April 28, 2010
On April 20, 2010, the Federal Trade Commission ("FTC") (in cooperation with the Antitrust Division of the U.S. Department of Justice ("DOJ")) released for public comment new Horizontal Merger Guidelines, which would replace the prior guidelines promulgated in 1992 and amended in 1997. A copy of the new guidelines is available on the FTC’s website (http://www.ftc.gov/opa/2010/04/hmg.shtm) and public comments will be accepted until June 4, 2010. The new guidelines represent the FTC’s and DOJ’s first effort in nearly two decades to revise comprehensively the Horizontal Merger Guidelines. Although the proposed new guidelines may be modified after public comments are received, the likelihood is that there will not be major changes and they are thus a significant development that will have a lasting impact on how the agencies analyze transactions and predict their probable competitive impact.
Like the prior Horizontal Merger Guidelines, the proposed new guidelines purport to describe the analytical process that the U.S. antitrust enforcement agencies use to investigate and decide whether to challenge proposed mergers and acquisitions. The new guidelines address only horizontal mergers — that is, transactions between competitors, or potential competitors. The guidelines do not address possible vertical issues, which may arise in mergers between firms that do not compete, but operate at different levels within the same supply chain. Nor do the new guidelines address or modify potential reporting requirements under the Hart-Scott-Rodino ("HSR") Act. As was the case with previous versions of the guidelines, the new guidelines apply regardless of whether the transaction is HSR reportable and whether or not the deal has closed.
The proposed new guidelines clarify and amend the basic analytical framework set forth in the prior guidelines in a number of ways, including the following:
- Key Evidence Used to Evaluate Mergers: The new guidelines highlight factors beyond market share and concentration statistics that the agencies use to evaluate the potential competitive effects of a proposed merger. Such evidence includes post-merger price increases (for consummated mergers), econometric studies, head-to-head competition between the merging parties, "disruptive" pre-merger behavior by a merging party (such as the introduction of a new technology), and information gathered from the merging parties, customers, and competitors.
- Market Definition and Market Shares: The new guidelines provide greater detail regarding the methodologies employed by the agencies to define the relevant product and geographic markets and to calculate market concentration. At the same time, the new guidelines generally preserve the traditional "hypothetical monopolist" test for defining markets (i.e., whether a hypothetical firm that controlled all the products in a putative market likely would be able to sustain at least a "small but significant and non-transitory increase in price").
- Presumptions Based on Market Concentration: The new guidelines retain the traditional method for measuring changes in market concentration based on the Herfindahl-Hirschman Index ("HHI"), but raise the thresholds for applying presumptions of anticompetitive harm based on pre- and post-merger market concentration levels. The new guidelines note that these thresholds are not a "rigid screen" and instead represent one of many methods the agencies use to identify potentially anticompetitive mergers.
- Unilateral Effects: The new guidelines elaborate on various methods the agencies have been using to evaluate whether a merger will result in unilateral effects — i.e., the ability and incentive of the merged entity to increase market price or reduce market output without coordination with competitors. For example, the new guidelines describe how the agencies evaluate the likelihood that a merger between firms that sell close substitutes would lead to higher prices and reduced innovation. Under certain circumstances, according to the agencies, "[d]iagnosing unilateral price effects . . . need not rely on market definition" or concentration. The new guidelines drop the presumption in the prior guidelines that a merger is likely to result in unilateral effects where the parties’ combined market share is 35 percent or more.
- Coordinated Effects: As in past iterations of the guidelines, the new guidelines describe the circumstances under which the agencies believe a proposed merger will facilitate coordinated interaction — i.e., enhance the ability and incentives of the merged entity and its competitors to take accommodative action to coordinate price or output. Consistent with the prior guidelines, the key factors for evaluating likely coordinated effects under the new guidelines include any industry history of collusion, pricing transparency, and frequency of bidding opportunities. Notably, the agencies now assert that they may challenge a merger even if they lack evidence demonstrating precisely how the alleged post-merger coordination will occur.
- Entry: Like the prior guidelines, the new guidelines outline the factors the agencies consider in determining whether new entry will be sufficiently "timely," "likely," and "sufficient" to counteract any anticompetitive effects of a proposed merger. In the new guidelines, the agencies dropped the two-year timeframe during which new entry would be considered "timely" and instead state that entry must be sufficiently rapid to prevent significant harm to consumers. The agencies also emphasize that they will give "substantial weight" to evidence showing a history of actual entry in the relevant market. In addition, a new provision states that the "[a]gencies normally look for reliable evidence that entry will be sufficient to replicate at least the scale and strength of one of the merging firms." Under the prior guidelines, establishing an entry defense did not require that the supposed new entrant would have to be a particular size, and instead, the inquiry focused on its likely impact in the market and its timing.
The new guidelines largely retain the existing framework in other respects, including the standards for evaluating merger-specific efficiencies and the "failing firm" defense.
