A recent antitrust enforcement decision by the U.S. Department of Justice (DOJ) has introduced a new and unprecedented risk into efforts by private equity firms to manage their portfolio companies, including through sales portfolio assets to strategic buyers. Private equity firms have long understood that their interests in companies are capable of raising antitrust risks, including where the acquisition of a competing business is considered. These risks could be particularly pronounced when the two interests are deemed effectively to be under common control. In its recent decision to oppose the proposed acquisition of Ainsworth Lumber Co. Ltd. by Louisiana-Pacific Corp., however, DOJ considered the proposed sale of one of two commonly owned companies to a strategic buyer in the same industry, and for ignored the common ownership—thus magnifying the apparent potential competitive effects of the transaction—to conclude that the transaction would eliminate an independent competitor from the market.
The proposed acquisition would have combined two competitors, LP and Ainsworth, which compete to supply wood-based structural panels used in construction. Publicly available records show that a majority of Ainsworth stock is owned by a fund associated with Brookfield Asset Management, which also owns a controlling majority stake in a third structural panel manufacturer, Norbord Inc.
Historically, the U.S. antitrust agencies have deemed commonly-owned companies that compete in the same markets to be a single economic entity because of the ability of their common owner to coordinate the affiliates' conduct lawfully as it sees fit. The basic law had been settled by the U.S. Supreme Court thirty years ago in the Copperweld case, which held that two wholly- owned affiliates were legally incapable of "conspiring" with one another so as to violate the Sherman Act. In the years since, the Copperweld decision and its premise were extended to apply to merely controlling interests, and to the evaluation of mergers and acquisitions. The effect was that common ownership of controlling interests in competing companies was generally deemed tantamount for antitrust purposes to ownership by a single entity. An analogy may be to the Chevrolet and Buick divisions of General Motors. Chevrolet and Buick may be rivals in the eyes of some consumers, but they are not competitors for antitrust purposes. Even if GM were to organize its divisions with separate and independent pricing and decision-making authority, in other words, it could later change this structure and even combine its divisions without antitrust risk. Indeed, under the U.S. Hart-Scott-Rodino antitrust statute, a formal combination of affiliates that are majority-owned by one entity need not even be reported to the Government.
Typically, the antitrust agencies have used the notional combination of commonly-owned competitors as a basis for opposing acquisitions by private equity firms of companies in markets where they already own a controlling interest in a competitor. For example, the proposed acquisition of Company A by a private equity firm already controlling Company B, an existing competitor in the market, would be analyzed by the agencies as a de facto merger between A and B, regardless of the extent to which A and B might be integrated or continue to operate independently post-transaction. This, in fact, has occurred frequently. In one notable example the Federal Trade Commission challenged a private equity purchase of Kinder Morgan (KMI) because two proposed private equity acquirers of KMI, Carlyle and Riverstone, already held significant positions in a major KMI competitor, Magellan Midstream. The FTC only agreed not to try to block the transaction upon the two purchasers' effective agreement to convert their holdings of Magellan into passive investments. The effect of this policy position is to limit private equity's ability to acquire a second competitor in any market.
By logical implication, if an acquisition by private equity can reduce competition between the target and an existing portfolio company irrespective of the planned operating structure, then a sale of one of two commonly controlled companies should increase competition. But this effect was not recognized by DOJ in the LP-Ainsworth transaction, which involved an effort by private equity to sell one of its two controlled structural panel firms, Ainsworth. Under the traditional analysis employed by the agencies, one of the effects of the proposed acquisition would be to reduce the apparent market share of the combined commonly-controlled entities, Ainsworth and Norbord, and to leave Norbord as independent competitor. Both of these effects would provide a pro-competitive counterweight to the proposed combination of LP and Ainsworth, one that indeed would leave the number of competitors in the market unaffected.
In this transaction, however, DOJ deviated from the traditional analysis, refusing to consider Ainsworth and Norbord to be commonly owned and effectively controlled as a single actor. No weight was given to the reduction in share and increase in number of competitors that would result from breaking the bond of common ownership between Ainsworth and Norbord by the sale of Ainsworth to LP. With its new analysis, DOJ objected to the proposed sale of Ainsworth by private equity to LP, stating in its press release that the transaction would combine "two of only three principal producers" in a region in the Upper Midwest.
Important details relating to DOJ's consideration of the transaction were not publicly disclosed. Thus, for example, the extent of coordination and/or competition between Ainsworth and Norbord was not part of DOJ's publicly-reported conclusions, nor was the standard used by the agency to make the determination that Ainsworth and Norbord should be treated as independent actors (i.e., In light of the majority ownership, what degree of coordination or competition between Ainsworth and Norbord would have altered the DOJ's conclusions?). Nonetheless, DOJ's approach in the LP-Ainsworth transaction should be studied by any private equity firm that currently owns a controlling interest in multiple companies that compete with one another in any market in the United States. That precedent could be used as a basis for limiting the ability of the firm to sell one of its companies to a strategic buyer, as the pro-competitive effects of separating affiliated competitors may well be ignored. At the same time, private equity should understand that the DOJ will likely try to continue to apply the traditional rule to any effort to acquire another competitor in the market.
Originally published in The Deal Pipeline
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