Skift Take

The joke goes that the only people who make money in mergers are the lawyers and the bankers. If litigation continues over Sabre's acquisition of Farelogix, the lawyers may be laughing all the way to the bank.

Sabre said this week that the U.S Department of Justice suit to block the company’s acquisition of tech vendor Farelogix was “fatally flawed” and denied all of the allegations.

The lawsuit, which the Justice Department launched on Aug. 20, alleged the $360 million merger would give Sabre too much control in airline distribution technology.

Sabre’s response provided a few tidbits of information about Farelogix. It only earned $7 million in the U.S. last year, out of $42 million in revenue worldwide.

The global distribution system provider said that only two of Farelogix’s 15 customers are U.S.-based. However, Farelogix’s website lists Alaska, American, Delta, United, and Hawaiian as customers. The company’s lawyers must have been referring to customers of Farelogix’s direct connect product. American Airlines is the largest U.S. user of that.

Sabre said the company’s small revenue numbers equates to “a close to zero” market share in the U.S. But, like the department, it didn’t offer a market definition.

The Justice Department said U.S. courts often measure market concentration with a particular type of calculation. Courts have found that mergers that increase this index of market concentration by more than 200 and result in a score above 2,500 out of 10,000 are anticompetitive.

The government’s lawyers said they had analyzed the market “for booking services for airline tickets sold through traditional travel agencies in the United States.” They alleged that the proposed acquisition would lead to a more than a 350 point increase in this index and give and Sabre a post-transaction score of more than 4,000 out of 10,000.

Sabre agreed that courts sometimes use that index. But it disputed the department’s calculation.

The exchange of salvos came before Wednesday’s decision by a U.S. appeals court that breathed new life into a separate, eight-year-old US Airways federal antitrust complaint against Sabre.

The U.S. Court of Appeals for the Second Circuit in New York opened up the possibility of a new trial on the allegation that Sabre’s 2011 contract with the airline harmed competition. That case alleges Sabre forced US Airways, which American Airlines Group now owns, to pay excessive booking fees and restrained trade.

It was unclear if that decision would have any impact on the feud between the Justice Department and Sabre. But the repeated mention of American Airlines in the Farelogix case filings hints that the carrier has been goading the Justice Department.

In another intriguing detail in the Farelogix case, Sabre and Farelogix’s private equity owner Sandler denied the department’s claim that Sandler had conducted “a limited sale process” that resulted in “at least one other potential buyer” who was “not a competitor” and who “offered a substantial price.” The department didn’t name the competing bidder. It wasn’t clear how much of that account of the sale process Sabre and the private equity firm were denying.

Delicate Dance

Overall, Sabre’s response to the allegations highlighted the delicate dance the travel technology company has to perform.

On the one hand, it must tell investors that it’s “the leading technology provider to the global travel industry,” as it did in a generic press release last week.

During an August 1 earnings call with investment analysts, Doug Barnett, chief financial officer, said Sabre had “over 80 percent share within large travel management companies in this region [North America], representing airlines’ most valued customers.”

On the other hand, Sabre doesn’t want litigators to think it’s leading the sectors it offers services in by too much. In its filing on Tuesday, it noted “Sabre is not dominant. It’s not even the largest GDS [global distribution system] in the world. Amadeus is.”

Sabre also wants investors to get excited about the potential of the Farelogix acquisition. The company has forecast that the merger will improve its revenue.

But the company also doesn’t want to anger antitrust authorities by suggesting the merger would lead to high market concentration.

In a filing, Sabre’s lawyers said the suit misstates the competitive position of Farelogix. “Farelogix is not disruptive today and will not become so in the future,” Sabre’s lawyers wrote.

But in its message to investors announcing the Farelogix merger, the company highlighted the advantages of helping to speed up the company’s technology prowess in a market where it had product gaps.

Embarrassing Testimony?

The Justice Department alleged it had proof of statements made by Sabre and Farelogix executives, such as text messages, that might be embarrassing if true and presented in a court. Sabre’s lawyers said they were confident that the executive statements wouldn’t be embarrassing when viewed in their full context rather than quoted from selectively.

In a presentation to Sabre’s CEO, Sabre executives emphasized that buying Farelogix would “mitigate risk from potential GDS [global distribution system] bypass,” the Justice Department alleged.

The department quoted a text message allegedly sent on the day of the merger announcement commenting on one of Farelogix’s airline customers. The “FLX [Farelogix] bill is going up big time,” the text allegedly said.