In addition to revising the traditional framework, the proposed new guidelines also address a number of topics that are not discussed in the prior guidelines. These topics, including the following, have long been an integral part of the agencies’ analytical process but until now were not squarely addressed in the guidelines:
- Innovation: For the first time, the agencies have added language to the guidelines addressing "innovation competition." According to the new guidelines, a merger may harm innovation competition by reducing the parties’ incentives either to continue existing product development efforts or to initiate the development of new products. The new guidelines also state, in language that merging companies may well wish to rely upon, that some mergers, particularly mergers that bring together complementary assets, may allow for innovations that are not otherwise possible.
- Partial Acquisitions: Courts and antitrust enforcement agencies have long recognized that a partial acquisition — an acquisition of a minority (non-controlling) ownership interest in a competitor — may raise issues under Section 7 of the Clayton Act and Section 1 of the Sherman Act. The new guidelines address special issues that may arise in connection with partial acquisitions. Generally speaking, the agencies will evaluate whether a partial acquisition will harm competition by (i) giving the acquiring firm the ability to influence the competitive conduct of the acquired firm, (ii) reducing the financial incentives of the acquiring firm to compete, or (iii) allowing the acquiring firm to access the competitively sensitive information (e.g., prices) of the acquired firm.
- Potential Competition: The new guidelines state that "a merger between an incumbent and a potential entrant can raise significant competitive concerns" depending on the market share of the incumbent and the competitive significance of the potential entrant. In such cases, the new guidelines state that the agencies will use projected revenues and market shares to predict the future competitive impact of the potential entrant.
- Mergers of Competing Buyers: The new guidelines include a new section addressing concerns that may arise on the buying side of the market (e.g., where firms compete to purchase inputs, supplies, or goods for resale). In such cases, the new guidelines state that the agencies will use essentially the same analytical framework that applies to mergers involving competing sellers.
- Role of Powerful Buyers: The new guidelines state that the agencies will not presume that the presence of large, powerful buyers will counteract any anticompetitive impact of a merger between upstream suppliers. According to the new guidelines, such buyers do not always have sufficient leverage against merging parties and other, less powerful buyers may still be vulnerable.
As noted above, the proposed new guidelines are subject to public comment and likely will not be finalized for several months. It also remains to be seen how the agencies will apply the new guidelines in practice. Significantly, while the new guidelines represent the views of the U.S. antitrust enforcement agencies, in some respects they do not necessarily reflect the current state of the law. A number of assertions and analytical methods set forth in the new guidelines have not yet been tested before the courts in merger litigation, and it may be years before courts have the occasion to review key revisions to the guidelines.
In the meantime, the new guidelines reflect an ongoing evolution in DOJ and FTC merger enforcement practice and policy. Consistent with agency practice in recent years, the new guidelines place greater emphasis on direct evidence of competitive effects than past iterations of the guidelines. And while market shares and concentration continue to play an important role, the new guidelines emphasize that market share statistics are often not decisive factors in determining whether the agencies will challenge a specific merger. This is particularly true, according to the draft language, in unilateral effects cases, where the guidelines introduce analytical methods that the agencies may use in lieu of market share statistics. In addition, as the new guidelines make clear, partial acquisitions and mergers between potential competitors may raise antitrust concerns under certain circumstances. The agencies have brought a number of enforcement actions involving these types of transactions in recent years.
Given the ongoing uncertainty regarding the application of the new guidelines, companies weighing a merger or acquisition of a competitor should review and consider the new guidelines with the assistance of experienced antitrust counsel. As the new guidelines note, the merger review process is a fact-specific inquiry and enforcement outcomes may vary considerably. As always, it is critical that companies carefully consider the merger review process, and likely sources of relevant evidence under the guidelines, well in advance of launching a new transaction.
 HHI is calculated by summing the squares of the individual competitors’ market shares. The prior guidelines defined "Highly Concentrated Markets" as having an HHI above 1800, whereas the new guidelines define "Highly Concentrated Markets" as having an HHI above 2500. In addition, the prior guidelines presumed that a merger in a Highly Concentrated Market would be anticompetitive if the post-merger HHI increase was more than 100 points, whereas the new guidelines raise this threshold to 200 points.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, any member of the firm’s Antitrust and Trade Regulation Practice Group, or any of the following:
John A. Herfort (212-351-3832, [email protected])
Peter Sullivan (212-351-5370, [email protected])
Daniel G. Swanson (213-229-7430, [email protected])
Joel S. Sanders (415-393-8268, [email protected])
Trey Nicoud (415-393-8308, [email protected])
Rachel S. Brass (415-393-8293, [email protected])
M. Sean Royall (214-698-3256, [email protected])
D. Jarrett Arp (202-955-8678, [email protected])
Joseph Kattan P.C. (202-955-8239, [email protected])
Joshua Lipton (202-955-8226, [email protected])
Adam Di Vincenzo (202-887-3704, [email protected])
Cynthia Richman (202-955-8234, [email protected])
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