On August 19, 2010, the DOJ and the FTC issued Horizontal Merger Guidelines, which are revisions of the joint agency guidelines first issued in 1992. The new Guidelines are available on the FTC's website by clicking here. The Horizontal Merger Guidelines relate to mergers and acquisitions involving competitors while the DOJ Merger Guidelines of 1984 continue to apply to vertical and other nonhorizontal mergers. After announcing the revised Guidelines project in September 2009, the agencies held workshops and received "hundreds of public comments." In many respects, the revisions, summarized here, are quite significant.
In their August 19 press release, the agencies state that the Guidelines "derive from the agencies' collective experience" and "better reflect [their] actual practices." They claim that the new Guidelines "take into account the legal and economic developments since the 1992 guidelines were issued" and "[c]larify that merger analysis does not use a single methodology, but is a fact-specific process." Indeed, some portions of the new Guidelines, particularly the much longer Section 6 on unilateral effects, incorporate new economics that one leading economist has referred to as involving "a potentially powerful new tool" but one at a "nascent stage of refinement."*
Although the new Guidelines revise upward the post-merger concentration levels of concern, in other respects they signal more aggressive merger review. For example:
- The agencies may not need to define relevant product and geographic markets, particularly where evaluating unilateral effects in mergers involving differentiated products.
- A threat of post-merger coordinated interaction may be found even if "terms of coordination" cannot be identified.
- Consummated mergers may be particularly threatened since post-merger price increases would be fatal, but an absence of such increases would be interpreted as strategic conduct by the merged firm.
- A viable ease of entry defense may now require proof of actual past entry.
- Even though customer testimony may be grounded in hostility it may, nevertheless, be "valuable" and "highly relevant."
- Power buyers may be to no avail as a merger defense unless all customers are "powerful."
Demotion of Market Definition
The new Guidelines move away from a five-step analysis of mergers, which began with defining the relevant product and geographic markets, and adopting a more flexible approach in determining a merger's effect on competition. The Guidelines now explicitly state that "[t]he Agencies' analysis need not start with market definition" (Sec. 4) and a substantial new Section 2 describes the different kinds of evidence of competitive effects that may be considered and the sources of such evidence. The Guidelines also state that application of some of these tools "[does] not rely on market definition." Sec. 4. For example, the Guidelines indicate that evidence that the prices of products in a candidate market have increased "can itself establish that those products form a relevant market." Sec. 4. More closely read, however, it appears that the agencies' plan to proceed initially to matters other than market definition may be applicable only when considering unilateral effects in differentiated product markets as opposed to such effects in homogenous product markets and when considering coordinated effects generally.
This material is a dramatic move away from and even inconsistent with the 1992 Guidelines, which stated that the agencies "evaluated the likely competitive impact of a merger within the context of economically meaningful markets." The new Guidelines are also inconsistent with many judicial decisions holding, as in the duPont case, that "[d]etermination of a relevant market is the necessary predicate" to any claim that a merger is illegal. These and other inconsistencies may well produce interesting judicial commentary. Former Guidelines have certainly influenced legal developments but the Guidelines are not "law" and cannot repeal existing decisions.
The Separate Statement of Commissioner Rosch
The new Guidelines were accompanied by a "statement" of Commissioner Rosch, who voted for them but, nevertheless, sounded vigorous objections. He claims that the Guidelines project was "largely managed" by three unidentified economists, "trained and steeped in price theory," with the result that they contain an "overemphasis on economic formulae and models based on price theory," evidence which he says has been repeatedly rejected by the courts. He urges that "economic theories based on prices and margins" are simply "theories" that may be used "to corroborate . . . the empirical evidence [but] they are not substitutes for that evidence." Rosch concludes by claiming that the new Guidelines fail both to describe what agency lawyers consider in merger investigations and to provide helpful guidance to the courts.
Summary of Major Changes in the New Guidelines
- Redefinition of Concentration Categories: Using the HHI concentration index system, redefining the concentration categories so that "highly concentrated" markets no longer have an HHI of 1800 or higher but 2500 or higher and unconcentrated markets are no longer 1000 or less but 1500 or less. Sec. 5.3. Post-merger markets in the HHI range of 1800 - 2500, formerly in the "highly concentrated" category are now in the "moderately concentrated" category.
- Safe Harbors: As a practical matter, the revised Guidelines suggest there is a safe harbor for mergers resulting in an unconcentrated market, i.e., an HHI of 1500 or less or where, regardless of the post-merger HHI, the change or "delta" is less than 100 points. In pure concentration terms, the merger creating the greatest concern is where the post-merger HHI exceeds 2500 and the delta exceeds 200. Such mergers "will be presumed to be likely to enhance market power." Sec. 5.3.
- Market Definition: Although, as noted, the Guidelines take the position that market definition may not always be necessary, they contain lengthy and detailed sections discussing product and geographic market definition issues. Some of this material enhances the likelihood the merger would be challenged, including warnings against defining overly-broad markets ("the competitive significance of distant substitutes is unlikely to be commensurate with their shares in a broad market"), retention of the hypothetical monopolist SSNIP system ("small but significant and nontransitory increase in price") but noting that it may define more than one relevant market including one where customers substitute substantially to products outside the market. Sec. 4.1.1. The Guidelines also include dense discussion of critical loss, predicted loss and profit margin analysis.
