DOJ Tries Constraining Second Requests

This is welcome news that DOJ is trying to put some limits around how it handles second requests for information in large mergers. The biggest issue in second requests is the sheer number of documents that need to be provided to DOJ. When I ran the process for relying to DOJ's second request in the sale of AT&T Wireless, we ended up turning over 10 million pages of documents - and that was the smallest number provided by the 4 parties (SBC, BellSouth, Cingular, AWE) in the merger. We upended the offices of dozens of employees, and for a two-month stretch commandeered a large conference room and filled it with scanners that busily hummed away night and day collecting the documents. I doubt that the mountains of documents dumped on DOJ's door during that process could possibly have been reviewed in any meaningful way, rendering the document portion of the second request more of a costly compliance exercise than anything else.

It's unfortunate, because DOJ has an important job to do in reviewing mergers, but the tools it wields are the blunt instruments of litigation. Any merger of substantial size is going to be subjected to a second request, and thus put through the time and expense of a paper response that must follow the broad rules of discovery in litigation but that is unlikely to be useful in most cases. I suspect that DOJ's economic analyses and the parties' responses to interrogatories (and perhaps certain electronic discovery) are far more determinative to DOJ's decisions on blocking mergers and negotiating consent decrees than any documents provided. Ideally, DOJ would find a way to limit or stage document production while finding ways to more closely hone in on the critical review issues in each merger. Anything that moved this process away from the binary intractability of litigation - at least in all but the most extreme cases - would be welcome indeed.

Private Equity Collusion

Quick post in NYT Dealbook today regarding the latest prosecutorial muscle-flexing against corporate America; this time a DOJ inquiry into the possibility that private equity outfits are colluding to keep prices low.

I'm sure DOJ's investigators have thought about this a lot more than I have, but it doesn't seem to pass the smell test. Private equity is playing in bigger and bigger deals, and prices as a multiple of EBITDA (or any other measure you choose) keep rising. This hardly seems an environment colored by collusion.

Yes, as Dealbook points out, average premiums in $1B+ deals (those where consortia of PE firms are likelier to submit club proposals) are smaller at 16.5% than the 27.4% fetched by sellers in the $100M - $1B price range. But bigger companies are typically associated with mature markets, lower growth, etc. - all factors that keep a damper on the mark-up paid.

In fact, PE firms cobbling together clubs to compete for big game - bigger, at least, than any of the constituent members could take down solo - would seem to enhance, rather than detract from, competition. Finally, there's the issue of market harm - $1B+ companies are not clueless naifs being forced to take cut-rate prices. Beyond their sophistication, these companies have alternatives in strategic buyers and, of course, continuing to run independently.

If DOJ really has a bone to pick with PE, perhaps its energies would be better spent looking at all of those dividend recaps . . .

HP Board Leaks and the Trust Issue

James Surowiecki has another typically excellent article on the need for trust in making good corporate decisions. Trust among colleagues allows for vigorous debate without the participants feeling like they are being personally attacked or put at risk for airing their views. As we know - but don't see often enough in the corporate world - open, unfettered discussion of alternatives leads to the best decisions.

By all accounts, the HP board was not a model of decision-making prowess to begin with. However, as Surowiecki points out, the HP leaks, overshadowed as they might be by a bungled and overreaching investigation, further diminished that capacity.

Facebook and YouTube

I've said before that Facebook should take the money and scamper, if indeed Yahoo is willing to pony up $900MM large. My biggest concern is that while Facebook may be different in many ways than MySpace, it's not really a competitor. I'm not sure it can reach beyond its niche, and it runs a very real risk of being swamped under as MySpace's youthful devotees start entering college. I just don't see enough upside versus risk for Facebook to justify scorning mountains of the good stuff.

YouTube, apparently in play at $1.6B mark from Google, is a different story. This company is comparable to MySpace in reach, and even more so in possibility. YouTube has, seemingly overnight, built an unbelievable brand. There's a lot of hand-wringing over YouTube and copyright issues, but it's all noise - I guarantee those issues will be in the margins, if not forgotten, within a year. Besides all the kooky stuff, smart media companies have begun seizing on YouTube as a distribution source, and who knows what the company could pull off with the heft of a major partner? All in all, it's not at all shocking to see the price this high. While YouTube's sub-30-year-old leaders will most likely sell, unlike Facebook I wouldn't fault them for holding out and continuing to grow the business.

Fortune on the Guidant Deal

Good in-depth report in Fortune on the Guidant - BSX deal. It's a good thing the medical devices industry offers the potential for companies to experience "bursty" growth, as BSX has got a long road back from what is being described as the "biggest M&S blunder since AOL/Time Warner." J&J's recent lawsuit now looks more like the pouring of salt on BSX's wounds than anything else.