December 17, 2001 16:35
HP, Compaq Face Antitrust Hurdle
San Jose Mercury News, Calif.
Dec. 17--General Electric and Honeywell couldn't do it.
Neither could MCI/WorldCom and Sprint.
The planned merger between Hewlett-Packard and Compaq Computer faces the twin hurdles neither of those deals could overcome: regulatory approval from the Federal Trade Commission or Justice Department, topped off by the European Commission.
At issue is whether the HP-Compaq merger will result in reduced competition, giving consumers fewer choices and higher prices. Each regulatory agency must investigate the deal, and until HP and Compaq executives receive full approval in the United States and Europe, they won't set a shareholder vote.
Given the regulatory timelines, the HP-Compaq deal is not likely to win government approval in both places before the end of January. HP has said it expects a shareholder vote sometime between late February and the end of June.
Chief executive Carly Fiorina and other HP and Compaq executives are confident they will win approval, saying they have done their homework. And they have learned from one of GE's mistakes: Don't rush through a complicated process.
"We had done weeks of study on the regulatory issues before we ever called the banker," Fiorina said during a recent editorial board meeting with the Mercury News. "The other difference between this and GE-Honeywell is I didn't do this deal over a fax machine on a weekend. There was a lot of thought that went into this."
Both HP and Compaq, she said, have tried to anticipate what aspects of the proposed acquisition each regulatory agency might challenge.
"Where the EU and the FTC will raise questions is where these two companies have the highest combined market share. That happens to be in PCs and low-end servers," Fiorina said.
"Those are markets that have millions of customers, not handfuls. Those are markets that are industry-standard with low barriers to entry, not high barriers to entry. Those are markets with intensive price competition. All of those things are fundamentally different from GE-Honeywell."
HP has survived the FTC process in past acquisitions and has dealt with regulatory approval in specific European countries on smaller issues. But it never has had to go through the process for the European Union. And never in the company's 63-year history has it submitted such a massive merger proposal.
Stanford Law School Professor and former Silicon Valley Rep. Tom Campbell thinks the merger will be allowed in the United States, provided that HP-Compaq spin off enough of the server market to satisfy the FTC.
"But in Europe, if the Honeywell example is followed, then the European Union might oppose this merger if it makes the product more attractive to consumers and strengthens the position of HP-Compaq, vis-a-vis European competitors," said Campbell, who once headed the FTC's Antitrust Enforcement Division.
HP and Compaq began the regulatory review process with the FTC on Sept. 25 by filing their notification of intent to merge. The companies must do so in accordance with the Hart-Scott-Rodino Act of 1976, which requires all companies of a certain size to file premerger notifications with the Federal Trade Commission and the Antitrust Division of the U.S. Justice Department.
Established to prevent "midnight mergers," the act gives antitrust agencies critical information about a proposed merger, and establishes waiting periods to help either agency analyze the deal.
As it happens, the HP-Compaq merger fell under the control of the FTC, which had to respond within 30 days and decide whether it agreed with the merger or wanted additional information.
On Oct. 25, the FTC responded with a second request for additional information, which HP and Compaq executives say they are providing.
Although sources close to the process would not say what, exactly, the FTC has requested, one hint was provided by attorney Larry Sonsini, whose firm is assisting HP's lawyers.
"We are addressing market shares in various product areas, such as PCs, low-end servers, high-end servers," Sonsini said. "We are starting to design potential solutions to address some of their concerns."
Both HP and Compaq have "reasonable time" to supply the information.
"You can take as long as you like to take," said Chris Compton, senior antitrust partner for Wilson Sonsini Goodrich & Rosati. But, he said, "there is some urgency on behalf of the parties to completely comply."
Once HP and Compaq have complied with the FTC's requests, the FTC staff has 30 days to continue its investigation and make a decision. During that time, the staff may talk with experts in the field as well as economists. They may talk to customers and suppliers, vendors and even competitors of the merging companies.
If the FTC concludes that the deal reduces competition to the detriment of consumers, the companies and the FTC can go one of three ways: agree to a remedy -- one or both companies may be asked to divest certain assets, for example; the FTC can seek a preliminary injunction; or the parties can decide to abandon the merger.
The European Commission process is much stricter and the timeline not so flexible, which is one reason why HP and Compaq have yet to file their merger agreement in Europe. Once the clock starts ticking in the European process, it doesn't stop.
In that process, both companies are required to notify the European Commission within seven days after they reach a definitive agreement to merge. This is different from the FTC, which requires notification only on the basis of a letter of intent to merge.
Before they file that definitive agreement, HP and Compaq representatives have been meeting with European Commission staff to determine what will be required to overcome any concerns.
"That is the big filing," Compton said. "It requires enormously more information than the Hart-Scott-Rodino filing."
Sources close to the process said HP-Compaq expects to file the European Commission notification form in the next few weeks.
Documents -- and there are hundreds of boxes of them -- provided to the FTC by HP-Compaq will be shared with the European Commission, Compton said.
"You don't want inconsistent results to occur just because they are not sharing the information in their respective investigations, so the parties will often waive their confidentiality and hopefully come to consistent results."
Within the first 30 days of filing, the European Commission has to decide whether the deal raises serious doubts. If it does, the companies can offer a remedy that would resolve the problems.
But if the parties cannot reach a solution, then the process moves to a second phase of investigation, which must be concluded within four months.
"It is more of an adversary proceeding," Compton said of this phase. "At that point, they have serious concerns, and you are really in a position of needing to establish that those concerns are unsubstantiated."
If the European Commission and the companies can reach a settlement, the commission may clear the merger. If they cannot, the commission can decide to prohibit the merger.
That decision can be appealed to two higher courts in Europe. GE and MCI WorldCom have appealed their denials to the first of the higher courts.
But experts say reversals of decisions by either court are rare.
By Tracy Seipel and Therese Poletti
----- |
