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M&A Uptick

Do regulatory and economic trends favor industry mergers?

Fortnightly Magazine - October 2010

It’s therefore characterized by individual, regional geographic markets, and these are subject to dual layers of federal and state regulation, in which some companies possess an obligation to serve. As a result, each company tends to face its own particular competitive and regulatory situation, and mergers tend to be opportunistic. Moreover, at least two other important factors tend to serve as a counter balance to the forces that otherwise would impel large-scale consolidation. First, in the market for corporate control in the power industry, the acquiring company often needs to pay a significant premium. Changes that have occurred in the industry’s economic regulatory landscape can make it harder for potential acquirors to be certain that the necessary premium is warranted. Second, the regulatory approval process creates uncertainty. Thus, it’s important that the process be managed to reduce that uncertainty to the extent possible, and to do so, the recent changes in dynamics of the industry must be considered carefully and taken into account.

Regulatory Landscape Changes

Among the significant changes currently in play in the power industry, several key developments—involving competitive issues, transmission planning, renewable goals, and economic and financial issues—potentially affect merger negotiations and the regulatory approval process.

Competition: The competitive effects of a power-industry transaction typically are reviewed at both the federal and state level. A merger must pass through two layers of federal review: Competitive issues have stymied some major mergers, while others that potentially raised such issues ( e.g., the AEP-CSW merger) have moved smoothly through the approval process with acceptable conditions. It’s very important to be able to identify, at an early stage in the merger evaluation process, any competitive issues and the worst-case mitigation that might be necessary.

Two recent developments potentially affect the competition analysis applicable to power industry mergers. First, on April 20, 2010, the Department of Justice Antitrust Division and Federal Trade Commission proposed to revise their horizontal merger guidelines to liberalize the safe harbors for identifying mergers that don’t raise competitive issues. The merger guidelines identify certain mergers that don’t raise significant competitive issues because they either occur in unconcentrated markets or don’t cause an increase in market concentration large enough to raise any concerns. The proposed merger guidelines would raise the market concentration levels that define these merger safe harbors. This proposed change is significant because it would permit more transactions to be approved promptly by FERC and the federal antitrust authorities, without the uncertainty and delay of time-consuming hearings and investigations. These new criteria also should aid in state proceedings.

Currently, FERC’s merger policy statement adopts the market-concentration screens in the existing federal merger guidelines. Proposed mergers that satisfy those screening criteria can be approved by FERC without any evidentiary hearing. Getting FERC approval without a hearing is important because the hearing process at FERC can take 12 months. 5 Having the certainty of federal merger approvals and the knowledge of how much divestiture, if any, will be required, can help substantially at the state level when competition issues are considered. Largely for this reason, merger applicants