On January 16, 2024 the long-running M&A saga of Spirit Airlines took a seemingly decisive turn when a federal judge sided with the U.S. Department of Justice’s Antitrust Division and rejected JetBlue Airways’ attempt to buy it in a $3.8 billion transaction (the parties are appealing). Two weeks later, Amazon cancelled its $1.7 billion acquisition of iRobot in the face of increasing headwinds from EU and U.S. antitrust regulators, and a decline in the Roomba robot vacuum-maker’s value over the 18-month pursuit.

Just a few years ago, these outcomes would have been unlikely if not unthinkable. Recent decades saw an extended period of corporate concentration driven by cheap capital, endless upside and light-touch regulation, leaving the big banks of Wall Street consolidated into five giant institutions; the pharmaceutical industry dominated by a handful of companies; and major airline carriers reduced twelve in 1980 to four in 2024. But with global M&A activity down significantly over the past two years, companies are still getting used to the higher cost of capital and more rigorous antitrust scrutiny, particularly within the United States.

In this post, we examine several recent mergers that fell apart, the wider dealmaking climate, the scope of the Biden Administration’s focus on competition, and what it all means for boards and investors.

Spirit, Frontier and JetBlue

The Spirit/JetBlue/Frontier saga goes back to 2022. Spirit held a special shareholder meeting on June 30 of that year to consider a final offer from Frontier worth $23.05 per Spirit share in cash and (mostly) equity. JetBlue contested this meeting with a competing all-cash bid worth at least $33.50, urging Spirit shareholders to reject the Frontier offer.

Spirit’s board continued to favor a tie-up with Frontier, arguing that Frontier’s offer, though much lower, stood a far better chance of receiving regulatory approval than JetBlue’s offer. Spirit’s board made this assessment in part due to the separate existence of the “Northeastern Alliance” (NEA), under which JetBlue coordinated flights with American Airlines, and which was already being challenged by the DOJ.

In our original assessment of the competing offers between Frontier and JetBlue for Spirit, Glass Lewis sided with Spirit’s board in support of the Frontier transaction, noting the excess regulatory risk posed by JetBlue’s merger proposal, particularly absent JetBlue showing willingness to agree to a “hell-or-high-water” provision or to abandon the NEA. Of particular note, in May 2023, a U.S. district court judge ruled that the NEA violated antitrust law. Soon after, JetBlue opted to walk away from the NEA altogether to focus its efforts of trying to see the Spirit deal through, though American Airlines is continuing on its own with an appeal.

The contested Spirit shareholder meeting to consider the Frontier deal was adjourned multiple times before the parties finally called off the deal on July 27, 2022 due to insufficient support among Spirit shareholders. Shortly thereafter, Spirit agreed to JetBlue’s merger proposal, which was backed by 95% of the Spirit shareholders voting at the new special meeting held on October 19, 2022.

Again, Glass Lewis’ analysis for clients prior to this meeting highlighted the substantial regulatory risk of JetBlue’s proposal, reflected in the unusually high merger arbitrage spread. We also pointed out that the Spirit board’s “prior opposition to JetBlue’s then-hostile bid [may] be used by regulators to bolster their case” against the Spirit-JetBlue combination. This did indeed come to pass, with the DOJ’s complaint directly quoting Spirit’s contested meeting proxy materials.

Nonetheless, absent a competing offer and after noting the mitigating effects of JetBlue’s higher break-up fees of $470 million, we recommended supporting the JetBlue proposal. Even subsequent to approval from shareholders and through to the recent court decision, Spirit’s stock continued to trade well below the offer price.

Two years ago, it was JetBlue that dragged an initially unwilling party in Spirit into a merger, but in a twist of irony, the roles have now seemingly reversed in some respects. Both sides originally put out a joint statement on January 19, 2024 indicating that they would appeal the district court ruling blocking their deal. However, on January 26, JetBlue stated it might soon walk away from the deal due to its belief that certain of the closing conditions would not be capable of being satisfied prior to the outside date (July 2024). Spirit swiftly responded by expressing its belief that there was still no basis for calling off the deal. Several days later, the two sides agreed to seek an expedited appeal of the lower court ruling.

