Vetting The Deal — Why So Long, and Is It Ending Soon?

On Hertz’s second quarter conference call, Chairman and CEO Mark Frissora said that the company “remains engaged with the FTC to secure antitrust clearance to potentially acquire Dollar Thrifty, which requires, among other things, the divestiture of our Advantage business.”

Let me get this straight — after more than two years, the Federal Trade Commission is still assessing this deal? What’s taking so long?

I’ll admit this is a naïve question, coming from someone who knows nothing about the government’s considerations when it comes to antitrust cases, or the considerations of any multi-billion dollar company involved in such a deal. But I’m sure I’m not the only one asking the question.

And so I reached out to someone who could shed some light on the situation — not the potential Hertz/Dollar Thrifty merger specifically, but the FTC’s antitrust examination process and backroom wrangling with the parties involved.

“I can’t recall a deal taking this long,” said Ankur Kapoor, a partner at Constantine Cannon, the law firm that secured the largest settlement in antitrust history for a class of retailers against Visa and MasterCard.

Kapoor recalled major deals in the past few years such as AT&T’s attempt to buy T-Mobile, NASDAQ’s attempted takeover of the New York Stock Exchange and many Google acquisitions. He said that those cases were resolved in six months to a year.

I asked what the government’s goals are in analyzing such a deal. Is it really about making sure that one company doesn’t garner too much market share? “Market share is a starting point, but it’s not even close to the end point,” Kapoor said. “You really need to look at prices. Are people going to pay more to rent a car?”

While the end goal is to understand the merger’s effect on rates, car rental rates are set market to market. Therefore, the FTC is analyzing market share on a market-to-market basis. If you take, say, the top 100 airport markets, that analysis would surely take some time.

Kapoor gave some general guidance regarding market consolidation in a given industry. He said that the FTC would stop a deal that brings three competitors in a market down to two. Kapoor calls going from four players to three “borderline,” saying there is a presumption that the FTC will analyze a four-to-three deal very closely, if not stop it entirely. From five players to four, a deal “will probably go through,” he said.

On most airports, the Hertz/Dollar Thrifty combination would bring the major players from four to three. Pre-merger, those companies are Hertz (including Advantage), Avis Budget Group, Enterprise Holdings (including National and Alamo) and Dollar Thrifty Automotive Group.

The whole thing then gets very scientific. Kapoor says the FTC uses a mathematical formula to measure market concentration called the Herfindahl-Hirschman Index (HHI).

With that in mind, I asked Kapoor to run some numbers from a hypothetical airport situation: Hertz with a 26% market share and Advantage with a 2% share; Dollar at 8% and Thrifty at 4%. Without getting into the math, Kapoor noted that the pre-merger HHI for Hertz/Advantage in this fictitious situation is already high, and adding Dollar and Thrifty puts the HHI well over the comfort level at the FTC.

“You’ve got a highly concentrated market that’s getting more concentrated; therefore, the antitrust agencies presume that the deal creates market power,” Kapoor said.

You can see why one of the FTC’s requirements would be to jettison Advantage, even with its small market share, and how closely in general the FTC would be scrutinizing the deal.

The FTC would be analyzing the HHI threshold in a hundred or more markets, inevitably involving some “horse trading” to satisfy the index. That would certainly take some time indeed, Kapoor agreed, especially in markets in which Hertz would be required to theoretically excise a store post-merger.

A few other factors may be affecting the timeline:

• The FTC is not just getting information and data from the car rental companies themselves, but subpoenaing entities that do business with car rental companies, such as corporate customers and websites that deliver car rental rates.

• The FTC is not comprised of a single entity, but many divisions such as the Bureau of Competition and Bureau of Economics that would each be looking at the deal. On top of that, the FTC is headed by five commissioners, who often convene an “attorney panel” that conduct a separate enquiry, which is apparently what is happening in this deal. That’s a lot of cooks in the kitchen, but it is standard operating procedure.

• In terms of an Advantage divestiture, even if and when a buyer is found, getting the buyer to agree to the FTC’s conditions could delay the process, Kapoor says.

Nonetheless, there are signs that this process may finally be nearing a conclusion. According to an item in Policy and Regulatory Report (PaRR) and picked up by Financial Times, the FTC convened on July 23 to discuss the merger. The report states that a recommendation was made to the commissioners. Once a recommendation is made, the commissioners typically take a few weeks to vote on a deal, and they rarely oppose a staff recommendation directly, according to the report.

The report also stated that “the meeting did not result in a formal consensus recommendation.” Taking into account August vacations, I asked Kapoor whether a recommendation without a formal consensus would delay a mid-September conclusion to the FTC’s process.

“It just means that the FTC staff wasn't entirely in agreement on what to do,” Kapoor replied. “The Commissioners will still weigh both sides and cast their vote, so it shouldn't affect the timing too much unless there was a real major split.”

You can bank on the FTC’s recommendation to come with conditions and divestitures in certain markets. Those conditions and divestitures will take effect only after the merger is completed — a merger that is still hypothetical. According to the PaRR report, this is an unusual set of circumstances for the FTC.

The good news for all of us — and transparency’s sake — is that if a deal goes through, the FTC would publish its analysis in what is called an Analysis to Aid Public Comment. The document essentially outlines how and why the FTC arrived at its ruling, without releasing confidential business data, Kapoor explained.

This whole deal-vetting process seems ironic and somewhat contradictory. On the one hand, you have these public car rental companies and the investment community looking forward to a deal that would raise car rental rates. On the other hand, you have the FTC worrying about how a merger would negatively impact car rental rates for the consumer.

Kapoor understands the irony all too well. “As an anti-trust lawyer, if you’re representing the plaintiff, you love all the earnings calls that talk about how they’ve stabilized or raised pricing and have erected barriers to entry and competition,” Kapoor said. “And if you’re on the defense side your stomach just leaps when you see something like that because it could come back to bite you.”

“It has been happening as long as I’ve been practicing and will continue to happen,” he added.

And so we wait, again. I’ll stay cynical regarding the end to this process – but a bit more enlightened.

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Originally posted on Business Fleet