paint an inaccurate picture of the marketplace", and that DOJ "ignored virtually all of our recent ordinary course documents and substantial economic evidence". Bazaarvoice expressed "surprise" that the DOJ would challenge a completed transaction of an entity that generated under $12 million in annual revenues.

The bigger picture

The Bazaarvoice lawsuit has several significant implications for counsel involved in strategic transactions:

  • The agencies will continue to scrutinise completed transactions aggressively, even small transactions that are not reported under the Hart-Scott-Rodino Act.
  • Companies should be extremely careful when creating documents discussing transactions, particularly those that could be interpreted as referring to price increases or the elimination of competition following a transaction.
  • Even when the agencies do not allege specific market shares or concentration levels, the agencies may challenge mergers that allegedly eliminate the company's closest competitor. However, it is unclear whether the courts will agree with this approach.

For further information on this topic please contact J. Robert Robertson, Benjamin F. Holt or Justin W. Bernick at Hogan Lovells US LLP by telephone (+1 202 637 5600), fax (+1 202 637 5910) or email (robby.robertson@hoganlovells.com, benjamin.holt@hoganlovells.com or justin.bernick@hoganlovells.com).

Endnotes

(1) United States v Bazaarvoice, Inc (Case C-13-0133-JSC, ND Cal January 10 2013), available at www.justice.gov/atr/cases/bazaarvoice.html.

(2) Although the acquisition was valued at $168.2 million, PowerReviews had only $12 million in revenue for the most recent fiscal year, according to a statement issued by the company. Statement of Bazaarvoice on Yesterday's Filing of an Antitrust Action Against it by the Department of Justice, available at http://investors.bazaarvoice.com/releases.cfm. The parties did not report the transaction to the agencies under the Hart-Scott-Rodino Act.

(3) In re Graco, Inc (FTC Docket 9350), available at http://ftc.gov/os/adjpro/d9350/index.shtm.

(4) In re Renown Health (FTC File 1110101), available at www.ftc.gov/os/caselist/1110101/index.shtm.

(5) In re Magnesium Elektron North America, Inc (FTC Docket C-4381), available at www.ftc.gov/os/caselist/0910094/index.shtm.

(6) United States v George's Foods, LLC (Case 5:11-cv-00043-gec, WD Va May 10 2011), available at www.justice.gov/atr/cases/georgefood.html.


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