- "Rapid Entrants:" Firms that would enter the market rapidly in response to a SSNIP, formerly referred to as "uncommitted entrants," are now "rapid entrants." Sec. 5.1. The new Guidelines, however, do not identify one category of rapid entrants previously identified, i.e., firms having no productive assets relevant to the market but who could acquire such assets within one year in response to a SSNIP without incurring sunk costs.
- Merger Involving a Potential Entrant: The new Guidelines have a statement that did not appear in the 1992 Guidelines, viz., "[a] merger between an incumbent and a potential entrant can raise significant competitive concerns." Sec. 5.3.
- Unilateral Effects: The two-page discussion of unilateral anticompetitive effects that appeared in the 1992 Guidelines has been expanded to five pages in the new Guidelines. The new Guidelines point out that in a differentiated product market, a merger may produce an adverse unilateral effect if the combined company can increase the price of a product one of the companies sold and "a significant fraction of the customers" who purchase that product are simply diverted to a product formerly sold by the other firm. The new Guidelines also state that determining unilateral effects where differentiated (but not homogenous) products are involved "need not rely on market definition" and that "[t]he Agencies rely much more on the value of diverted sales than on the level of the HHI for diagnosing unilateral price effects in markets with differentiated products." Sec. 6.1.
- Coordinated Interaction: The substantial revisions that have been made in this section will operate to make it easier for the agencies to claim a merger threatens to produce coordinated interaction. For example, the new Guidelines no longer contain the formula, "Successful coordinated interaction entails reaching terms of coordination that are profitable to the firms involved and an ability to detect and punish deviations that would undermine the coordinated interaction." 1992 Guidelines, Sec. 2.1. The new Guidelines not only abandon the idea that "terms of coordination" must be "reached," but state that coordinated interaction "can involve parallel accommodating conduct not pursuant to a prior understanding." Sec. 7. Indeed, the words, "terms of coordination" (or their equivalent) occurred 22 times in the 1992 Guidelines but not once in the new Guidelines. The new Guidelines also drop the recitations in the 1992 Guidelines that coordinated interaction "may be limited or impeded by product heterogeneity," by the fact that firms have incomplete information about rivals businesses, by differences in business operations or firm heterogeneity. 1992 Guidelines Sec. 2.11. At the same time, the new Guidelines acknowledge more directly that a significant increase in concentration producing a moderately or highly concentrated market will be necessary (Sec. 7.1) thereby indicating that market definition and assessment of concentration will be essential in gauging the likelihood of coordinated interaction.
- Consummated Mergers: The Guidelines contain a "gotcha" provision relating to consummated mergers, pointing out that evidence of post-merger price increases can be damning but that the merger may also be held illegal even without such evidence because the firm, aware of possible post-merger antitrust review, might be "moderating its conduct." Sec. 2.1.1.
- Entry: The entry section of the new Guidelines indicates that merging companies will find it more difficult to make an "ease of entry" defense. The 1992 Guidelines commenced with an opening sentence to the effect that easy entry would prevent merging companies from creating or enhancing market power. They continued by reciting that where entry would be timely, likely and sufficient, the merger would "raise no antitrust concern and ordinarily require no further analysis." 1992 Guidelines Sec. 3.0. The new Guidelines contain no such global, deal-clearing comments. Rather, they commence by saying that the prospect of entry will alleviate concerns only if the entry would "deter or counteract any competitive effects of concern." They note that the agencies will give "substantial weight" to evidence relating to the "actual history of entry into the relevant market." Sec. 9. The requirement that entry be "timely" now states that "entry must be rapid enough" but drops the former two-year requirement. Sec. 9.1. As regards the "sufficiency" requirement, a sentence in the new Guidelines states, "Entry by a single firm that will replicate at least the scale and strength of one of the merging firms is sufficient." Sec. 9.3.
- Customer Testimony: While acknowledging that customers may favor or oppose a merger for "reasons unrelated to the antitrust issues," the Guidelines also state that customers can "provide valuable information" and that it may be "highly relevant." Sec. 2.2.2.
- Power Buyers, Mergers of Competing Buyers and Partial Acquisitions: The new Guidelines contain new sections on these topics. The section on "Powerful Buyers" states that the agencies will consider whether they may be able to forestall post-acquisition price increases but that they will take note (1) if the buyer had been avoiding pre-acquisition price increases by playing one merger partner off against the other and (2) that even if powerful buyers may be able to protect themselves, other buyers might still be harmed.
Companies considering mergers may be able to take some comfort in the acknowledgement that concentration levels of concern are higher than the 1992 Guidelines indicated. Their lawyers may look forward to relying on judicial precedent that, among other things, would require the agencies to proceed only after they have proved the relevant markets. All stand to gain substantially from the new Guidelines since they disclose more fully how the agencies now assess proposed mergers.
*Robert Willig, Public Comments on the 2010 Draft Horizontal Merger Guidelines
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