The January 26 statements provide a glimpse into how each side likely views the deal today. From the perspective of JetBlue, it’s evident they’d likely be at peace with walking away from the deal altogether, particularly considering the deterioration in Spirit’s business performance since the original deal terms were first agreed to. From the perspective of Spirit, it’s possible the ultra-low-cost carrier believes a successful court appeal can be achieved.

Alternatively (and arguably more realistically), Spirit is simply taking the view that extending even just the mere possibility of the deal represents the best available option to keep its share price elevated for at least the near term. Considering the relevant industry and market conditions, and absent any renewed takeover interest on the part of Frontier, Spirit likely has few, if any, available strategic options that would be perceived by investors today as being more favorable than JetBlue’s merger proposal, from a shareholder value standpoint. It’s also worth remembering that the JetBlue deal includes a ticking fee mechanism that requires JetBlue to continue paying Spirit shareholders a monthly cash dividend of $0.10 per share until the earlier of the closing date and the outside date, so keeping the prospect of a deal alive allows Spirit shareholders to at least continue receiving this ticking fee for a few more months.

iRobot and Amazon

On January 29, 2024, Amazon and iRobot announced they had mutually agreed to terminate their merger agreement that had originally been announced roughly 18 months’ prior, and that Amazon would pay iRobot a $94 million termination fee. Prior to the deal termination, iRobot shareholders were asked to vote on the Amazon deal on two separate occasions one year apart –  the first vote took place in October 2022 and the second in the same month of 2023 – with iRobot shareholders expressing overwhelming support for the transaction in both instances (support of over 96% of the votes cast).

Unlike the situation at Spirit, Amazon’s acquisition proposal for iRobot did not include an active bidding war. Although iRobot did not undertake a pre-signing market check (out of fear that Amazon would withdraw its bid), no other party ever emerged with a competing offer before or after the deal signing. With iRobot staring at deteriorating standalone prospects at the time, Amazon’s original all-cash offer of $61.00 per share, representing a 22% unaffected market premium, was clearly a welcome sight for iRobot and its shareholders.

Yet, similar to the situation at Spirit, antitrust concerns would come to play a key role in the eventual demise of this deal. In our analysis of the original deal terms, we flagged that iRobot had, unusually for a U.S.-listed merger target, not presented investors with a general timeline for closing. We also noted a widely reported complicating factor, specifically, that current FTC chair Lina Khan had been a longtime critic of Amazon and appeared to be pursuing an aggressive antitrust agenda, particularly against the so-called “Big Tech” firms. Various media reports at the time also suggested that the FTC would look into whether Amazon’s acquisition of iRobot would illegally boost Amazon’s market share in certain markets, as well as whether the data generated about users from iRobot’s Roomba vacuum products would give Amazon an unfair competitive advantage over other retailers.

As the merger closing process dragged on into 2023, iRobot, facing ever-worsening business prospects, found itself in a position of needing a significant capital injection to fund its ongoing operations, a move that required Amazon’s sign-off. In an inflationary environment, that turned out to be costly. Amazon eventually agreed in July 2023 to allow iRobot to obtain a $200 million term loan from a lender (Carlyle) in exchange for a roughly 15% reduction to the amount of the merger consideration, to $51.75 per share.

By the time that iRobot shareholders were asked to approve the revised deal terms in October 2023, the regulatory pressure had spread across the pond, as European regulators had put the deal in their crosshairs after citing concerns that largely mirrored those expressed by the FTC. Further, on September 26, 2023, the FTC announced that it, together with 17 other state attorneys general, had filed a lawsuit alleging that Amazon is a monopolist that uses “interlocking anticompetitive and unfair strategies to illegally maintain its monopoly power.” While the unredacted sections of that lawsuit did not specifically reference the iRobot deal, the legal challenge certainly bolstered the generally prevailing view regarding the FTC’s aggressive antitrust enforcement efforts.

