Question
June 8, 2009
Mr. B. Michael Verne
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
7th & Pennsylvania Avenue, NW
Washington, DC 20580
Dear Mike:
I am writing to confirm our discussion of June 8,2009 regarding the non-reportability under the Hart-Scott-Rodino AntitrustImprovements Act of 1976, as amended ("HSR Act") of the proposedtransaction discussed below.
Proposed Transaction
The business of the acquiring party in the proposedtransaction ("Purchaser") includes the sale and installation ofsecurity alarm equipment, and alarm system maintenance, repair, service andmonitoring. Purchaser will be acquiring from a seller ("Seller")approximately 80,000 to 90,000 U.S. security alarm customer accounts (the"Proposed Transaction"). These security alarm customers pay a fee,typically on a monthly basis, for ongoing alarm system monitoring. Thesecustomers also may require alarm system maintenance, service and repair. Theacquisition of these accounts includes related customer contracts, relatedaccounts receivable, related customer records, rights to certain communicationsassets necessary to provide services to or in connection with the accountsbeing acquired, and certain transitional rights necessary to effectivelytransfer the accounts being sold. Please assume that the HSR size of thetransaction test and size of the parties test would be met.
Seller also is a participant in the security alarmindustry. Seller provides security alarm monitoring both for residential andcommercial accounts. Seller has an independent dealer network that provides thesale, installation, and service of alarm systems. The accounts that Seller isselling to Purchaser are primarily residential accounts although included withthose accounts are some accounts for small commercial customers (e.g., a smallstore). Seller's strategy is to shift its focus away from the residentialaspect of its business to concentrate on commercial accounts. As a part of thisshift in its focus, Seller intends to cease its residential dealer program.(Seller presumes that a number of the terminated dealers will choose to remainin the security alarm business just without any affiliation with Seller.)
Following the Proposed Transaction, Seller stillwill continue serving residential accounts through providing monitoring, atleast for the immediate future. There are a few thousand such residentialaccounts that Purchaser has declined to purchase and that will be retained bySeller following closing, although Seller may choose to sell those accounts inthe future. Further, as a part of its monitoring business, Seller providesmonitoring for approximately 50,000 to 60,000 primarily residential customeraccounts that are owned by other parties (i.e., security and alarm companiesthat do not have their own internal alarm monitoring capability and thatcontract on a wholesale basis with a party like Seller to provide monitoringservices for their customers). These wholesale accounts are not part of theProposed Transaction, and Seller will be maintaining its wholesale businessgoing forward. Seller also will be maintaining and intends to grow itscommercial business. Thus, Seller is not exiting the security alarm monitoringbusiness.
Another legal entity that is part of the sameultimate parent as Seller also owns approximately 10,000 to 11,000 residentialaccounts that are monitored by Seller and are not part of the ProposedTransaction, although Seller's parent intends to sell these accounts as a partof the strategic move to focus on commercial accounts. The ultimate parententity of Seller also has other subsidiaries involved in the security alarmmonitoring business outside the United States.
Purchaser has acquired customer accounts in bulkfrom others in the security alarm industry on a number of occasions in the pastand would intend to make additional such acquisitions in the future. The ProposedTransaction involves the acquisition of more security alarm customer accountsthan in other individual transactions Purchaser has made in the past from othersellers, with the exception of the acquisition of customer accounts that haveoccurred as part of certain past purchases of entire businesses.
Analysis and Conclusions
You confirmed the following:
(I) The Proposed Transaction is notreportable under the HSR Act regardless of the value of the transaction or thesize of the parties;
(2) The Proposed Transaction isexempt under the ordinary course statutory exemption contained in the HSR Act.15 U.S.C. 18a(c)(1) (exempting "acquisitions o goods or realtytransferred in the ordinary course of business"). See Informal StaffOpinion 0709016;
(3) The ordinary course HSR Actexemption applies to the acquisition of security alarm customer accounts where,as here, Seller will still continue to monitor security alarm accounts. Theexemption applies even if Seller is exiting or intends to exit the provision ofmonitoring or other security alarm services and activities for residentialcustomers given that it intends to continue to serve commercial accounts. SeeABA Section of Antitrust Law, Premerger Notification Practice Manual (4th ed.2007), Interpretation #8 ("if the bank were selling all of the assets of asubsidiary that represented all its consumer loans, but retained anothersubsidiary that handled its commercial loan business, the transaction would beexempt in the ordinary course.");
(4) The ordinary course HSR Actexemption applies where as here Purchaser has purchased security alarm customeraccounts in bulk in the past and intends to do so in the future; and
(5) The ordinary course exemptionstill applies to the Proposed Transaction even if it involves the acquisitionof more security alarm customer accounts than has occurred in past acquisitionsby Purchaser or by others in the industry.
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Please let me know as soon as possible if youdisagree with any of the conclusions discussed above, or if I havemisunderstood any aspect of your advice. Thank you for your assistance
,