The department alleged it had evidence that in 2018 Farelogix’s CEO Jim Davidson told another potential purchaser of the company that for Farelogix’s service, “the slow adoption was solely and inarguably due to the blocking and pressure the GDSs put on Farelogix, airlines, and travel agents not to adopt.”

In January 2019, a Sabre senior vice president acknowledged, according to evidence the U.S. government’s lawyers claim to have, that airlines view Sabre’s distribution contract restrictions as “abusive, but there’s nothing they can do because they need the distribution and they are tied with a contract.”

While they go against Sabre’s official message, it’s unlikely that professional lapses like the alleged ones quoted above would necessarily merit quashing a merger deal.

Headache-Inducing Issues

Pity the judges that might have to confront airline distribution issues if the case proceeds further rather than settles with Sabre offering airline customers additional concessions. The topics are complex.

Exhibit A: Sabre’s lawyers said in their filing that Farelogix “is not a GDS.” Its lawyers said, “Sabre provides GDS services to both airlines and travel agencies; Farelogix does not.”

However, when it sued Lufthansa over that airline’s decision to break a distribution contract, Sabre’s lawyers argued that Lufthansa should apply its fee tickets booked through distribution technology intermediaries to Farelogix and not just Sabre because Farelogix was functioning in the virtually the same capacity. That case in a Texas court is different, of course, and relates to different legal issues.

Another example of complexity: In its Tuesday filing, Sabre said that “Sabre faces new competition from tech giants in this space, such as Google and SAP.”

On the one hand, neither Google, via its ITA Software subsidiary, nor SAP have recently introduced services to steal share from Sabre. Neither have recently debuted products in the central airline technology business lines of passenger service systems, computer reservation systems, or airline content distribution.

That said, the recent rise of new computing interfaces and airline industry practices might open up the opportunity for new tech players to enter the market.

The Justice Department spent some time talking about its version of industry history. But it’s unclear how much history would matter to a judge rather than future impact when analyzing a merger’s competitiveness.

What’s more, Sabre doesn’t offer the direct connect technology that Farelogix has, and so it could be said not to be taking out a competitor.

In one mental twister, Sabre argued that there are now at least 39 developers of airline tech solutions of the kind that Farelogix primarily specializes in.

However, none of that development happened until several years ago, when Farelogix donated its code to the International Air Transport Association, a trade association of global airlines. The code encouraged the launch of a change in industry messaging standards called the New Distribution Capability. In 2013, Sabre urged the Department of Transportation to block approval of that standard, the Justice Department alleged.

Earlier, in 2011, Sabre allegedly retaliated against American Airlines for working with Farelogix by burying American’s flight options in the search results it distributed to travel agencies to make them less visible to travel agencies.

On the other hand, if Farelogix is so great, why did it attract perhaps as few as only two bidders? Why was the winning bid merely $360 million, which was only 8.5 times the company’s last year revenues? In other words, if airlines truly valued its disruptive importance, why didn’t they outbid Sabre?

To the Lawyers Go the Spoils

The legal documents are full of statements that may seem remarkable to people outside of the legal profession.

For example, the Justice Department alleged that “Business travelers book flights through travel management companies because they provide the extensive customer support and reporting functionality that business travelers typically require.” The department went on: “Business travelers are particularly lucrative customers because they tend to travel more often and spend more than leisure travelers on purchases such as last-minute flights, refundable tickets, and premium seats

Sabre’s lawyers responded to those specific sentences by saying, “Sabre lacks knowledge or information sufficient to form a belief as to the truth of the allegations.”

In a non-legal context, it would be surprising if Sabre couldn’t comment on such generic statements about a customer segment of significant relevance to its revenue.

In other words, given fights over definitions and concepts like that, it’s going to be a contentious legal battle until it ends in a settlement or a decision.

Ironies abound. If the merger is blocked, Farelogix might not receive an equivalent acquisition offer from another company instead. So the actual victim of one possible legal outcome may be Farelogix, the very company the airlines, via the Justice Department, are presumably keen on protecting. If Farelogix has fought for a decade for a place at the table, then it’s quite a twist that regulatory enforcers would be the one to deny it a market reward for its long struggle.

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Tags: farelogix, justice department, mergers and acquisitions, sabre

Photo credit: A view of a Sabre office in Tel Aviv, Israel. The company faces a U.S. lawsuit over its proposed acquisition of tech vendor Farelogix. Auerbach Halevy Architects

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