On August 19, 2010, the FTC and the DOJ issued the 2010 Horizontal Merger Guidelines, which are available on the FTC’s website at http://www.ftc.gov/os/2010/08/100819hmg.pdf. The five-step analytical process outlined in the 1992 Horizontal Merger Guidelines-market definition, competitive effects, entry, efficiencies, and failing firm defense-has been replaced with a more flexible approach to competitive effects analysis. That being said, each individual element still continues to play a role in the revised merger review process.
The antitrust agencies make clear that the goal of the Guidelines is to provide lawyers, courts and others outside the agencies a transparent view of how the antitrust agencies actually review mergers. The antitrust agencies believe that in the past some courts may have taken too restrictive of a view of the 1992 Guidelines (holding them against the agencies) rather than focusing on the totality of the circumstances presented by the agencies.
The unifying theme of the 2010 Guidelines is that mergers should not be permitted to create, enhance, or entrench market power or to facilitate its exercise. A merger enhances market power if it is likely to encourage one or more firms to raise price, reduce output, diminish innovation, or otherwise harm customers as a result of diminished competitive constraints or incentives.
A merger can enhance market power simply by eliminating competition between the merging parties – called “unilateral effects” – or by increasing the risk of coordinated or interdependent behavior among rivals – called “coordinated effects.” In any given case, either or both types of effects may be present, and the distinction between them may be blurred.
Types of evidence that the DOJ and the FTC have historically found most informative in predicting the likely competitive effects of mergers include: (1) actual effects observed in consummated mergers; (2) direct comparisons based on experience, including historical events that are informative regarding the competitive effects of the merger; reliable evidence based on variations among similar markets; and how prices in similar markets vary with the number of substantial competitors in those markets; (3) market shares and concentration in a relevant market; (4) substantial head-to-head competition; (5) disruptive role of a merging party and the extent to which the merger may lessen competition by eliminating a “maverick” firm to the detriment of customers.
The most common sources of reasonably available and reliable evidence are the merging parties, customers, other industry participants, and industry observers.
The Guidelines make clear that market definition is no longer a prerequisite to undertaking competitive effects analysis; instead, it is complementary to direct analysis of competitive effects. In other words, the agencies do not need to define the relevant market as it would like to rely on a more realistic approach in determining competitive effects. In practice, the agencies have been operating this way for some time, but private and government lawyers would still spend a lot of time arguing over market definition (an imprecise inquiry) and market share calculations based off of the imprecise market definition. While indicating that defining the relevant market is not a prerequisite, the agencies acknowledged that they do “normally” define relevant markets and consider market shares and concentration as part of their competitive effects analysis.
Indeed, the agencies will still employ the hypothetical monopolist test as the methodology for defining markets. Critical loss analysis is explicitly mentioned as a tool for undertaking the hypothetical monopolist test. Critical loss identifies for any given price increase the quantity in sales that can be lost before the price increase becomes unprofitable. The agencies will require the analysis to be consistent with evidence of customer substitution, including information inherent in the margins of profit maximizing firms. The HHI thresholds for determining when a merger in a highly concentrated market will be presumed to enhance market power have been increased from a post-merger HHI of 1800 with a delta HHI of 100 to a post-merger HHI of 2500 with a delta HHI of 200.
The discussion of unilateral effects analysis in mergers involving differentiated products has been expanded. The presumption that a combined market share of 35% implies that the merging firms’ products are close substitutes has been dropped. The relevance of diversion ratios and pre-merger margins has been more clearly spelled out, but without any thresholds analogous to the 10% efficiency credit that is noted in academic writing about the upward pricing pressure test. The theory is relatively easy to articulate: If the producer of one product acquires a close substitute product, it may have an incentive to increase prices on one of them because some of the resulting sales will be captured by the substitute. A prediction of whether this may actually happen requires estimates of sales lost by the product subject to a hypothetical price increase; the percentage of the lost sales likely to be captured by the newly acquired product; and the future incremental profit margins on both. The revised Guidelines acknowledge that there may be a number of alternative economic models and information relevant to the analysis of unilateral effects.
Regarding coordinated effects analysis, the agencies are likely to challenge a merger if the merger leads to a moderately or highly concentrated market and if that market shows signs of vulnerability to coordinated conduct. A market is found to be more vulnerable to coordinated conduct if there have been previous collusion attempts, there is price transparency, products are homogeneous, customers face low switching costs, suppliers use meeting-competition clauses, and demand is inelastic (among other factors). In addition, the agencies recognize a sliding scale in that the higher the HHI, the greater the likelihood that the agencies will investigate.
Regarding the role of entry, the timely, likely, and sufficient language has been retained, but some changes have been made. The Guidelines eliminate the distinction between committed and uncommitted entrants from the 1992 version. Rapid entrants can be included in the initial market definition. Actual history of entry is given substantial weight. For sufficiency of entry, the agencies look for reliable evidence that entry will replicate at least the scale and strength of one of the merging firms. The reference to “within 2 years” has been dropped from the discussion about timeliness.
The agencies have reviewed partial acquisitions in the past. However, for the first time, the Guidelines include a discussion about the potential competitive effects of such acquisitions, which include giving a minority owner the ability to influence the competitive conduct of the target firm, reduced incentives to compete because of profits gained through the minority interest, and the exchange of competitively sensitive information, which may facilitate coordination.
In summary, the agencies state that the Guidelines provide a more accurate description of actual agency practice in recent years. The Guidelines do not indicate that the agencies have any intention to make radical changes in merger analysis. Rather the Guidelines are an attempt to provide everyone outside of the agencies with a more transparent view of how the agencies actually review mergers. While the Guidelines do seem to provide a more flexible approach to analyzing mergers, this approach may be helpful to both government and private lawyers. The focus will be more on competitive effects and the totality of the circumstances rather than trying to define a relevant product market which is an imprecise inquiry. The agencies believe that the Guidelines will be more instructive to judges as well. Some courts have used the 1992 Merger Guidelines against the agencies so the Guidelines more accurately explain to the courts how the agencies review mergers. While this may mean that there will be less certainty in merger reviews, courts rely on precedence and that fact alone will temper any dramatic changes by the antitrust agencies in terms of challenging transactions.