Unscrambling Eggs

Unscrambling Eggs

It doesn't happen often. But, that doesn't mean it doesn't happen.  The FTC is now suing Dun & Bradstreet (H/T Main Justice) to unwind a transaction D&B closed last year.  According to the complaint, D&B acquired the Quality Education Data (QED), a division of Scholastic, Inc., in an asset purchase and integrated QED with its own Market Data Retrieval unit in February 2009.  The FTC sums up the transaction this way:

 Market Data Retrieval ("MDR"), a company of D&B, is the leading provider of data for marketing to kindergarten through twelfth-grade teachers, administrators, schools and school districts ("K-12 data") in the United States. K-12 data includes but is not limited to contact, demographic and other information relating to K-12 educators. K-12 data is sold or leased to customers that use the data to market products and services to educators. In early 2009, D&B acquired the assets of QED, MDR's primary competitor. As a result of the acquisition, MDR now holds over 90% of the relevant market, with only a small fringe consisting of two firms accounting for the remainder. This transaction is in practical effect a merger-to-monopoly and, if allowed to remain, would likely allow MDR unilaterally to exercise market power in various ways, including increasing prices and reducing product quality and services to K-12 data customers.

"Merge-to-monopoly"?  Acquiring your "primary competitor"?  Neither of those sound good.  In fact, they're not.  So, why didn't the [Hart-Scott-Rodino Antitrust Improvement Acts pre-merger notification (HSR)]  process catch this transaction?  Simply put, the deal was too small to trigger a required HSR filing.  The transaction was valued at $29 million, well below the $69 million trigger at the time.  It was probably unwise not to file anyway.  Certainly, in antitrust sensitive transactions the FTC will accept a voluntary filing.  Here it looks like the parties decided against such a filing.  They either neglected to consult antitrust counsel on the transaction, or they did, and then took a shot (in Feb 2009) that the somnolent attitude towards enforcement that was a hallmark of the previous administration would continue going forward.  And anyway ... unscrambling the eggs post closing is so expensive and time-consuming, the FTC wouldn't waste their time on such a small market.  Would they?

They would.  Here's a little advice from the FTC's Richard Feinstein, Director of the Bureau of Competition

Despite its relatively low dollar value, this transaction dramatically decreased competition in the marketplace.  When Dun & Bradstreet acquired QED, it bought its closest competitor and created a monopoly. That's going to get the FTC's attention every time.

While a voluntary HSR filing would not have created an absolute safe harbor from a subsequent antitrust suit, it might have cleared the ground and allowed the parties to address the government's antitrust concerns earlier on in the process - before there had been any integration work, before there had been any joint marketing, etc.  True, making such a filing might have added additional costs and added time to an otherwise small transaction.    These are common cost/benefit questions that parties have to consider with antitrust counsel in these kinds of transactions.  They can be close calls.  In this case, it looks like the parties may have made the wrong call.  By avoiding a voluntary pre-closing process, the parties have apparently triggered a worse fate - the potential that the government will come in ex post and undo a deal that closed more than a year ago.   

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