On July 19, 2023, the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice (collectively, “the Agencies”) issued a new set of merger guidelines in draft form for public comment (the “Draft Guidelines”). The Draft Guidelines, if adopted, will replace the Horizontal Merger Guidelines issued in 2010 and the Vertical Merger Guidelines issued in 2020 (the latter of which the FTC withdrew in September 2021). The updates make significant changes to the guidelines, such as:
- Lowering the thresholds for when the Agencies are likely to presume that horizontal mergers are illegal;
- Including—for the first time—a presumption of illegality for certain vertical mergers;
- Adding guidelines focused on serial acquisitions and acquisitions of potential competitors;
- Introducing concepts related specifically to multi-sided “platforms”; and
- Explicitly addressing the effects of transactions on labor markets for the first time.
The Draft Guidelines signal that going forward the Agencies are likely to rely more heavily on presumptions of illegality and relatively subjective standards. This shift suggests that the Agencies will find a greater number of mergers potentially problematic and deserving of scrutiny and of challenge. To the extent that the Draft Guidelines provide insight regarding how the Agencies evaluate the legality of transactions, private parties can better predict when the agencies may find a merger problematic and can incorporate such insights in their decisions regarding potential transactions. That said, the Draft Guidelines are only a statement of enforcement policy. They are not themselves laws or regulations, nor are courts required to rely on them when they interpret and apply the antitrust laws. It remains to be seen how effectively the Draft Guidelines—if adopted in their current form after the comment period—will provide transparency and predictability of Agency enforcement decisions and whether and to what extent the Draft Guidelines’ articulation of the Agencies’ enforcement philosophy will be persuasive to judges in deciding or reviewing the transactions that the Agencies decide to challenge.
The Draft Guidelines are subject to a 60-day comment period, closing on September 18, 2023. After that, the Agencies are expected to evaluate the comments, make any changes that they deem warranted, and issue the guidelines in their final form. Regardless of how much the final guidelines resemble the draft issued on July 19, companies considering mergers and other transactions should work closely with antitrust counsel to determine how, in light of the positions taken in the Draft Guidelines, the Agencies may view their deals.
Key Developments and Takeaways
- The Draft Guidelines Adopt More and Lower Thresholds for the Agencies to Deem Transactions Presumptively Illegal. The Draft Guidelines set out presumptions of illegality against certain horizontal and vertical mergers that seek to shift the burden to the parties to show that mergers would not substantially lessen competition.
The Draft Guidelines significantly lower the concentration and share thresholds that the Agencies believe should be required for finding that a horizontal merger between actual or potential competitors is subject to a structural presumption of illegality:
- Post-Merger Concentration: The Agencies will deem a transaction presumptively illegal when it would result in a post-merger Herfindahl-Hirschman Index (HHI) greater than 1,800 (previously 2,500 under the 2010 Horizontal Merger Guidelines) and a change in HHI of more than 100 points (previously 200). The Draft Guidelines claim that the lowered concentration-based presumptions mark a return to the thresholds found in versions of the Guidelines prior to 2010, when the Agencies increased those figures to reflect the cases they had been bringing.Merged Firm’s Market Share: Under the Draft Guidelines, a transaction is presumptively illegal if the post-merger firm’s market share is greater than 30% and the transaction will result in a change in HHI of more than 100 points. Citing the Supreme Court’s 1963 Philadelphia National Bank decision, the Agencies believe that such a transaction “presents an impermissible threat of undue concentration regardless of the overall level of market concentration.”
This is the first time that Agency-issued guidelines have included a presumption of illegality for certain vertical transactions. Although many such arrangements have well-recognized procompetitive benefits, the Draft Guidelines state that the Agencies will consider vertical transactions to be presumptively illegal if they result in the combined company controlling above a 50 percent “foreclosure share.” The Agencies define “foreclosure share” as “the share of the related market that is controlled by the merged firm, such that it could foreclose rival’s access to the related product on competitive terms.”
- Skeptical View of “Trends Toward Concentration.” The Draft Guidelines state that transactions that “contribute to a trend toward concentration” may raise concerns. In this context, the Agencies assert that they will be skeptical of even a small increase of market share or market concentration where concentration is already high or has been recently increasing. To evaluate whether a transaction would “further a trend toward consolidation,” the Agencies will look at two factors:
- First, the Agencies will consider whether the merger will occur in a market or industry sector where there is a significant tendency toward market concentration, including concentration that has resulted from companies exiting the market.
- Second, the Agencies will consider whether the merger will contribute to an increase in concentration or accelerate the pace of a trend toward concentration. The Draft Guidelines note that this second factor can be demonstrated by indicators such as “a purchase price that exceeds [the] acquired firm’s stand-alone market value[, which] can sometimes indicate that the acquiring firm is paying a premium because it expects to be able to benefit from reduced competition.” The Draft Guidelines do not appear to acknowledge other explanations for price premiums, such as that mergers can yield efficiencies.
- There Are New and Sweeping Statements about Multi-Sided “Platforms.” The Draft Guidelines contain new sections addressing mergers involving multi-sided “platforms.” In particular, the Agencies will consider a transaction’s likely effects on competition between platforms, competition on a platform, and competition to displace a platform. For example, the Draft Guidelines:
- Signal increased scrutiny of acquisitions of nascent competitors by “dominant platforms” out of concern that they will “entrench their position by systematically acquiring [other] platforms while they are in their infancy.”
