‘Control of American business is being transferred from local communities to distant cities where men on the 54th floor with only balance sheets and profit and loss statements before them decide the fate of communities with which they have little or no relationship. A nation of clerks is anathema to the American antitrust dream,’ said US Supreme Court Justice William Douglas in 1966.
For many IR professionals, the process for dealing with antitrust is simple: issue a press release then get out of the lawyers’ way. While that strategy may pay off in some instances, too often IROs are caught off-guard when the Justice Department or Federal Trade Commission investigates potential antitrust violations.
Anititrust pitfalls are steep. Just ask Staples investor relations director Sam Levenson, who spent long hours dealing with lawyers, investors, and risk arbitrageurs during a ten-month campaign to acquire rival Office Depot – a campaign that ended in vain when the FTC blocked the merger this spring.
‘You’ve got your hands full,’ he says. ‘The stock seems relentlessly volatile and you have to keep investors up-to-date every day on what’s going on. On top of that, you’ve got to be actively involved with both in-house, outside and antitrust counsel. Then there’s the arbs who call every day. Everyone wants you to predict the future but all you can do is get the facts straight as best you can and deliver them to the appropriate parties. It’s a difficult process.’
Cognizant IR
Experts maintain IROs should know that process cold, especially as mergers and acquisitions are fast proliferating. ‘The IR person is the conduit for the company during an antitrust investigation,’ explains Paul Gifford, Boeing’s IR director. ‘IROs also have to be cognizant of the fact that investors will be getting information from various sources, like media, friends, and other places, which will help shape their opinions significantly. Then they’ll pick up the phone and call you with questions that you may have no idea how to answer.’
Other IROs agree it’s best to be prepared. ‘You could argue that antitrust is not an issue of great import on a day-to-day basis,’ concedes Gregory Kisloff, investor relations director at New York Regional Rail Corporation, which is in the midst of an antitrust battle with Conrail. ‘But I’ve found it’s invariably better to be armed with more information than less in order to respond to immediate situations.’
Then there’s investors, who begin looking for the door upon hearing the dreaded ‘A’ word. ‘If you’re an investor in a company that’s being investigated for antitrust, you’d be crazy not to be concerned,’ offers Mark Mandel, an analyst with Chicago Corp in New York City. ‘They’ll be looking for all the information they can get their hands on so IROs, particularly in high-growth areas like computers or telecommunications, should bone up on antitrust issues.’
If that’s not reason enough to make you crack open a weighty tome on antitrust, consider the IR staffer at Nynex who, in the aftermath of Bell Atlantic’s successful merger with the Northeast phone giant, glumly admits, ‘It’s difficult to talk about our antitrust plan when our company’s not going to be in existence next week.’ In short, he never saw it coming.
Feeding Frenzy
The cornerstone of antitrust is the Sherman Act, enacted by Congress in 1890. Its definition of antitrust rings as clear today as it did then, saying ‘individual entrepreneurs should have autonomy and opportunity, consumers should have sovereignty, and entrepreneurs and consumers should be free from oppressive corporate power.’ A good notion in theory, if not in practice.
If Sherman were alive to see his handiwork in action today, he might pull his beard out. Lockheed Martin and Northrop Grumman. Boeing and McDonnell Douglas. Staples and Office Depot. All have been – or are in the midst of – protracted antitrust battles with the US government or even Europe’s in the case of Boeing and McDonnell. And all have seen their stocks gyrate wildly from day to day as uncertainty erodes the will and confidence of shareholders, like Northrop Grumman, which rose $21.125 on July 3, the day the proposed merger with Lockheed was announced.
Take Boeing and its $14 bn purchase of McDonnell, approved by the FTC but stymied by the European Union before getting a green light on July 30. The EU claimed the merger would solidify Boeing’s stranglehold on the aerospace industry and grab over 84 percent of the jetliner market – almost doubling the share of French consortium Airbus, the world’s second largest airplane maker. To no avail at first, Boeing offered to reduce the length of exclusive sales contracts with major airlines to 15 years from 20 years, and not enter into any new exclusive deals for the next ten years.
