The US Federal Trade Commission (FTC) and US Department of Justice Antitrust Division (DOJ) issued their updated Merger Guidelines on December 18, 2023.
These guidelines represent a significantly more enforcement-oriented approach than the prior guidelines, and they largely follow the contours of draft guidelines released in July 2023. Companies should be aware of the Merger Guidelines and their implications as they formulate strategies for assessing potential merger and acquisition options. However, the guidelines are not the law, and the FTC and DOJ (Agencies) have experienced many losses—or have accepted settlements allowing transactions to proceed—when pursuing some of the more aggressive theories discussed in these new Merger Guidelines. So, despite challenges posed by the guidelines’ more enforcement-oriented approach, many opportunities and strategies remain for successful regulatory clearance.
The prior Merger Guidelines’ unifying theme was that mergers should not be allowed to raise price or reduce output, quality or innovation. The various analyses in the document informed the assessment of that underlying issue.
The 2023 Merger Guidelines replace that theme with a long list of potential enforcement theories, including several from the prior guidelines (such as findings that mergers between close competitors or mergers that significantly raise concentration can be problematic).
In other areas, the Merger Guidelines introduce concepts not addressed in the prior version, such as more expansive theories of potential entry, mergers entrenching a dominant position, and merger impacts on labor markets. The net result of the new guidelines is that the Agencies have codified what has been apparent to practitioners in recent years: that parties and counsel need to be prepared to defend a transaction on a range of horizontal, vertical and potential competition theories. Equally important, since the Agencies’ theories go beyond current case law, counsel needs to be prepared, and have time, to litigate merger challenges. As noted below, that has been the route many companies have followed recently to secure approval of their transactions.
DRAFT VERSUS FINAL GUIDELINES
After publishing a draft of these guidelines in July 2023, the Agencies assessed public comments and then released the final Merger Guidelines. Our assessment of the earlier draft is available in this On the Subject.
The final Merger Guidelines are largely consistent with the earlier draft, but they include some changes that, on the surface, make the guidelines appear more flexible than the draft. For example, the draft guidelines laid out many different situations in which the agency would “presume” a transaction violates the law, and those statements went well beyond the law. In the final Merger Guidelines, the Agencies back off their position that various structural factors give rise to a “presumption” of illegality. However, they retain the same concepts by describing how those factors will cause the Agencies to “infer” that a transaction is anticompetitive.
While the final Merger Guidelines tone down language setting out presumptions that go beyond the cases, the concepts remain firmly part of the document.
MAJOR THEMES IN THE MERGER GUIDELINES
Below are some of the key themes and takeaways in the new Merger Guidelines, as well as non-exhaustive thoughts on some actions companies can consider to best position themselves to succeed in this environment (by creating rebuttal evidence that can overcome the prima facie case the Agencies will look to establish using these themes). Experienced counsel can help companies in assessing these facts and developing evidence to rebut, and resist, a governmental challenge.
Mergers raise a presumption of illegality at lower market shares and concentration levels. In light of this guidance, contesting relevant market definition in which to measure shares will be even more important than in the past. Parties must understand their documents and the arguments they will support, or foreclose, to inform this analysis. In addition, it may become more important to engage economists early to assist in econometric work that can help define appropriate and defensible relevant markets. This will become even more pronounced if the proposed new Hart-Scott-Rodino filing rules come into place later this year. Those draft rules, also released over the summer, will require parties to take affirmative positions on issues such as relevant markets, shares and concentration with their initial filings.
Mergers between close competitors are particularly suspect, even if they compete in a broader market. This theme incorporates and expands upon the concepts of “unilateral effects” arising from mergers of close competitors that have been part of the merger reviews for many years. It has been, and remains, important for companies to understand whether they are particularly close rivals that are differentiated from other firms. Understanding how the businesses look at each other in their ordinary course documents is important to evaluating the likelihood of successfully navigating the review process. It also is important for counsel to have access to the types of documents that will be disclosed in a merger review to provide a meaningful risk assessment, and to help develop clearance strategies early in the deal process.
Coordinated effects analysis is more important in the Agencies’ reviews. The coordinated effects analysis assesses whether the elimination of one competitor through a merger will make it more likely that the remaining firms will be able to coordinate their pricing and other actions. This does not require an illegal agreement, but the theory is that with fewer firms there is a greater likelihood that competitors will be able to observe each other’s actions and pull their punches. The Merger Guidelines show that the Agencies are very skeptical that parties will be able to overcome the inference of increased coordination in a concentrated market, but it is important that merging parties attempt to do so. This can entail understanding the types of normal interactions and competitive information available to parties. For example, the Agencies are very focused on price increase announcements and similar activities through which competitors can learn of their rivals’ actions, even if there is a legitimate purpose for the disclosures. Given the increased importance of these coordinated effects theories, counsel need to understand industry dynamics to help develop effective rebuttals.
