On July 19, 2023, the U.S. Department of Justice Antitrust Division (DOJ) and the Federal Trade Commission (FTC) jointly released the long-awaited 2023 Draft Merger Guidelines (the new Merger Guidelines or Draft Guidelines). After a 60-day comment period that closes on September 18, 2023, the DOJ and FTC will finalize the new Merger Guidelines. This single set of guidelines will replace all existing merger guidelines (horizontal and vertical) issued by the DOJ and FTC (the Agencies).
What the Draft Guidelines Say
As expected, the new Merger Guidelines reflect the Biden administration’s goal of “reinvigorated merger enforcement” and are a major rewrite of previous guidelines. As articulated by the Agencies, the goal of the Draft Guidelines is to provide the DOJ and FTC with a flexible set of tools to analyze the competitive impact of transactions in a fast-changing economy and to identify problematic deals that previous guidelines may have missed. The Draft Guidelines also expressly aim to inform “the public, business community, practitioners, and courts” on how the Agencies approach merger analysis, the types of evidence the Agencies consider, and when the Agencies may choose to challenge a transaction.
The new Merger Guidelines are built on 13 separate “principles” that layout a framework for how the Agencies will evaluate deals. Specifically, a transaction may raise concerns where it implicates one or more of these principles:
- significantly increases concentration in a highly concentrated market;
- eliminates substantial competition among firms;
- increases the risk of coordination;
- eliminates a potential entrant in a concentrated market;
- creates a firm that controls products or services necessary for rivals to compete;
- creates market structures that foreclose competition;
- entrenches or extends a dominant position;
- furthers a trend toward concentration;
- is part of a series of multiple acquisitions;
- affects competition with respect to a multi-sided platform;
- consolidates competing users of a good, service, or type of worker;
- involves partial ownership or minority interests; or
- otherwise substantially lessens competition or tends to create a monopoly.
The new Merger Guidelines go on to provide significant detail regarding how the Agencies apply these principles, including the types of evidence that underpin each principle.
What the Draft Guidelines Mean for Deals
In the short term, the Draft Guidelines may not have an obvious impact on merger review because the DOJ and FTC under the Biden administration already use these 13 principles to review mergers. They do, however, for the first time provide key insight into how the Agencies pursue investigations, develop theories of harm, choose to take enforcement action, and argue their cases in court.
Further, the DOJ and FTC have recently used these principles to bring enforcement actions in court with mixed success, especially transactions related to (i) vertical foreclosure of competitors and (ii) elimination of potential competition. Until the Agencies begin consistently winning court actions based on these principles, some of the newer principles are less likely to impact merging parties’ internal deal calculus.
Significantly, the new Merger Guidelines will not be binding on the courts (which have the ultimate power to block or allow transactions in the U.S.), though courts have often viewed the agency guidelines as “persuasive authority.” Courts have historically adopted certain concepts from previous versions of the guidelines — such as the concentration thresholds required to establish a prima facie case and the test for supply-side substitutability — both in favor of and against the government position in a particular case, but they are not required to follow the guidelines. In a departure from previous guidelines, which focused more on the Agencies’ internal evaluation, the new Merger Guidelines liberally cite to case law developed more than half a century ago, showing how the Agencies plan to argue some of their more aggressive positions in court and giving parties an opportunity to prepare for those arguments.
Other Key Takeaways From the Draft Guidelines
There is a much to digest in the 51 pages of guidelines and appendices, but here are several important takeaways:
- Transactions raise presumptive competition concerns at lower market share and concentration levels:
- A transaction raises presumptive concerns where the merging parties’ combined market share is over 30% and the Herfindahl-Hirschman Index (HHI) in the overall market increases by over 100.1 There is no similar market share presumption in the current guidelines.
- A transaction raises presumptive concerns where the post-merger HHI is over 1,800 (i.e., a highly concentrated market) and the deal increases HHI by over 100. The current guidelines use higher thresholds for presumptive harm, and the new Merger Guidelines return concentration thresholds to previous levels.
- Unlike the current Guidelines, which at least note that market shares and HHIs are but one piece of evidence in merger analysis, the new Merger Guidelines are clear that transactions that trip share and HHI thresholds are presumptively problematic.
- Mergers in highly concentrated markets can be presumptively anticompetitive even where one of the parties has a very small share of a relevant market.
- Transactions can raise concerns if the merging parties are significant competitors for specific types of workers with respect to employee wages, benefits, working conditions, and any other factors important to employees.
- The new Merger Guidelines highlight transactions that eliminate potential competitors, which is consistent with the Agencies’ increased scrutiny of deals in the digital/technology sector and especially “killer acquisitions” (i.e., those involving nascent competitors or recent entrants). In fact, the new Guidelines specifically note that “corporate growth by internal expansion is socially preferable to growth by acquisition.”
- The new Merger Guidelines emphasize that vertical mergers (where firms operate at different levels in the same supply chain) can raise serious concerns where the merging parties have the ability and incentive to foreclose rivals from important products, services, or customers that are necessary to compete effectively. This includes deals that reduce rivals’ scale by eliminating access to a particular input. Further, if one of the merging parties has a market share above 50% for a particular input (a “related market”), that share is sufficient to presume that a transaction raises vertical foreclosure concerns.
- The new Merger Guidelines introduce “entrenchment theory,” which applies to deals with no horizontal or vertical overlap, but where the transaction may “entrench” a dominant position. According to the new Guidelines, a dominant position is where “one of the merging firms possesses at least 30% market share.”
- The review of a merger in the context of a broader series of transactions will be particularly important for private equity and serial acquirors. This focus is consistent with public comments from the Agencies the past few years regarding their increased concerns with “roll-up” strategies by private equity firms and other repeat acquirors. The new Merger Guidelines provide guidance to bring enforcement actions against such acquisitions.
- An emphasis on partial/minority acquisitions reflects the Agencies’ increased scrutiny of potential misuse of competitively sensitive information and interlocking directorate issues.
- The new Merger Guidelines appear skeptical of procompetitive arguments around entry, repositioning, and efficiencies and present high evidentiary hurdles to making successful arguments.
- Internal business documents are critical to the Agencies’ antitrust analysis, and such documentary evidence is mentioned throughout the new Merger Guidelines.
- Transaction terms, such as a significant purchase price premium, can be evidence of an anticompetitive transaction.
1 The HHI measures concentration levels and is defined as the sum of the squares of competitors’ market shares. HHI increases as a market has fewer competitors with higher market shares.
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