M&A Reviews Must Be More Predictable

Each year, thousands of corporations merge with or acquire other corporations. The financial and contractual issues surrounding mergers and acquisitions can be daunting. Perhaps the most unpredictable aspect is governmental review, particularly from federal agencies that do not have clearly established review procedures. The recent merger of CTC Communications and Choice One Communications is a case in point.Not all governmental reviews are unpredictable. The SEC reviews the disclosure of financial and corporate structural information about the transaction. Either the Department of Justice or the Federal Trade Commission reviews the antitrust issues related to the acquisition. In some industries, such as banking or telecommunications, a regulatory body reviews the mergers for compliance with industry specific rules. While far from perfect, these reviews are predictable enough that the merging parties are able to retain specialized counsel to assist with the governmental review process.The problem is that other federal agencies also have interests in reviewing mergers and acquisitions. Mergers involving a foreign acquiring party are subject to review by the Committee on Foreign Investment in the United States, an interagency group chaired by the Treasury Department. CFIUS can include, among others, representatives from the White House, the office of the U.S. trade representative, and the departments of State, Commerce, Defense, Justice, and Homeland Security. The decision on which mergers to review, the standards of review, the balancing of interests among the various federal agencies, and the remedies to problems are ad hoc. To individuals inside the federal government, the CFIUS process is opaque and unpredictable. The view from parties outside the federal government is understandably less benign. Fortunately, the administration is reviewing the CFIUS process.Expansive reviews can occur even when no foreign ownership is involved. Consider the competitive local exchange carriers CTC, based in Waltham, Mass., and Choice One, based in Rochester, N.Y. The telecommunications companies announced a merger in February. In mid-March, the Federal Communications Commission, as the industry regulator, announced an expedited review process and sought public comment on the merger, with comments due by April 10. Perhaps presuming the merger review process was on track, the newly merged entity announced in late March the acquisition of Conversent, another competitive local exchange carrier.Other than those from the merging parties, the only public comment is an April 10 letter jointly filed by the FBI, the Department of Justice, and the Department of Homeland Security. These agencies requested that the FCC “defer action” until resolution of “potential national security, law enforcement, and public safety issues.” The letter from these agencies suggests nothing improper in the behavior of the merging parties. Eventually, after satisfying these agencies, the merger will almost certainly be approved.The letter, however, illustrates a serious flaw in the way that the federal government reviews mergers and acquisitions. DHS, DOJ, and the FBI have critical responsibilities, the details of which are properly and usually hidden from public view. Yet these and other federal agencies have no formal means to ensure that “national security, law enforcement, and public safety issues” are considered in the review of mergers. Having no formal review authority, these agencies insinuate themselves in the reviews conducted by other federal agencies, in this case the FCC.The FCC merger review process is convenient for such intervention. The agency apparently has unlimited discretion to delay mergers and acquisitions involving closely regulated companies such as CTC and Choice One. Their investors are no doubt puzzled as to why they must first spend months to satisfy the unpredictable demands of several unrelated federal agencies in order to satisfy the FCC.The vast majority of mergers and acquisitions are in industries, such as Internet software or chemical manufacturing, that are not closely regulated by a federal agency. Unlike the instance of CTC and Choice One, most mergers are beyond easy federal review for “potential national security, law enforcement, and public safety issues.”The federal government has legitimate national security, law enforcement, and other interests. If the government wants to review these issues in the context of mergers and acquisitions, it should do so through predictable review procedures that apply equally to all merging parties, rather than unpredictable procedures that apply to firms such as CTC and Choice One that happen to be heavily regulated. The current unpredictable structure of reviews benefits neither the government nor the capital markets nor the merger parties.A former FCC commissioner, Mr. Furchtgott-Roth is president of Furchtgott-Roth Economic Enterprises. He can be reached at hfr@furchtgott-roth.com.

M&A Reviews Must Be More Predictable

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