Well this is getting ridiculous. Now the Federal Trade Commission is preemptively imposing conditions on hostile takeover bids. Today the Commission announced a “consent order” against Air Products and Chemicals, Inc. In February, according to the FTC’s complaint, Air Products offered to purchase all the outstanding shares of Airgas, Inc., for $7 billion. Airgas management rejected the offer, but Air Products continues to pursue its bid as a hostile takeover, which includes a proxy fight for control of the Airgas board.
Somehow, the FTC got involved and decided that an Air Products-Airgas combination would illegally consolidate the markets for “bulk liquid oxygen” and “bulk liquid nitrogen” in five areas of the country. Apparently it’s really, really expensive to produce this stuff, and the FTC is upset that new competitors won’t be able to instantly enter the market and compete. Ergo, the FTC forced Air Products to promise it will sell parts of Air Products’ businesses to an FTC-selected buyer.
So the FTC and Air Products signed an “agreement” regarding the distribution of assets Air Products does not actually own. Air Products doesn’t even have an agreement to purchase the assets. I’m puzzled as to how this can be legal, much less constitutional.
The first question I have is: Who lobbied the FTC to get involved? The obvious suspect is Airgas management. They want to prevent the takeover and keep their jobs. Maybe they hired some expensive antitrust lawyers to lobby the FTC in the hopes that the prospect of an antitrust review would scare Air Products away. If so, then Air Products called that bluff. Maybe there’s another company that wants to get its hands on Air Products assets — or at the very least, weaken both Air Products and Airgas by forcing them to spend money on antitrust lawyers. Maybe a customer — and I’m guessing bulk liquid gasses are the type of products purchased by large, sophisticated firms — did the lobbying. Whatever the reason, we’ll likely never know, as the “consent order” effectively shuts off any public access to the details of how this case came to be.
The second question I have — and it’s one I frequently ask — is why did Air Products hire a big-shot antitrust lawyer, in this case Deborah Feinstein of Arnold & Porter LLP, to represent them in a matter where they caved without even putting up the pretense of a fight. Feinstein apparently advised her client to settle even before the takeover bid succeeded! The FTC’s complaint doesn’t cite a lick of evidence demonstrating the proposed takeover would be “anticompetitive,” and I suspect a federal judge would be really, really reluctant to grant the Commission a temporary injunction to block a hostile takeover without any empirical evidene. Sure, I realize Air Products probably thought it was cheaper — and helpful to their takeover bid — to get the FTC out of the way. But then why hire Deborah Feinstein in the first place? You could have picked a random lawyer via Google and gotten the exact same outcome.
(Come to think of it, I recall a defendant in another merger case once telling me that his lawyers — Arnold & Porter, Feinstein’s firm — were far more concerned with staying in the FTC’s good graces then defending their client’s position; I’m starting to see a pattern here.)
Returning to the main issue, a policy of preemptively imposing conditions on hostile takeover bids introduces a whole new element of “regime uncertainty” into the economy. The entire “merger review” scam is predicated on the false notion that antitrust regulators understand the present and future market conditions better than the firms that compete in said markets. Applying this false theology to hostile takeovers sharply reduces the value of such bids, since the takeover firm now must account for regulatory intervention during the bid process itself. This is a boon for poorly managed companies — for their managers anyway — as they are less likely to be targeted, depending on how closely their industry is scrutinized by the FTC. Obviously, it’s a bad deal for shareholders, as they are deprived not only of a competitive bidding process for their shares, but also face the forced sale of valuable assets at below-market prices to FTC-approved buyers.
From a legal standpoint, the FTC once again makes a mockery of due process. “Preemption” is not just a doctrine reserved for illegal wars in foreign countries. It’s a universal regulatory creed that permits government intervention in purely hypothetical transactions.
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You are quite right about the “regime uncertainty” of an agency consent order. Once one company makes a bid for another, it is the hostage of fortune. Almost as much as the target, it is “in play” with its stockholders expecting the deal to close, its management hanging their prestige (and their bonuses and, very likely, their tenure) on the deal getting done in a crisp and orderly way. If the FTC wants to impose a toll in the form of arbitrary and even irrational concessions that suck value out of the bargain and cripple the resulting enterprise, then management has to pay attention and, if at all possible, capitulate. You can’t argue with City Hall; and very rarely do businesses go to war with the antitrust authorities. Those bureaucrats have power out of all proportion to their apparent status.
The FTC: We attack more peaceful institutions by 6 AM than most worthless bureaucracies do all day!
“the FTC forced Air Products to promise it will sell parts of Air Products’ business to an FTC-selected buyer”, sounds like a chapter in “ATLAS SHRUGGED.” FTC employees could approve their relatives etc. Great economics.
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