The winds of time are blowing against the Federal Trade Commission. In recent decades, its mere dixit has been enough to scuttle many a merger. And that may still be the case, for many mergers. But there is movement in the other direction, toward judicial assertiveness on the subject, and thus toward the possibility that some mergers will go through despite an agency blockade.
On September 24, the Dan A. Polster, U.S. District Court Judge for the Northern District of Ohio, issued an opinion in the matter of FTC v. Steris Corp., which deserves serious contemplation by merger arbs.
The court denied an FTC request for a preliminary injunction that would have blocked the merger of Steris with Synergy Health.
Both Synergy and Steris sell sterilization systems that perform the crucial final stage in the manufacture of a range of health care products. Only a few manufacturers sterilize their own products before putting them into the market place, most rely on a company such as … Steris or Synergy.
Not Head to Head Competitors
But the two are not head-to-head competitors, because the market is segmented by the method in which the bugs are killed off: whether by gamma radiation, e-beam radiation, or ethylene oxide gas. Steris is a big player in the market for gamma sterilization (the method used for implantable devices such as pace makers). Synergy Health is not active in that market.
The plot is a bit thicker. There is a fourth possible sterilization method just now emerging into commercial significance: X-ray sterilization. There is as yet only one facility in the world that provides this X-ray sterilization service on a commercial scale: it is run by Synergy and is located in Daniken, Switzerland.
The FTC’s theory is that X-ray sterilization is a threat specifically to gamma sterilization. Further, it holds that Synergy has been planning to enter the U.S. market with this technology, which would put it in head to head competition with Steris. The merger removes that prospect.
So the question before the court was whether, but for the merger, Synergy would have followed through with the alleged plans and created an enhanced level of competition.
The court looked at the facts, and decided (without giving a lot of deference to the presumed agency expertise in such matters) that Synergy’s management had never sought, and had never obtained, corporate board approval to make the capital investment that would have made this competitive challenge to Steris and the other big gamma-sterilization firm, Sterigenics, a reality.
Cobalt-60 Seller, Bought
Intriguingly, the decision also alludes to an instance of vertical integration. In late 2013, Nordion, the world’s leading supplier of Cobalt-60, put itself up for sale. Cobalt-60 is the energy source generally used for gamma radiation, and so a critical raw material for both Steris and Sterigenics. It was Sterigenics that won the resulting bidding war, and entered into a contract to acquire the Canadian company Nordion on March 31, 2014.That development seems to have stimulated Synergy’s interest in X-ray technology as a way around the bottleneck that Sterigenics’ control of the raw material for gamma sterilization might otherwise generate.
Although vertical integration was itself once a hot subject of discussion and debate within the antitrust bar, the Sterigenic/Nordion deal went unopposed, either by the FTC in Washington or by the Competition Bureau in Ottawa.
But there were worries, within Synergy, about just how hard this project ought to be pushed. Andrew McLean, Synergy’s head of Applied Sterilization Technologies & Laboratories, wrote in a memo on May 29, 2014, “[I]f we push ahead and build without a proper baseload customer(s) in the US it is to our peril. And of course we do not have the same foothold in the US [as in Europe] that would allow us to ‘force’ customers to convert and cross validate and indeed our competitors would be doing everything possible to stop that occurring, creating further delays and barriers.”
In the light of such evidence, the Judge could not find that the FTC was likely to prevail after a full hearing, so he denied the request for an injunction. As lawyers for Wachtell Lipton wrote recently, the significance of this is that courts do nowadays “hold the FTC to its burden of proof, and that the parties to a merger can successfully oppose the agency’s theories” at this stage of the proceedings.
For merger arbs, the lesson is that game’s a lot longer than it used to be. There may still be money to be made betting that a merger will go through even after the FTC has decided agin’ it – a wager that not long ago would have made a state lottery look like a T-bond.