Feds Adopt Harder Line On Takeovers Antitrust Concerns Prompt Regulators To Scrutinize Big Deals More Carefully

Even as U.S. corporate mergers and acquisitions have grown consistently larger and more frequent in recent years, the potential for deals to run into an antitrust obstacle had seemed to grow ever more remote.

But now, federal regulators are sending unmistakable signals that they are taking a closer look at big mergers - as well as the competitive practices of big corporations - and have the political backbone to challenge powerful interests.

The result is a government regulatory apparatus baring its teeth at Microsoft Chairman Bill Gates, the wealthiest American, and Lockheed Martin, the world’s largest arms maker. Deals in the airline, accounting, pharmaceutical and telecommunications industries are getting a hard look. Last week, Lockheed hit a snag in its plan to buy Northrop Grumman.

Any threat of a government crackdown on mergers could cast a shadow over the great bull market of the 1990s, which has been fueled in part by takeover mania. Despite such high risks, the antitrust bite has not spooked investors yet.

Although the Federal Trade Commission and Justice Department are not challenging a significantly larger percentage of mergers, they are taking a harder look at so-called strategic mergers that result in greater market concentration, said William Baer, who heads the Federal Trade Commission’s Bureau of Competition.

As more corporations attempt to be the top dog in their industry, deals are increasingly cutting closer to what the government will allow. Antitrust regulators are seeing more proposed mergers that would combine the largest companies in already highly concentrated industries, Baer said.

“If everybody wants to be No. 1 or No. 2, then you are going to see a lot of markets where there are only going to be one or two competitors,” he said.

The mega-mergers that formerly sailed through the antitrust reviews are finding the going far tougher, experts say.

“There is certainly a more critical approach to mergers and acquisitions than there was 10 years ago, when the attitude was fairly relaxed,” Baer said.

But the sheer volume of mergers means that regulators are facing a more difficult task than ever before. The squeeze on federal agency budgets has kept staffing nearly level, while deals are mushrooming.

In 1992, antitrust regulators examined 1,589 mergers and acquisitions that filed for review under the Hart Scott Rodino Antitrust Act. By 1997, that number had soared to 3,702, and in 1998 it is expected to surpass 5,000.

The total number of merger transactions announced last year between U.S. companies totaled 9,992, worth $845 billion. That’s double the 4,950 deals that were worth just $139 billion announced in 1992, according to Securities Data Co., which tallies deals.

Meanwhile, the regulators have challenged or blocked more deals. In 1997, the FTC challenged 27 mergers and the Justice Department challenged 17. In 1991, the FTC challenged 14 deals and the Justice Department four.

While the number of challenges to antitrust deals represent a tiny fraction of the total, it is the quality of the challenges that appear to be attracting attention.

The merger boom has been fueled by companies facing an outlook for slow sales growth and seeking to boost their market share and earnings growth - and thereby stock value - by taking over competitors. The deals have occurred at prices that represent significant premiums to the targets’ share prices.

So far, however, Wall Street doesn’t appear concerned that the government might be adopting a harder line on takeovers: The Dow Jones industrial average reached record highs on two straight days last week before turning lower on Thursday.

In addition, key industrial sectors such as defense are seeing the major firms attempt to vertically integrate, giving them the capability of building all the constituent parts of their products. Such organizations can lock out competing parts suppliers.

It appears that is exactly what the Justice Department was worried about in the Lockheed Martin deal to buy Northrop Grumman for $11.6 billion. Lockheed would have the ability, for example, to build fighter jets with its own radar and other electronic systems, which it would get from Northrop operations.

The issue is growing more important because of an economywide convergence of technologies, according to Steven Sunshine, former anti-trust chief at the Justice Department.

Big players are rushing to buy the capabilities they need to create new markets, such as putting video over telephone lines or putting the Internet over cable systems, which no one company has the know-how to do, Sunshine said.

“What you are seeing is increased aggressiveness,” he said. “In terms of philosophy and substance, that hasn’t moved much in the last several years. But you are seeing an increased willingness to take on the tough cases.”

Challenges to vertical mergers are also more visible in cases where a company attempts to expand its reach - for example from production to distribution, according to Keith Shugarman, chairman of the antitrust department at the Washington law firm of Goodwin Procter & Hoar.

Shugarman cites challenges to such deals as drug maker Eli Lilly’s acquisition of distributor PCS, and, perhaps most prominently, the ongoing probe of Microsoft Corp.’s practices.

The government has objected to what it views as Microsoft’s ability to use its dominant Windows operating system for personal computers to crush competition in other businesses, such as Internet browsers.

Shugarman, a former FTC attorney, says the key question that regulators ask themselves in judging a merger’s impact today is whether “prices are likely to rise as a result of eliminating competition. … That is still the touchstone of antitrust analysis.”

The dramatic growth of data on major industries over the past 20 years, coupled with the power of personal computers, allows regulators essentially to create models demonstrating a given industry’s competitiveness and how it would be affected by fewer players.

Still, deals that would have attracted challenges in the 1950s and 1960s are easily passing review today. Many experts don’t expect the resurgence of antitrust enforcement to slow the pace of mergers and acquisitions significantly.

“I don’t see it having a real chilling effect,” said Robert Sacks, an anti-trust attorney at Sullivan & Cromwell in Los Angeles, who has worked on many of the firm’s banking mergers.

Ken Moelis, managing director of investment banking with Donaldson Lufkin & Jenrette, who has worked on such high-profile deals as Hilton Hotels Corp.’s unsuccessful $6.5-billion bid for ITT, said trust issues are always an issue and will continue to be a focus of mega-mergers.

“It’s going to be deal-specific,” Moelis said. “But I don’t see it changing the general trend toward mergers.”

Ian Pereira, a principal with Morgan Stanley Dean Witter in Century City, agreed that he doesn’t see much of a change in antitrust challenges, because “it’s not exactly clear why they pick certain deals rather than others.”

Yet other experts say the government message is already having an impact, forcing corporations to ponder more seriously whether potential deals will get through federal review.

“Businessmen don’t like to waste their time in transactions that don’t pass muster,” Baer said. “The word is out there that both agencies are willing to go to court where consumers are at risk.” Still, the reality is that most mergers won’t be challenged today and the few that are challenged usually are settled - not in court, but in negotiations among corporate lawyers and regulators.

“Twenty years ago they would stop a deal entirely,” Shugarman said. “Now, we can do more ‘laser surgery”’ to make a deal palatable to regulators, often with the sale of certain businesses by either the acquiring company or the target.

MEMO: This sidebar appeared with the story: MERGER TRENDS In 1992, antitrust regulators examined 1,589 mergers and acquisitions that filed for review under the Hart Scott Rodino Antitrust Act. By 1997, that number had soared to 3,702, and in 1998 it is expected to surpass 5,000. The total number of merger transactions announced last year between U.S. companies totaled 9,992, worth $845 billion. That’s double the 4,950 deals that were worth just $139 billion announced in 1992. In 1997, the FTC challenged 27 mergers and the Justice Department challenged 17. In 1991, the FTC challenged 14 deals and the Justice Department four.

The following fields overflowed: BYLINE = Ralph Vartabedian, Tom Petruno and Debora Vrana Los Angeles Times