- Explain that the Agencies are concerned about “platform operators” acquiring “platform participants” because such transactions could “entrench the operator’s position by depriving rivals of participants and, in turn, deprive them of network effects.” This concern derives from the Agencies’ belief that “platform operators” that are also “platform participants” have a conflict of interest between “operating the platform as a forum for competition and its interest in winning competition on it.”
- State that the Agencies will seek to prevent mergers that would allow dominant “platforms” to prevent the use or growth of replacement or alternative functions provided by the “platform.”
- Describe a concern about “platform operators” acquiring inputs (e.g., data) that would allow them “to weaken rival platforms by denying . . . rivals the benefits of those inputs.”
- The Draft Guidelines Bring Back the “Entrenchment” Theory of Competitive Harm. The Draft Guidelines attempt to revitalize the entrenchment theory—which the Agencies abandoned long ago—for “conglomerate” mergers. Conglomerate mergers involve firms that are not actual or potential competitors (horizontal) and that do not have an actual or potential customer-supplier relationship (vertical). The Draft Guidelines state that the Agencies will evaluate whether such mergers risk “entrenching or extending an already dominant position.”
This would be a two-part inquiry under the Draft Guidelines: (1) whether “one of the merged firms already has a dominant position”; and (2) whether the merger is likely to “entrench or extend that position.” The first prong is satisfied if “one of the merging firms possesses at least 30 percent market share,” or if there is “direct evidence that one or both merging firms has the power to raise price, reduce quality, or otherwise impose or obtain terms that they could not obtain but for that dominance.” Under the second prong, the Agencies will “examine whether the merger may entrench the dominant position through any mechanism consistent with market realities that lessens the competitive threats the merged firm faces,” such as by increasing entry barriers, increasing switching costs, or eliminating a nascent competitive threat.
The Draft Guidelines also express the view that the “greater the dominance already held, the lower the degree of entrenchment that gives rise to a substantial lessening of competition,” and that “[w]hen one merging firm has or is approaching monopoly power, any acquisition that may tend to preserve its dominant position may tend to create a monopoly in violation of Section 7.” The Agencies rely almost entirely on cases from the 1960s and 1970s to support including an entrenchment theory in the Draft Guidelines. They do not mention the Agencies’ own prior statements discarding the entrenchment theory as “thoroughly discredited” or the fact that the courts rejected it decades ago for similar reasons.
- New Attention to Serial Acquisitions. The Draft Guidelines state that the Agencies will investigate serial acquisitions and roll-up strategies, neither of which was addressed explicitly in the 2010 Horizontal Merger Guidelines. As part of analyzing a series of acquisitions, the Agencies will look to evidence of the overall strategic approach to serial acquisitions in an acquiring firm’s history, including whether the company engaged in roll-up acquisitions in any market (not just the market at issue in the transaction). Under this new approach, if the Agencies conclude that a series of acquisitions was problematic, they would bring a Section 7 challenge arguing that “the impact of the cumulative strategy” violated the law even if no single acquisition—on its own—would substantially lessen competition or tend to create a monopoly.
- Other Major Changes. The Draft Guidelines propose other significant changes that raise questions regarding how the Agencies intend to implement them, including, for example, the following:
- New attention to the effects of a merger between buyers may have on competition for inputs, including labor. Considerations of the effects of transactions on workers and labor market competition have become a regular part of the Agencies’ reviews of transactions in recent years, but they have not been mentioned explicitly in prior versions of their guidelines.
- A focus on the kinds of transactions common in the private equity space, such as a new emphasis on the extent to which partial acquisitions (minority investments) and common ownership across companies in the same sector may give investors access to non-public, competitively sensitive information.
- Seeking to shift the burden onto the merging parties to prove their transaction is not anticompetitive, rather than on the government, which bears that burden in court.
- Seeking to infer from direct evidence of substantial head-to-head competition between the merging parties the existence of a relevant antitrust market in which competition could be harmed by the transaction without having to specify “the precise meets and bounds” of the inferred market.
- Using transaction value as a proxy for the merged firm’s ability “to benefit from reduced competition.”
If you have any questions concerning the material discussed in this client alert, please contact the members of our antitrust group.
 See, e.g., Dep’t of Justice, Antitrust Div., Range Effects: The United States Perspective, Submission for OECD Roundtable on Portfolio Effects in Conglomerate Mergers (Oct. 12, 2001), https://www.justice.gov/sites/default/files/atr/legacy/2015/01/26/9550.pdf (“In its complete rewrite of the Merger Guidelines in 1982, the Department, influenced by the growing trend in the court decisions and by the critical scholarly commentary, eliminated entrenchment as a basis for challenging non-horizontal mergers. In so doing, the Department acted consistently with the recommendation of the American Bar Association Section on Antitrust Law . . . . By 1982, then, the entrenchment doctrine was thoroughly discredited in nonjudicial circles in the U.S., and the courts soon came to share that view.”) and Conglomerate Effects of Mergers – Note by the United States, OECD Directorate for Financial and Enterprise Affairs Competition Committee (June 10, 2020), https://www.ftc.gov/system/files/attachments/us-submissions-oecd-2010-present-other-international-competition-fora/oecd-conglomerate_mergers_us_submission.pdf (“The ‘entrenchment’ doctrine . . . . is no longer viewed as valid under U.S. law or economic theory.”).