The New Horizontal Merger Guidelines: A Likely Increase In Agency Review Of Proposed Mergers



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Originally published in American Intellectual Property Association Committee on Antitrust Law, ?THE AIPLA ANTITRUST NEWS?, October, 2010

I. Introduction 

The Federal Trade Commission (?FTC?) and the Department of Justice (?DOJ?) (collectively the ?Agencies?) issued revised Horizontal Merger Guidelines (?2010 Guidelines? or ?Guidelines?) on August 19, 2010.1 The guidelines were last significantly revised in 1992.2 The 2010 Guidelines now replace the 1992 Guidelines.3

The 2010 Guidelines outline the principal analytical techniques, practices, and enforcement policy of the Agencies with respect to horizontal mergers and acquisitions involving actual or potential competitors. The purpose of the 2010 Guidelines is to provide both more ?transparency? and a clarification of those principal analytical techniques, practices and enforcement policy to be used in a review of a proposed merger. The Guidelines also discuss the type of ?evidence? that will be influential with and relied upon by the Agencies.4 Thus, the Guidelines are meant to be a ?road map? to assist the parties and their antitrust counsel in their own analysis of a potential merger.

The 2010 Guidelines do not set out a new direction for reviews nor are they a total rewrite of the 1992 Guidelines, but rather, the revisions are more evolutionary in nature. The 2010 Guidelines detail the techniques and main types of evidence the Agencies typically use to predict whether horizontal mergers may substantially lessen competition.5 For antitrust practitioners, to a large extent it is a written confirmation of the analytical processes currently used in horizontal merger review by the Agencies.

The analytical approaches in the 2010 Guidelines suggest that the Agencies will more closely scrutinize certain proposed mergers that previously may not have received such close scrutiny, such as merging parties with differentiated products where quality and brand name play a competitively important role; the Agencies may place less weight on arguments made by the merging parties that ease of entry will alleviate competitive concerns; and, the Agencies will take a close look at how a proposed merger may inhibit or encourage innovation among the merging parties. The Agencies are placing more emphasis on other analytical tools such as merger simulation and various economic models. Thus, the 2010 Guidelines do provide a better understanding of what evidence and what analytical methods are more likely to be persuasive with the Agencies. And, on the flip side, the parties and their antitrust counsel should have a better understanding of what facts and what analysis need to be addressed even before an Agency gets involved in reviewing a proposed merger.

Another expressed purpose of the Guidelines is that ?they may also assist the courts in developing an appropriate framework for interpreting and applying the antitrust laws in the horizontal merger context.?6 Although the Guidelines have no force of law, the Agencies hope they will be highly influential with the courts. In attempting to influence the courts, the Agencies, in turn, will be bound by their own reliance on the Guidelines.7 Whether they are influential or not, since most horizontal merger investigations are not litigated in the courts but resolved at the Agency level, the 2010 Guidelines provide an important road map as to how best to address an Agency?s antitrust concerns.

II. The Significant Changes and Their Likely Impact

    A. Evidence Of Adverse Competitive Impact

This is a new section in the 2010 Guidelines. From a practical standpoint this may be the most helpful new section in the Guidelines. This section is a good example of the Agencies? attempts at creating more transparency. It signals an attempt by the Agencies to shift away from heavy reliance on market definition and market share information and to reliance on more facts specific to the proposed merger and the market and its participants. It does give the merging parties and the attorneys a better understanding as to what categories and sources of evidence is likely to be relied upon by the Agencies or influential with the Agencies in predicting the likely competitive effects. It thus gives the parties? attorneys an opportunity in advance of any review to begin identifying ?evidence? that may be influential in arguing that the merger would not create anticompetitive effects. It also allows the attorney an opportunity to prepare to counter any evidence that the Agency is likely to point to as predictors of potential anticompetitive effects. As a practical matter, much of the evidence discussed is the type of evidence that the Agencies in recent years have been looking to and relying upon more heavily than as indicated in the 1992 Guidelines.

The evidence must be ?reasonably available and reliable evidence? that predicts the likely competitive effects from the merger. Historical events within the industry are given substantial weight as it is deemed to be reliable evidence; for example, other entrants into the market, expansion by other competitors in the market and other recent mergers. Those historical events may either be supportive or create antitrust concerns about the current proposed merger. Sources of reliable evidence, according to the Agencies, include documents, data and testimony from the merging parties, customers and other industry participants like suppliers. Documents created in the ordinary course of business are usually deemed reliable evidence and more probative than advocacy materials prepared or used in the merger review. The types of evidence highlighted are: actual effects observed in consummated mergers; direct comparisons based on experience; market shares and concentration in a relevant market; substantial head-to-head competition; and, any prior disruptive role of a merging party.9

The Agencies do recognize that one form of evidence is the market concentration that would occur post merger. But there is a shift in the weight given to market definition and concentration. In the 2010 Guidelines concentration is one important form of evidence which, in contrast, is a reduction in the weight now given versus the heavy emphasis given in the 1992 Guidelines. In the 1992 Guidelines there was more of a step by step analysis: market definition, concentration determination, ease of entry, unilateral and coordinated effects, and substantiated efficiencies. In other words, now the analysis is a more flexible approach depending on the industry, specific facts and reliable and readily available evidence and with a focus on the ultimate question of competitive effects. 