In mid-January 2024, Amazon reportedly missed a deadline to offer merger remedies to the European Union, and media outlets subsequently reported that the European Commission intended to block Amazon’s acquisition of iRobot on anti-competition grounds. These regulatory hurdles ultimately contributed to the termination of the deal at the end of the month.

Premium Compensation

Another notable aspect of the iRobot merger relates to the target company’s executive compensation. Like most U.S. public company acquisition situations, iRobot shareholders were asked to cast an advisory vote on golden parachute payments that may be paid to the selling company’s executives pursuant to change-in-control provisions in their employment agreements.

Glass Lewis supported the golden parachute proposal under the original 2022 terms, noting that they represented just 9.3% of the equity premium of the merger. However, one year later, we recommended that our clients oppose the new payout arrangements. The expected value of the equity-based components had risen for all beneficiaries (from $11.5 million to $14.1 million for the CEO) while the deal premium had fallen, such that the parachute valuations were estimated at 69% of the deal premium.

In addition to the golden parachute payments, iRobot’s CEO was slated to receive one-time awards from Amazon to continue as CEO for up to four years post-completion, regardless of performance. As we noted in our analysis, the presence of potentially misaligned incentives raises a question mark over “whether executives are entering this deal with the best interests of long-term shareholders in mind or whether this excessive personal payday has shaped their judgment.”

IRBT shareholder support for the golden parachutes fell from 90% at the first meeting to 74% at the second — even though, despite the reduce offer, support for the merger itself rose from 97% to 98%.

The Bigger Picture

Mergers, when they work, can help companies to realize economies of scale, greater diversification, improved growth prospects, enhanced profitability and other synergies, all of which can result in value accretion for shareholders. That the decades prior to Biden’s election saw widespread corporate consolidation both in the U.S. and globally is well understood. Industry concentration rose steeply across the board. An S&P report notes that in “91 of the 157 primary industries tracked by S&P Global Market Intelligence, the five largest U.S. companies by revenue combine for at least 80% of total revenue among publicly traded companies in their respective industries, up from 71 industries in 2000.”

However, M&A activity has declined significantly from a peak in 2021, falling by an estimated 20% in 2023 compared with 2022 – which itself was also a down year. These trends are primarily explained by macroeconomic factors, most obviously higher interest rates set by central banks to combat inflation (notably, the lack of cheap liquidity directly contributed to iRobot’s reduced value at the second merger meeting).

At the same time that lessening access to capital has slowed down corporate consolidation, antitrust regulation and enforcement activity in the U.S. has ramped up. The Biden government has diverged sharply from prior administrations in its approach to competition and corporate conduct in the American economy. This was affirmed in the president’s 2023 State of the Union address, in which Biden protested against predatory corporate conduct and demanded bipartisan support to strengthen antitrust enforcement.

The shift started soon after he took office, with the appointments of Lina Khan and Jonathan Kanter to head the Federal Trade Commission and DOJ Antitrust Division, respectively. These are the two most important offices for bringing antitrust complaints. Both appointees were well-known for having more aggressive enforcement philosophies than their predecessors. Their appointments signalled a success for the “New Brandeisian” political movement, a concept sometimes referred to as “hipster antitrust”.

In less than three years in office, both authorities have brought high-profile merger challenges, setting new records for the sheer number of challenges (50 in fiscal 2022 compared to 32 the prior year). The governing philosophy at play here appears to be that if enforcers take more shots, they’ll score more baskets.

