Deck 2: The Regulatory Environment

Question 1

Federal antitrust laws exist to prevent individual corporations from assuming too much market power such that they can limit their output and raise prices without concern for any significant competitor reaction.

Answer 1

True

Question 2

Speculate as to why the share prices of American and US Airways increased sharply on the day that the agreement with the Justice Department had been reached? Why did the share prices of other major airlines also increase?

Answer 2

Investors approved of the merger and other airline share prices rose due to
the expectation that their profits would rise as a result of less competitive fare discounting.
Not only would American and US Airways profitability be positively affected but also other
airlines as well causing investors to bid up their share prices in anticipation of higher future
profits.

Question 3

did the delay in filing the Justice Department lawsuit impact the economic viability of American Airlines?

Answer 3

The delay created an unnecessary amount of uncertainty for all stakeholders to the process including investors, creditors, workers, suppliers, and communities. The uncertainty disrupted the ability of these stakeholders to plan for the eventual exit of American from Chapter 11. By threatening the merger, it disrupted the ability of American and US Airways to develop plans for the eventual integration of the two airlines. History shows that the complexity of airline integration makes such planning critical to the successful combination of the businesses. Ineffective post-closing integration creates passenger angst, reduces employee morale, and disrupts supply and creditor agreements.
Examination Questions and Answers
Answer true or false to the following questions.

Question 4

Insider trading involves buying or selling securities based on knowledge not available to the general public.

Question 5

do you believe the regulators approved the deal despite the large increase in industry concentration and their awareness that historically increases in concentration would likely result in a further reduction in industry capacity?

Question 6

The Sarbanes-Oxley Act has been very controversial. Discuss the arguments for and against the Act.
Which side do you find more convincing and why?

Question 7

Comment on whether antitrust policy can be used as an effective means of encouraging innovation.
Explain your answer.

Question 8

typical consent decree for firms involved in a merger requires the merging parties to divest overlapping businesses or to restrict anticompetitive practices.

Question 9

When is a person or firm required to submit a Schedule 13D to the SEC? What is the purpose of such a
filing?

Question 10

What factors do U.S. antitrust regulators consider before challenging a merger or acquisition?

Question 11

does the approval of a merger involving a firm in Chapter 11 complicate decision making for regulators?

Question 12

primary reason the Sarbanes-Oxly Act of 2002 was passed was to eliminate insider trading.

Question 13

Give examples of the types of actions that may be required by the parties to a proposed merger subject
to a FTC consent decree?

Question 14

What are the obligations of the acquirer and target firms according to Section 14(d) of the Williams
Act?

Question 15

Assume that you are an antitrust regulator. How important is properly defining the market segment in
which the acquirer and target companies compete in determining the potential increase in market
power if the two firms are permitted to combine? Explain your answer.

Question 16

In an effort to gain approval of their proposed merger from the FTC, top executives from Exxon
Corporation and Mobil Corporation argued that they needed to merge because of the increasingly
competitive world oil market. Falling oil prices during much of the late 1990s put a squeeze on oil
industry profits. Moreover, giant state-owned oil companies are posing a competitive threat because
of their access to huge amounts of capital. To offset these factors, Exxon and Mobil argued that they
had to combine to achieve substantial cost savings. Why were the Exxon and Mobil executives
emphasizing efficiencies as a justification for this merger?

Question 17

Foreign competitors are not relevant to antitrust regulators when trying to determine if a merger of two domestic firms would create excessive pricing power.

Question 18

Discuss the pros and cons of federal antitrust laws.

Question 19

Whose interests do you believe antitrust regulators represent? What trade-offs do antitrust regulators face in making decisions that impact the groups whose interests they represent? Be specific.

Question 20

Having received approval from the Justice Department and the Federal Trade Commission,
Ameritech and SBC Communications received permission from the Federal Communications Commission to form the nation's largest local telephone company. The FCC gave its approval of the $74 billion transaction, subject to conditions requiring that the companies open their markets to rivals and enter new markets to compete with established local phone companies. SBC had considerable difficulty in complying with its agreement with the FCC. Between December 2000 and July 2001, SBC paid the U.S. government $38.5 million for failing to provide adequately rivals with access to its network. The government noted that SBC failed repeatedly to make available its network in a timely manner, to meet installation deadlines, and to notify competitors when their orders were filled. Comment on the fairness and effectiveness of using the imposition of heavy fines to promote
government-imposed outcomes, rather than free market outcomes..

Question 21

U.S. Securities Act of 1933 requires that all securities offered to the public must be registered with the government.

Question 22

The Williams Act of 1968 consists of a series of amendments to the Securities Act of 1933, and it is intended to protect target firm shareholders from lighting fast takeovers in which they would not have enough time to adequately assess the value of an acquirer's offer.

Question 23

Mergers and acquisitions are subject to federal regulation only.

Question 24

A heavily concentrated market is one in which a single or a few firms control a disproportionately large share of the total market.

