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Companies that want to merge and the agencies that want to block them seem to be growing more willing to settle their differences in court, according to the latest analysis of merger transactions from litigation consulting firm Cornerstone Research.

Cornerstone, based in San Francisco, released its third annual edition of Trends in Merger Investigations and Enforcement at the U.S. Antitrust Agencies: FY 2007–2016. The study analyzes data from the most recent competition report released jointly by the Federal Trade Commission and the U.S. Department of Justice back in October.

Cagatay Koc, a Cornerstone principal in the firm's Washington, D.C., office and co-author of the trends study, told Corporate Counsel that the increased willingness to litigate was “an interesting finding” for general counsel and their companies.

Cagatay Koc. Courtesy photo.

When one of the federal agencies challenges a merger, the companies involved can drop their merger plan, or they can fight the agency in court. In fiscal year 2016, 17 percent of the agencies' 47 challenges resulted in litigation.

That was the second-highest percentage of court battles in the 10-year period, and it more than doubled the historical average.

Koc said the prior year there were only three court challenges, compared with eight in FY 2016. But he doesn't think the numbers necessarily mean that enforcement is growing more aggressive.

“It could just mean in this particular year the cases were more problematic,” Koc said. “I think we have to observe what happens over the next four or five years before we cite a trend.”

The number of reported mergers continued to rise in FY 2016. “The most plausible explanation of the increase is that the economy is doing well and the cost of doing a merger is cheaper,” Koc said. Credit comes easier, he explained, and interest rates are lower.

When companies file merger plans with the federal government, the agencies can simply let the merger proceed or refer it for further investigation if the agencies spot possible competition issues. The referral can include a second request for information.

In FY 2016, despite an increased number of mergers, the agencies referred fewer transactions for further investigation. The study said the agencies proceeded with additional regulatory reviews in only 13 percent of reported merger transactions, the lowest in 10 years.

“Probably in this particular year the cases mostly involved parties that were not strong competitors,” Koc said.

He does not read the declining figures as suggesting that agency enforcement has weakened. To the contrary, he pointed to two other figures that suggest otherwise.

One of them was the high number of court challenges previously discussed. The other was an increased number of second requests for more information by the agencies,

Other data from the study include:

• There were 1,772 reported merger transactions in FY 2016 compared with 1,754 in FY 2015.
• The pharmaceutical industry continued to be a focus of regulatory enforcers, receiving “a disproportionately high share of second requests compared to its share of transactions in the past 10 fiscal years.” The information sector was second, and manufacturing third.
• Of the second requests for information issued in FY 2016, the majority, or 66 percent, were for transactions larger than $500 million.