Some notable results bear this out. A number of proposed mergers have been withdrawn, rejected by a judge, or instructed to unwind following challenges. The list includes Illumina-Grail and Penguin Random House-Simon & Schuster, while Epic Games, maker of the ‘Fortnite’ video game, recently won an antitrust lawsuit it brought against Google. Misses for the government include the 2022 DOJ loss in court over the UnitedHealth and Change Healthcare merger and the failed injunction to stop Microsoft from closing its Activision-Blizzard purchase before a full trial (although the FTC continues to pursue the case).

Meanwhile, outstanding challenges continue to await further developments, among these the $24.6 billion Kroger-Albertsons deal, the FTC’s probes into the confluence of AI start-ups and big tech firms. Among those ordered to provide information on investments and partnerships were reportedly OpenAI, Anthropic, Microsoft, Amazon, and Alphabet. And though inspecting merger proposals is a large part of the remit of an antitrust lens, it also has implications for corporate (mis)conduct and accountability to its stakeholders, including shareholders.

Indeed, while M&A activity understandably gets the most attention, the scope of the enhanced U.S. focus on competition extends beyond dealmaking. The non-merger components described above in relation to the larger acquiring entities, specifically the FTC/state AGs lawsuit against Amazon practices and the striking down of JetBlue’s NEA with American Airlines, emphasize that antitrust risk is not limited to companies seeking to combine or acquire one another; enforcers can also take action against the commercial decisions and conduct of an existing ‘standalone’ corporation.

The View from Europe

These developments represent a sea change in U.S. antitrust enforcement, but overseas observers may see it as catch-up. The European Commission has earned its reputation as an aggressive competition enforcer by taking actions such as the €2.42 billion fine against Google in 2017 for breaching antitrust rules. It continues to periodically issue dramatic enforcements, such as prohibiting Illumina’s acquisition of GRAIL and a reported challenge to Amazon-iRobot that helped dampen that now-abandoned deal.

Meanwhile, the UK’s Competition Authority blocked Microsoft-Activision before later approving it subject to concessions. In December Adobe and Figma abandoned their tie-up after assessing that “there is no clear path to receive necessary regulatory approvals from the European Commission and the UK Competition and Markets Authority” (the Antitrust Division had also reportedly been preparing a challenge and released a statement from Kanter welcoming the decision to abandon the deal).

Board Interlocks

Another facet of the increased U.S. antitrust scrutiny is the Department of Justice’s recent focus on potentially illegal board interlocks. Pursuant to Section 8 of the Clayton Act, directors and officers are prohibited from serving simultaneously on the boards of competitors, subject to limited exceptions. Section 8 is designed to prevent opportunities for directors to coordinate through interlocking directorates, explicitly or implicitly. By eliminating this possibility, Section 8 is also intended to prevent other antitrust violations before they occur.

This prohibition has been in effect since 1914, but in recent decades the DOJ has only very sporadically enforced it outside of the context of merger reviews. However, the Antitrust Division under Assistant Attorney General Kanter has begun to significantly ramp up its focus on competitors sharing company directors, which, as he stated, “further concentrates power and creates the opportunity to exchange competitively sensitive information and facilitate coordination- all to the detriment of the economy and the American public.”

The Division’s efforts to deter Section 8 violations began to bear fruit in October 2022,and to date the enforcement initiative has led to fifteen interlocking director resignations from eleven boards. Most recently, in August 2023 the Division announced that two directors of Pinterest Inc. resigned their positions at the board of Nextdoor Holdings, Inc. in response to the enforcement initiative (without the directors or either company admitting liability). Specifically, these interlocking directorships raised concerns as both companies are both large social networks.

Implications for Investors

In principle, competition is thought to be worth policing to prevent dominant firms abusing their market position through anti-competitive practices, as well as to protect the interests of consumers. As illustrated by the recent cases described above, protecting the interests of shareholders doesn’t always factor in.