What if the two companies had ignored the EU and gone ahead, as McDonnell vowed to do regardless of the outcome? The commission has the right to fine companies up to 10 percent of their annual revenues, which in Boeing’s case exceeded $33 bn. Plus, any contracts issued by the company wouldn’t be recognized in European courts.
Meanwhile, the stocks of both companies suffered as negotiations plodded on, dropping precipitously in mid-July – around $6 for Boeing and $8 for McDonnell in less than a week. Those kind of numbers inevitably result in shareholder calls.
‘The big investors like Putnam or Fidelity understand the risks, but the average investor rarely does,’ said Perrin Long, a Connecticut securities analyst. ‘Often you’ll see IROs take different approaches with the two groups. They’ll put a rosy spin on the antitrust issue with the little guys, telling them everything will work out in the end. With larger investors, they’ll be more honest and admit they don’t know what’s going to happen because you just never know with the Justice Department or, in this case, the EU. The latter strategy is closer to the truth, though, and should be championed by IROs in the middle of an antitrust investigation.’
Others say a rough look at the numbers in the immediate aftermath of a proposed merger or acquisition can indicate whether rough antitrust waters lie roiling ahead of an IR pro. ‘If there’s a segment of the market commandeered by one company, then you know you’ve got potential antitrust problems. That’s what the Justice Department looks for and that’s what IROs should look for as well,’ notes Paul Nisbett, a defense industry analyst with Newport, Rhode Island-based JSA Research. ‘In Boeing’s case, the fact that they would be controlling 84 percent of the market should have been a red flag to its IR and legal departments to prepare to defend the company from antitrust liability.’
Gearing Up
When it’s evident that an antitrust investigation is set to be launched, the top priority for IROs is to ensure that the daily record of events is accurately compiled and presented to the investor community in a straightforward fashion. That’s going to require at least a rudimentary understanding of how the Justice Department and the FTC works and what antitrust issues might be expected. It also means working hand-in-hand with the legal department.
‘Too many IR departments defer to the lawyers when it comes to dealing with antitrust issues,’ says Jeffrey Goldberger of Stern & Company, a New York-based IR consultant. ‘But getting out of the way of the lawyers will quickly put you in the dark. I know some IROs who even let their corporate lawyers write and sign off on company press releases in the middle of an antitrust matter. The problem, unfortunately, is that not enough IROs understand the issues involved.’
Red Flags and Green Lights
Even as the antitrust defense campaign is left to the legal eagles, IROs are still likely to be called upon to deliver the news, good or bad, to the investment community. ‘Handling damage control for shareholders is a big part of an IRO’s function,’ says Scott Hamilton, IR director at Jackson, Mississippi-based Mobile Telecommunications. ‘You’ve got to understand the regulatory issues because that’s what investors will ask you about once you get past the health of the stock.’
Although Hamilton says he’s in a fast moving industry that fosters competition and thus has never had to tackle the antitrust issue head on, he’s not above taking some preventive medicine. ‘I meet with my counterparts at other companies and I make it a point to talk to my general counsel on a regular basis. Although antitrust has never been an issue here, it’s something that other telecoms companies are facing with lots of M&A activity. It’s something I know shareholders are concerned about and, therefore, it concerns me too.’
While speculating what the Justice Department or the FTC will ultimately decide is usually a futile endeavor, it’s a bit easier to ascertain which industries are mostly safe from antitrust actions and which are wearing a bullseye on their backs. The consolidation of the US defense industry, for instance, has come in the wake of a government decision to bend antitrust regulations in that sector and encourage companies to reduce overlap and overhead as they face dramatic military budget cuts.