Mergers involving a potential entrant into a market face greater scrutiny. Potential entry is not a new theory, and it was part of the prior guidelines. Potential entry involves situations in which one of the merging parties may be positioned to enter, or may be perceived by the current competitors as positioned to enter, a market in competition with the company with which it is merging. The new Merger Guidelines take an expansive approach to potential entry and the competitive benefits such entry would deliver to customers. In light of the expansive theories of harm based on potential entry, companies should assess what their documents and facts will demonstrate in terms of whether one of the merging parties is capable of entering, has considered entering or has planned to enter, or is perceived by others (including the merger partner) as being well positioned to enter a market. Companies should demonstrate, if accurate, that they lack key resources for entering or have affirmatively rejected entering for business reasons unrelated to the proposed acquisition.
Vertical and other non-horizontal transactions are treated as far more problematic than they were in the short-lived 2020 Vertical Merger Guidelines issued by the Trump administration. In one respect, the Merger Guidelines pull back from the earlier draft, because they do not include a presumption that a vertical merger in which one party has a 50% share of a vertically related input product is anticompetitive. That change resolves a clear disconnect between the draft guidelines and the case law, because multiple courts have addressed the legal standard for vertical challenges in recent years, and they have rejected any concept of a market share-based presumption in a vertical transaction. Nevertheless, the Agencies can bring vertical challenges under a full rule of reason framework, and the Merger Guidelines make clear that having a 50% or greater share for a vertical transaction will be viewed with suspicion. Parties pursuing vertical transactions should evaluate and be prepared to demonstrate there is no ability to foreclose or degradeaccess to the input product, and there is no incentive to withholdor degrade access. Many different factors come in to play, such as: the existence of strong alternative supply options for the vertically related input product; the merging party’s share of the input product (i.e., shares lower than 50% would support an argument that the combined company would not have an ability or incentive to withhold or degrade access); and various commercial factors that may provide an incentive to supply the product or service despite the vertical integration. Also, in some cases, courts have viewed open offers or commitments of continued supply as important facts undercutting a governmental challenge to deals.
Transactions are more likely to be flagged as problematic if the industry has experienced, or is undergoing, consolidation. The Merger Guidelines stress how prior consolidation in an industry can be an aggravating factor in their merger review. Likewise, when multiple mergers are in process in an industry, the Agencies will be more likely to find a transaction to be anticompetitive. It is important for companies and counsel to consider and evaluate previous industry consolidation. If there have been prior transactions, it will likely be important to assess—and be ready to advocate about—whether and how competition changed following those deals. Key factors include the occurrence and magnitude of post-transaction price increases, changes in profit margins, or other indicia of competition such as innovation or levels of output (both for the merging parties and for other industry participants).
Private equity and roll-up transactions are assessed by the concentration and consolidation resulting from a series of transactions rather than the incremental change created by the most recent addition to a platform. The FTC, DOJ and others in government have made clear their concerns with the private equity business model, including the concept of multiple roll-up transactions in an industry. When evaluating a current merger, the Agencies will want to understand how market shares and concentration have changed over time and whether prior acquisitions have contributed to those changes. Under this rubric, a current acquisition that has a relatively minor impact on shares and concentration could be viewed differently when viewed as the latest step among multiple transactions, each of which has incrementally changed the market shares and concentration from the baseline. Companies involved in a series of transactions will want to evaluate not just the current deal, but the competitive impacts of a preceding series of transactions. Transaction documents that highlight past or anticipated industry consolidation are likely to catch the regulators’ attention and should be avoided where practicable.
Tech industries are a major focus. The Agencies have multiple guidelines they can use to attack tech industry transactions, including guidelines focused on multi-sided platforms, lowering the standard for challenging deals based on potential competition, and reintroducing 1960s-era theories around entrenchment of a dominant position. Changes from the draft to the final Merger Guidelines include the addition of new concepts that appear to be focused on technology companies, such as describing competitive issues that arise from factors such as interconnectivity of products that are common in technology platforms. Companies considering transactions in the tech space will need to take a holistic approach when evaluating the risks and preparing defenses.
LITIGATION CAN BE A VIABLE PATH TO DEAL CLEARANCE
The new Merger Guidelines reflect the current anti-merger stance at the Agencies, but they are not the law and should not deter companies from considering lawful transactions, even if disfavored by the current administration. The Merger Guidelines lay out the Agencies’ enforcement framework, but both DOJ and FTC are resource-constrained and so need to prioritize which transactions to investigate and challenge. In the past two years, the courts have rejected some of the Agencies’ more aggressive approaches or theories involving potential competition (Meta/Within), vertical foreclosure (United Health/Change Health; Microsoft/Activision) and defining a narrow relevant market around focused competition between the two merging parties that operated within a broader industry (Booz Allen Hamilton/EverWatch). The Agencies have had a strong record in court or in obtaining abandonments in traditional horizontal merger cases in well-defined product markets where the case law supports a presumption against a transaction creating high market shares. However, when the Agencies move beyond that well-established framework, they have far less success in challenging transactions.
Under the new Merger Guidelines, it is important for companies to assess the risk profiles of their transactions. This includes evaluating whether the Agencies are likely to focus on the transaction and investigate it closely, whether the Agencies are likely to challenge the transaction, and whether they are likely to win if they do challenge it.
Our experienced team at McDermott helps companies work through these issues every day, and we can help companies assess that risk and defend lawful transactions at the Agencies and, when necessary, in court. We also regularly help companies whose business interests are threatened by transactions involving their competitors or suppliers, and these Merger Guidelines create new opportunities to take such issues to the Agencies.