Acquisitions are a good thing for companies and shareholders. They bring new customers, faster growth, new technologies, economies of scale, and create other efficiencies. But for user-review software heavyweight Bazaarvoice, the fallout from its ill-fated 2012 acquisition of competitor PowerReviews just hit a new, nightmarish low-point last week as the Justice Department filed a 60-page document in connection with an antitrust lawsuit, asking for complete divestiture (forced sale) of the PowerReviews assets.
And divestiture was just the beginning.
Because 20 months had passed since the acquisition, the government argued that additional steps were needed to “restore the pre-merger state of competition.” On top of divestiture, it asked the court to:
- Force Bazaarvoice to provide cross-network syndication services to the purchaser of the PowerReviews assets at no charge;
- Require Bazaarvoice to waive trade-secret/confidentiality restrictions for any employees hired by the divestiture buyer;
- Bar Bazaarvoice from interfering with the buyer’s efforts to hire Bizaarvoice employees, even by offering to increase employees’ compensation;
- Provide the buyer access to new technology developed by Bazaarvoice after the merger;
- Require Bazaarvoice to license additional assets to the buyer if the sale does not transfer a “critical mass” of customers to the new company;
- Allow existing customers to terminate their existing contracts with Bazaarvoice;
- Appoint a watchdog (for four years) with complete access to Bazaarvoice’s files and personnel to ensure compliance;
- Require Bazaarvoice to notify the government of any transaction greater than $10 million.
Lest there is any doubt, these are draconian measures. Any one standing alone would be onerous. In combination, they are crippling and would obligate Bazaarvoice to underwrite the creation and success of a direct competitor by launching and supporting a competing venture using its own technology, employees, trade secrets and customers. If most or all of the demands are granted, the divestiture buyer would be put into a position where failure is nearly impossible.
How did a half-billion dollar company end up in this position? A full retrospective is still premature, but bad documents and hubris were key contributors to the downfall.
Bad decisions appeared from the very beginning. The deal’s total size of $168 million was potentially large enough to require government approval, but PowerReviews’ revenues were just small enough that a loophole allowed it to avoid pre-merger government clearance, even though the deal could still be challenged post-merger. Despite acquiring a direct competitor in a niche market with few players, Austin, Texas-based Bazaarvoice rolled the dice, perhaps hoping the relatively small merger would go unnoticed. The gamble failed – the Justice Department announced an investigation just two days after the June 12, 2012 closing and filed suit in January 2013.
Section 7 of the Clayton Antitrust Act prohibits mergers whose effect “may be substantially to lessen competition, or to tend to create a monopoly.” To prevail, the government needed to show a “reasonable likelihood” of anticompetitive effect.
At trial, the most damning evidence of “lessened competition” came from Bazaarvoice’s own employees and executives. Documents described PowerReviews as the “fiercest” competitor that was “challenging Bazaarvoice’s price points.” PowerReviews was “an ankle-biter that cause[d] price pressure in deals,” and it was “common for PowerReviews to provide extremely low pricing to our clients to push them in their favor.”
Competition was heated and personal. Combative attitudes were common, with one employee writing, “I want to screw PR and out them on their heels by wrecking a few of their big accounts and getting us a couple supernodes. You in? Let’s crush these MFs.” Another echoed the desire to “crush” PowerReviews but proposed instead: “damnit, lets just buy them now.” With respect to the acquisition, executives noted that it would provide “relief from … price erosion” that there would be “[n]o meaningful direct competitor” after acquiring PowerReviews.
These emails formed the core of the government’s case, and their breathtaking bluntness has already prompted some to label Bazaarvoice a poster child for how a handful of poorly worded documents can blow up in unexpected ways. Of course, they provide an excellent example for what not to say in emails, particularly when considering an acquisition that may undergo competition review. The language and tenor of the Bazaarvoice emails is unlikely to be unique in the high-octane environment of the tech industry, and their impact in this instance should be a cautionary tale.
The DOJ indicated it intends Bazaarvoice to be a warning for companies contemplating potentially anticompetitive transactions below the official reporting threshold, with Assistant Attorney General Bill Baer publicly announcing, “anticompetitive transactions that are not reported to federal agencies will not receive a free pass.’’ Less explicit, but equally important, was the court’s signal that companies in the tech industry are not shielded from antitrust scrutiny simply because of the industry’s “dynamism” or “rapid change.”
Merger review cases frequently occur in waves, and it would not be surprising for the Justice Department to leverage its experience and arguments in this case to challenge other tech mergers in the near future. Watch your emails if you fall into the crosshairs.
Jiaming “Jimmy” Shang is a senior attorney at the San Francisco Office of Sedgwick LLP and a member of its Antitrust and Unfair Competition Practice Group. He received his J.D. from the University of California – Hastings College of Law and his B.A. from Claremont McKenna College.