    B. Market Definition10 and Market Concentration11

Another change from the 1992 Guidelines is the increase in the levels of market concentration that will trigger a concern by the Agencies of possible harmful anticompetitive effects. But, the new thresholds really just conform the Guidelines to the thresholds that the Agencies typically have used in merger reviews. The new Herfendahl-Hirshman Index (?HHI?)12 are:

  • Unconcentrated Markets: HHI below 1500 (previously 1,000)
  • Moderately Concentrated Markets: HHI between 1500 and 2500 (previously between 1,000 and 1800)
  • Highly concentrated Markets: HHI above 2500 (previously above 1800).

To accurately determine market concentration a precise definition of the market is needed. Yet, as referenced above, the 2010 Guidelines downplay the significance of market definition in the Agencies? horizontal merger analysis. The Guidelines go on to acknowledge that market definition is not a precise science and that a market definition is not necessarily totally definitive. Even if the concentration numbers are low there may be other ?evidence? that could be indicative of competitive harm. The Guidelines also place significance on the question of whether a merger will create the opportunity for price discrimination against certain targeted customers.13 This suggests the possibility of the Agencies claiming narrow relevant markets based upon the targeted customers. This type of narrow market could be especially troublesome in the technology industry where there can be a limited number of customers for different variations of certain technology.

The 2010 Guidelines are clear that even if a market is not clearly definable it is not fatal to the Agencies finding anticompetitive effects. In most cases, the Agency will look for other evidence to determine whether, in its opinion, that evidence shows that a harmful competitive effect is likely. 

    C. Innovation and Product Variety14

The Agencies acknowledge that competition often spurs innovation. The question asked is whether a proposed merger diminishes innovation competition in reviewing any proposed merger that involves innovation. In other words the analysis would include questions such as ?what is in the pipeline? and ?what type of research and development is going on? by the parties at the time of the proposed merger. The Agencies are interested in knowing whether there would be incentives built into the merger such that would invite a curtailing or reduction tin the innovative efforts engaged in by each merging firm. The other related question is whether the proposed merger is likely to create complementary innovative capabilities that cannot be otherwise achieved separately by the merging parties.

As to the risk of innovation curtailment, the Guidelines indicate that (a) such curtailment effect is most likely to occur if at least one of the merging firms has been engaging in efforts to introduce new products that would capture substantial revenues from the other merging firm; that (b) a longer-run effect is most likely to occur if at least one of the merging firms has capabilities that are likely to lead it to develop new future products that would capture substantial revenues from the other merging firm; and, that (c) there is a question of whether the likelihood exists of innovation curtailment when a merger combines two of a very small number of firms with the strongest capabilities to successfully innovate in a specific direction.

The Guidelines indicate that the Agencies will evaluate the extent to which successful innovation by one merging firm is likely to take sales from the other and the extent to which post-merger incentives for future innovation will be lower than those that would prevail in the absence of the merger. Where a proposed merger would substantially reduce competition by bringing two close substitute products into the combined entity and one of the products is eliminated, the Guidelines conclude that ?the merger will often also lead to a price increase on the remaining product, but that is not a necessary condition for anticompetitive effect.? Example 21 in the Guidelines15 more clearly explains the Agencies? position that a price increase is not necessary for an anticompetitive effect: 

Example 21: Firm A sells a high-end product at a premium price. Firm B sells a mid-range product at a lower price, serving customers  who are more price sensitive. Several other firms have low-end products. Firms A and B together have a large share of the relevant market.  Firm A proposes to acquire Firm B and discontinue Firm B?s product. Firm A expects to retain most of Firm B?s customers. Firm A may not find it profitable to raise the price of its high-end product after the merger, because doing so would reduce its ability to retain Firm B?s more price-sensitive customers. The Agencies may conclude that the withdrawal of Firm B?s product results from a loss of competition and materially harms customers. 

    D. Market Entry16

The Agencies clarify what type of ?evidence? of market entry is influential. Evidence of entry by other likely competitors can be significant evidence; firms that would rapidly and easily enter the market are viewed as market participants; firms, prior to the merger, committed to entering the market will be treated as market participants; and, the actual history of entry in the market will be given substantial weight. The Agencies have modified the definition of timely entry by removing as part of the definition ?entry within two years? and substituted ?rapid entry? which is basically defined as rapid enough that customers are not significantly harmed by the merger. This could mean less than or greater than two years, depending on the industry and other factors. To counteract competitive effects that may be of concern to the Agencies, entry must be timely, likely, and sufficient. In other words, the Agencies will give weight to reliable evidence that shows that market entry will be rapid, will likely be profitable, and will produce sufficient impact in the marketplace. 