Question 25

Unlike the Sherman Act, which contains criminal penalties, the Clayton Act is a civil statute and allows private parties injured by the antitrust violations to sue in federal court for a multiple of their actual damages.

Question 26

Market share is usually easy to define.

Question 27

About 40% of all proposed M&A transactions are disallowed by the U.S. antitrust regulators, because they are believed to be anti-competitive.

Question 28

Acquisitions involving companies of a certain size cannot be completed until certain information is supplied to the federal government and until a specific waiting period has elapsed.

Question 29

Negotiated agreements between the buyer and seller rarely have a provision enabling the parties to back out, if the proposed transaction is challenged by the FTC or SEC.

Question 30

Under a consent decree, the regulatory authorities agree to approve a proposed transaction if the parties involved agree to take certain actions following closing.

Question 31

In the U.S., the Sherman Act makes illegal all contracts, combinations and conspiracies, which "unreasonably" restrain trade. The Act applies to all transactions and businesses engaging in both interstate and intrastate trade.

Question 32

Whenever either the acquiring or the target firm's stock is publicly traded, the transaction is subject to the substantial reporting requirements of federal securities laws.

Question 33

Whenever an investor accumulates 5% or more of a public company's stock, it must make a so-called 13(d) filing with the SEC.

Question 34

If the regulatory authorities suspect that a potential transaction may be anti-competitive, they will file a lawsuit to prevent completion of the transaction.

Question 35

In the U.S., the Federal Trade Commission has the exclusive right to approve mergers and acquisitions if they are determined to be potentially anti-competitive.

Question 36

Antitrust laws exist to prevent individual corporations from assuming too much market power such that they can limit their output and raise prices without concern for how their competitors might react.

Question 37

If an investor initiates a tender offer, it must make a 14(d) filing with the SEC.

Question 38

The market share of the combined firms is rarely an important factor in determining whether a proposed transaction is likely to be considered anti-competitive.

Question 39

Whenever an investor acquires 5% or more of public company, it must disclose its intentions, the identities of all investors, their occupation, sources of financing, and the purpose of the acquisition.

Question 40

The U.S. antitrust regulators are likely to be most concerned about vertical mergers.

Question 41

Horizontal mergers are rarely rejected by antitrust regulators.

Question 42

Antitrust regulators rarely consider the impact of a proposed takeover on product and technical innovation.

Question 43

Some state anti-takeover laws contain so-called "fair price provisions" requiring that all target shareholders of a successful tender offer receive the same price as those who actually tendered their shares.

Question 44

The Herfindahl-Hirschman Index is a measure of industry concentration used by U.S. antitrust regulators in determining whether to accept or reject a proposed merger.

Question 45

State antitrust laws are usually quite similar to federal laws.

Question 46

U.S. antitrust regulators in determining if a proposed business combination is likely to be anti-competitive consider only domestic competitors or foreign competitors with domestic operations.

Question 47

Efficiencies rarely are considered by antitrust regulators in determining whether to accept or reject a proposed merger.

Question 48

States are not allowed to pass any laws that impose restrictions on interstate commerce or that conflict in any way with federal laws regulating interstate commerce.

Question 49

The primary shortcoming of industry concentration ratios is the frequent inability of antitrust regulators to define accurately what constitutes an industry, the failure to reflect ease of entry or exit, foreign competition, and the distribution of firm size.

Question 50

Unlike the European Economic Union, a decision by U.S. antitrust regulators to block a transaction may be appealed in the courts.

Question 51

Employee benefit plans seldom create significant liabilities for buyers.

Question 52

U.S. antitrust regulators may approve a horizontal transaction even if it results in the combined firms having substantial market share if it can be shown that significant cost efficiencies would result.

Question 53

There are no state statutes affecting proposed takeovers.

Question 54

Under federal law, states have the right to sue to block mergers they believe are anti-competitive, even if the FTC or SEC does not challenge them.

Question 55

Antitrust authorities may approve a proposed takeover even if the resulting combination will substantially increase market concentration if the target from would go bankrupt if the takeover does not occur.

Question 56

Alliances and joint ventures are likely to receive more intensive scrutiny by regulators because of their tendency to be more anti-competitive than M&As.

Question 57

The Sherman Act makes illegal all contracts, combinations, and conspiracies that "unreasonably" restrain trade.

Question 58

Federal securities and antitrust laws are the only laws affecting corporate takeovers. Other laws usually have little impact.

Question 59

In addition to market share, antitrust regulators consider barriers to entry, the number of product substitutes, and the degree of product differentiation.

Question 60

Antitrust regulators take into account the likelihood that a firm would fail and exit a market if it is not allowed to merger with another firm.

Question 61

All of the following are true of antitrust lawsuits except for

A) The FTC files lawsuits in most cases they review.
B) The FTC reviews complaints that have been recommended by its staff and approved by the FTC
C) FTC guidelines commit the FTC to make a final decision within 13 months of a complaint
D) As an alternative to litigation, a company may seek to negotiate a voluntary settlement of its differences with the FTC.
E) FTC decisions can be appealed in the federal circuit courts.

