In the current environment, bank mergers are often arranged hastily — sometimes at the behest of the government — to stave off an imminent failure. The speed necessary to prevent failure can be inconsistent with the time normally required for antitrust review when a merger raises competition issues. Fortunately, the government's options are not limited simply to blocking a transaction or permitting it to proceed without regard to the competitive consequences.
The mere fact that a company is on the brink of insolvency does not normally short-circuit antitrust review. Through the "failing firm" doctrine, antitrust policy takes the possible collapse of a business into account.
While the Antitrust Division of the Department of Justice (DoJ) could allow a transaction to proceed on the theory that government involvement does not negate the failing firm test, it would be unfortunate over the long run if, even in this environment, the Antitrust Division were forced to stand by while transactions threaten competition.
The DoJ has several options when faced with a merger of a failing bank that raises competition issues. One option is a very fast review. While most merger reviews take six to nine months when there are serious competition issues, the DoJ examined PNC Financial Services Group's acquisition of National City Corp. in seven weeks, including the negotiation of a substantial divestiture package. Of course, when the DoJ moves that quickly, it is likely to make decisions on the basis of imperfect information and is likely to push for divestitures — the DoJ's preferred remedy for competition issues raised by a merger — that are not optimally designed to address the competition problem. And, it is likely to try to err in the direction of pushing for a larger divestiture than it would if it had more time.
Even a severely compressed time frame can be insufficiently quick in some cases. Seven weeks, for example, might have been too long for an antitrust investigation if JPMorgan Chase's acquisition of Bear Stearns had raised serious competition issues.
Another option for the DoJ is to persuade the banking agencies to accept a different purchaser. That could be very difficult in many instances — the FDIC, for example, is likely to believe that it must favor a purchaser that will minimize the drain on the insurance fund.
All of the banking agencies could be more concerned with short-term stability than long-term competition and might prefer purchasers that would create the best-capitalized institutions, regardless of the competition analysis.
A final option for the DoJ to consider is the so-called "pocket decree," which allows a transaction to close immediately, but within limits, and permits the Antitrust Division to force a divestiture at a later date if it concludes after a more complete investigation that a remedy is necessary.
There is precedent for such a solution. In 2006, the DoJ permitted Mittal Steel to pursue a hostile takeover of Arcelor S.A. before completing its investigation because Mittal agreed to divest specified assets, if required. Mittal agreed to hold those assets separate — that is, not exercise any control — for the duration of the investigation.
The pocket decree could be particularly well suited to rapid mergers of troubled institutions because a divestiture package might not be difficult to sell for a fair price at a later date without the burden of bad assets, and because of the extremely low price that a troubled institution is likely to command.
There are many situations in which it can't work, such as when the potential competition problem encompasses all or a substantial part of the target. Further, excessive use of the pocket decree, or even one pocket decree where the DoJ appears to impose particularly onerous terms at the conclusion of its investigation, could deter purchasers from considering transactions that raise substantial competition concerns for fear that the ultimate outcome could be a much less desirable acquisition.
We expect that the DoJ will try very hard to ensure that one of these options can work when it is faced with a transaction that raises serious competition issues, so that it can avoid the unpalatable choice between either thwarting a much-needed transaction in a vital sector of the economy or standing aside and running the risk of long-term damage to competition.