    E. Efficiencies17

To counter Agency competitive concerns, merging companies in the past would often argue and attempt to show that the merger would create efficiencies i.e. basically, that reduced costs from the merger would arguably result in reduced future prices by the merged firm. The 2010 Guidelines have ?clarified? what type of efficiencies evidence will be considered by the Agencies. To be influential, an efficiencies argument must be based on realistic efficiencies evidence that relies upon specific efficiencies coming out of the proposed merger and that cannot be obtained without the merger. Projection of efficiencies that are not based on past experience will not be given much weight by the Agencies; and, reliable short term efficiencies are given more weight than any alleged long term efficiencies. Therefore, all evidentiary support for an efficiencies argument must be verifiable by reasonable means. 

    F. Potential Acquisitions18

The Guidelines address possible competitive concerns involving a potential acquisition of competition. One concern is that even an acquisition of a minority interest in a competitor can create anticompetitive effects such that an acquisition of the minority interest may provide an opportunity to influence the competitive conduct of the target firm. A minority interest ownership may also reduce the incentive of the minority interest competitor and the target firm to compete effectively. Further, the Agencies will review whether any such acquisition may provide access to either or both parties (competitors) to nonpublic competitively sensitive information of the other party.

These ?concerns? could have significant impact upon a partial acquisition where the merging companies have research and development projects that overlap, compliment or substitute for the products of the other party or the parties have overlapping products in their pipeline.

In addition, an exclusive intellectual property license is considered an asset acquisition if it is exclusive even against the grantor. A license is deemed exclusive even if it is exclusive only in a particular territory or is exclusive only for a particular limited use.19 Therefore, the Agencies would review an exclusive intellectual property license as it would any other partial acquisition when the parties to the license are competitors or potential competitors. Even the formation of an unincorporated joint venture with competitors holding varying interests in the joint venture could be subject to a merger type review.20

III. Conclusion 
The 2010 Guidelines provide more transparency as to the type of ?evidence? and forms of analytical thinking the Agencies will rely on in their review of horizontal mergers. The 2010 Guidelines are not an overhaul of past Guidelines but are more evolutionary in nature and will be a more useful tool for antitrust counsel in their early assessment of whether a proposed horizontal merger may raise competitive concerns with the Agencies. And, ?reading between the lines,? there are likely to be more active horizontal merger reviews and investigations including the mergers of competitors with competitive intellectual property assets.

1Available at
2The 1992 Guidelines were also revised somewhat in 1997.
3The Commentary on the Horizontal Merger Guidelines issued by the Agencies in 2006 remains as a supplement to the 2010 Guidelines.
4?These Guidelines are intended to assist the business community and antitrust practitioners by increasing the transparency of the analytical process underlying the Agencies? enforcement decisions.? 2010 Guidelines at Section 1.
5Federal Trade Commission News Release, 8/19/2010, FEDERAL TRADE COMMISSION AND U.S. DEPARTMENT OF JUSTICE ISSUE REVISED HORIZONTAL GUIDELINES. To obtain a copy, see footnote 1 for website address.
62010 Guidelines at Section 1.5.
7The Agencies attempt to allow themselves more leeway in litigating cases by stating in the Guidelines that ??these Guidelines neither dictate nor exhaust the range of evidence the Agencies may introduce in litigation.? Guidelines at footnote 2.
8Besides the changes discussed herein, the 2010 Guidelines also have added new sections on Powerful Buyers (Section 8) and Mergers of Competing Buyers (Section 12).
9Guidelines at Section 2.1.
10Guidelines at Section 4. The 2010 Guidelines does still use the hypothetical monopolist test, with some minor revisions to the test.
11Guidelines at Section 5.3.
12The HHI is calculated by summing the square of each firm?s market share, which gives proportionately greater weight to larger market shares. For example, a market comprised of two firms with each having a 50% market share would have an HHI of 5,000 (50? x 2). If the two firms merged the post-merger HHI would be 10,000 or a total monopoly(100?). For a market with 10 firms, each of which has a 10% market share the HHI for that market would be 1,000 (10? x 10 firms). For determining the increase in market concentration, the HHI for the market is calculated before the merger and after the merger to determine the increase in the HHI.
13See, for example, Guidelines at Section 4.1.4.
14Guidelines at Section 6.4. The 1992 Guidelines do not highlight innovation and other unilateral effects.
15Guidelines at Section 6.4.
16Guidelines at Section 9.
17Guidelines at Section 10.
18Guidelines at Section 13.
19Premerger Notification Practice Manual, Fourth Edition, ABA Section of Antitrust, Interpretations 27, 86, 87.
20Id. Interpretation 162; see also Premerger Notification Rules, 16 C.F.R. Part 801, Section 801.50.

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