Question 62

U.S. and European Union antitrust law are virtually identical.

Question 63

Transactions involving firms in different countries are complicated by having to deal with multiple regulatory jurisdictions in specific countries or regions.

Question 64

European antitrust policies differ from those in the U.S. in what important way?

A) They focus on the impact on competitors
B) They focus on the impact on consumers
C) They focus on both consumers and competitors
D) They focus on suppliers
E) They focus on consumers, suppliers, and competitors

Question 65

U.S. antitrust regulators are most concerned about what types of transaction?

A) Vertical mergers
B) Horizontal mergers
C) Alliances
D) Joint ventures
E) Minority investments

Question 66

a tender offer, which of the following is true?

A) Both acquiring and target firms are required to disclose their intentions to the SEC
B) The target's management cannot advise its shareholders how to respond to a tender offer until has disclosed certain information to the SEC
C) Information must be disclosed only to the SEC and not to the exchanges on which the target's shares are traded
D) A and B
E) A, B, and C

Question 67

Antitakeover laws do not exist at the state level.

Question 68

Which of the following represent important shortcomings of using industry concentration ratios to determine whether the combination of certain firms will result in an increase in market power?

A) Frequent inability to define what constitutes an industry
B) Failure to measure ease of entry or exit for other firms
C) Failure to account for foreign competition
D) Failure to account properly for the distribution of firms of different sizes
E) All of the above

Question 69

Environmental laws in the European Union are generally more restrictive than in the U.S.

Question 70

purpose of the 1968 Williams Act was to

A) Give target firm shareholders time to review takeover proposals
B) Prosecute target firm shareholders who misuse information
C) Protect target firm employees from layoffs
D) Prevent tender offers
E) Promote tender offers

Question 71

All of the following are true of the Hart-Scott-Rodino Antitrust Improvements Act except for

A) Acquisitions involving firms of a certain size cannot be completed until certain information is supplied to the FTC
B) Only the acquiring firm is required to file with the FTC
C) An acquiring firm may agree to divest certain businesses following the completion of a transaction in order to get regulatory approval.
D) The Act is intended to give regulators time to determine whether the proposed combination is anti-competitive.
E) The FTC may file a lawsuit to block a proposed transaction

Question 72

Securities Act of 1933 requires the registration of all securities issued to the public. Such registration requires which of the following disclosures:

A) Description of the firm's properties and business
B) Description of the securities
C) Information about management
D) Financial statements audited by public accountants
E) All of the above.

Question 73

determining whether a proposed transaction is anti-competitive, U.S. regulators look at all of the following except for

A) Market share of the combined businesses
B) Potential for price fixing
C) Ease of new competitors to enter the market
D) Potential for job loss among target firm's employees
E) The potential for the target firm to fail without the takeover

Question 74

Which of the following is among the least regulated industries in the U.S.?

A) Defenses
B) Communications
C) Retailing
D) Public utilities
E) Banking

Question 75

All of the following are true about a consent decree except for

A) Requires the merging parties to divest overlapping businesses
B) An acquirer may seek to negotiate a consent decree in advance of consummating a deal.
C) In the absent of a consent decree, a buyer usually makes the receipt of regulatory approval necessary to closing the deal.
D) FTC studies indicate that consent decrees have historically been largely ineffectual in promoting competition
E) Consent decrees tend to be most effective in promoting competition if the divestitures made by the acquiring firms are to competitors.

Question 76

The requirements to be listed on most major public exchanges far exceed the auditor independence requirements of the Sarbanes-Oxley Act.

Question 77

Which of the following are true about the Sherman Antitrust Act?

A) Prohibits business combinations that result in monopolies.
B) Prohibits business combinations resulting in a significant increase in the pricing power of a single firm.
C) Makes illegal all contracts unreasonably restraining trade.
D) A and C only
E) A, B, and C

Question 78

of the following is true about proxy contests except for

A) Proxy materials must be filed with the SEC immediately following their distribution to investors
B) The names and interests of all parties to the proxy contest must be disclosed in the proxy materials
C) Proxy materials may be distributed by firms seeking to change the composition of a target firm's board of directors
D) Proxy materials may be distributed by the target firm seeking to influence how their shareholders vote on a particular proposal
E) Target firm proxy materials must be filed with the SEC.

Question 79

Which of the following are used by antitrust regulators to determine whether a proposed transaction will be anti-competitive?

A) Market share
B) Barriers to entry
C) Number of substitute products
D) A and B only
E) A, B, and C

Question 80

of the following are true of the Williams Act except for

A) Consists of a series of amendments to the 1934 Securities Exchange Act
B) Facilitates rapid takeovers over target companies
C) Requires investors acquiring 5% or more of a public company to file a 13(d) with the SEC
D) Firms undertaking tender offers are required to file a 14(d)-1 with the SEC
E) Acquiring firms initiating tender offers must disclose their intentions and business plans