The antitrust regulators have been more aggressive in telecoms and retail. The Staples/Office Depot deal will most assuredly serve as the poster child for anti-competitiveness for years to come. 800-pound superstore gorillas like Staples ‘really have a hard time because it’s so obvious that they would own their market after a merger with its top competitor,’ says Long. ‘It’s the same reaction you’d get from the feds if Merck attempted to merge with Johnson & Johnson. They would never go for it because the deal would result in a huge concentration in the health and medical field.’
Straightforward Approach
A blueprint for dealing with antitrust is offered up by some IR consultants. ‘Sure, I can understand why some IROs think that there’s not a lot they can do about antitrust,’ says Joseph Mansi, managing partner at KCSA, a New York-based investor relations firm. ‘Having said that, I think the issue is a big one that IROs should definitely learn more about. At the minimum, they should be able to get the right information out to the investment community and make sure that shareholders are kept up-to-date on any potential ramifications of government activity. Investors will appreciate that and be less likely to jump off the bandwagon if they know what’s going on.’
That information may come in handy the day your company finds out its proposed merger with Leviathan Inc is to be investigated by the Justice Department and the stock goes into a free fall. After all, you can’t influence Uncle Sam but you can influence the investment attitudes of your companies’ shareholders by recognizing how the antitrust game is played. Just think of it as leveling the playing field.
Invasion of the Arbs
Imagine this nightmare: some of the most loathsome, vile, irascible, and demanding scoundrels on earth have your number on speed dial and they’re using it three or four times a day. No, they’re not telemarketers or Washington lobbyists, they’re risk arbitrageurs. For two IR directors, this nightmare came to life.
‘Our phone volumes tripled,’ says Paul Gifford at Boeing of the McDonnell Douglas acquisition. ‘Most of the calls came from arbs who are serious players in the antitrust game. Even minor fluctuations in our stock price would drive them crazy.’
That the EU used the international media to aggressively state its case against the Boeing-McDonnell deal didn’t help matters. ‘The EU was in the media a lot and caused great fear and consternation among the arbs. We spent a lot of time on the phone with them trying to calm them down.’ Gifford says that once the EU finally rendered a positive opinion on the acquisition, the phones immediately stopped ringing.
Staples’ Sam Levenson experienced a similar fate, only the Framingham, Massachusetts-based superstore’s IR director didn’t have the satisfaction of seeing the proposed merger with Office Depot approved. ‘By far the biggest challenge we faced was dealing with the arbs, who were mercilessly trading the two stocks. Even minutiae would set the phones ringing off the hook. Our stock’s short position went from 5 mn to 40 mn seemingly overnight. It was unbelievable.’
Levenson estimates that 95 percent of his IR staff’s time during the antitrust investigation was spent dealing with the arbs. Sometimes he felt they knew more than he did about the merger’s prospects with the FTC. ‘From an IRO’s perspective, you’re dealing with people who trade off of antitrust rumors day in and day out. They knew a lot about antitrust and they were hard-wired into the rumor network. It was impossible to keep up with the things they were telling us.’
As lawyers for the two companies negotiated with the FTC, many arbs would have ‘plants’ in the courtroom – some waiting in line all night for a seat – to report on the proceedings. ‘They would leap up and dash out to a pay phone when anything they perceived as news came up. Then they would call us and practically ask us to commit securities fraud by giving them inside information. The thing is, we didn’t know much and we were very clear with them from the start that the only way we would communicate was through a press release. That didn’t stop them, though.’
To keep the arbs at arms length, Levenson teamed up with Office Depot’s IR staff to coordinate the companies’ message. ‘You can’t predict the future and you can’t get involved in the rumor game,’ he says. ‘You have to be extremely sensitive about how you report the facts.’ Keep doing that, he adds, and sooner or later, the phones will stop ringing and the arbs will turn to their next quarry. ‘(Risk arbitrage) is a hell of a way to make a living,’ concludes Levenson. Boeing’s Gifford would no doubt agree that the scoundrels won’t be missed.