The court’s decision to block the JetBlue deal contributed to Spirit’s share price collapsing by more than 47% that day. Spirit’s shares have since traded in the mid- to high-single digits, well below the $29.85 per share that Spirit shareholders would be eligible to receive in the JetBlue deal today (after accounting for the relevant ticking fee offsets). If the court appeal is unsuccessful, Spirit likely faces a challenging road ahead, as it has around $1.1 billion in senior debt coming due in 2025, a looming issue that is further compounded by a host of other challenges to its business. At least one equity analyst has even suggested that a likely scenario for Spirit could involve a bankruptcy and subsequent liquidation.

The situation facing iRobot is no less dire. With the Amazon deal no longer in play, iRobot now finds its shares trading in the low to mid-teens, a far cry from the $51.75 per share that shareholders would have been slated to receive from Amazon. Additionally, on the day that the Amazon deal was terminated, iRobot announced a significant operational restructuring that included its Chair and CEO stepping down, a 31% workforce reduction, the closure of certain offices and various other cost cuts. The struggling robot vacuum maker is now left trying to pick up the pieces as it tries to navigate a more competitive industry landscape on its own and return to profitability.

Despite these negative outcomes, this climate of stronger enforcement is not necessarily bad for investors, at least in some circumstances. On many occasions (see Cigna in Dec 2023) the share price of a merging party, particularly the buyer, has risen upon notice of its abandonment. Prior to Arm Holdings conducting a U.S. IPO in September 2023, NVIDIA had spent much of the prior few years attempting to prise it away from Softbank. In January 2024, the CEO of Arm, whose stock has risen 16% since its IPO, implied that the protracted but ultimately failed acquisition attempt by NVIDIA may have helped the company determine its long-term strategy as an independent concern.

Implications for Boards

Corporate boards will need to give due consideration to whether a deal can truly make it through the current antitrust regimes, whether in the U.S. or abroad, and this could involve having to think about merger antitrust issues in a different light than in years’ past. Boards of potential targets will likely have to look at deals with a far more critical regulatory lens. The current antitrust environment could point towards regulatory risk protections (e.g., reverse termination fees, ticking fees, and/or securing commitments in the merger agreement that specify the extent to which a buyer must make divestitures or agree to remedies to obtain regulatory approvals) becoming a larger point of contention in deal negotiations.

Target boards should be aware of this — particularly for smaller companies and startups, where the potential to get acquired at a premium has traditionally formed part of the core business plan — but acquirers should also be mindful. After all, old habits are hard to break, not least for executives of megacompanies molded through business combinations and bolt-on acquisitions. The DOJ decision and iRobot termination fee may not represent existential threats to JetBlue and Amazon, respectively, but the increased stakes make the board’s role in assessing strategic options – and ability to rein in management, if necessary – all the more important.

Even if no deal is in play, the Antitrust Division’s focus on director interlocks adds a new wrinkle to the already complex challenge of ensuring appropriate board composition. In their searches for director candidates, many companies look for board members and executives among similar companies in their industry, which can bypass a big hurdle for incoming directors: the ability to get up to speed on the company very quickly, and understand the ins and outs of increasingly complex industries, market circumstances, technological challenges, etc. Now, boards may need to think more outside of the traditional box when it comes to director candidates.

While this may present a headache for nominating committees, it could be a good thing for encouraging diversity of thought on boards. The venerable tenure and tendency towards homogeneity of corporate boards is something of a cliché; with efforts to promote diversity for its own sake increasingly drawing criticism, the threat of Section 8 enforcement could provide a non-ideological driver for companies to refresh their boards, opening the door to new directors with different backgrounds and experience.

Looking Ahead

Regulatory regimes are periodically subject to course correction, particularly after general elections, so there is no guarantee that the more aggressive U.S. government posture will survive an administration changeover. That said, near-zero interest rates do not look set to return, and there is evidence that the tougher enforcement environment has bipartisan support, implying that corporate boards and management teams (and their legal counsel) may not wish to rush a return to the old conventional wisdom.

 

Brianna Castro and Eric Dao contributed to this report.