The jointly-issued Department of Justice and Federal Trade Commission 2010 Horizontal Merger Guidelines largely reflect practices that the agencies already were implementing. However, the 2010 Guidelines include some significant changes from earlier versions, and as such provide clearer guidance to the business community and the public.
Market shares and concentration levels (as measured by the Herfindahl-Hirschman Index (HHI)) still are an important to the merger analysis. The 2010 Guidelines increased the HHI thresholds that the agencies use to assess whether a rebuttable presumption regarding market power applies. Although the HHI thresholds have increased, the revised treatment of market definition principles sometimes can result in narrower markets, and therefore, higher market concentration. HHIs and concentration often are used primarily as an initial screen — where the post-merger HHI is fairly low, it helps the government determine that further scrutiny may not be required. The 2010 Guidelines’ competitive effects focus means that where the post-merger HHI thresholds appear to be exceeded in an initial screen, agency staff then can shift to more sophisticated analysis of other factors to assess whether the transaction is likely lead to adverse competitive effects.
The agencies’ main focus when beginning a merger investigation are the number of significant competitors, the closeness of competition between the merging companies, and the companies’ documents — the documents supplied under Item 4 of the HSR notification as well as strategic plans, customer lists, and other documents routinely requested by staff during the initial waiting period. These documents typically provide staff with insight into the acquirer’s rationale for the transaction, and how the merging companies view the marketplace and competitive dynamics. Further, the government’s initial interviews of customers and competitors also provide staff with an early assessment of whether the transaction could raise competitive concerns. In fact, documents that point to possible anticompetitive effects have figured prominently in most of the recent transactions that the agencies have challenged in court or entered into settlements with the merging companies.
A merger is unlikely to raise antitrust concerns if there are lots of viable competitors in the market. On the other hand, where there are only a few significant competitors, a transaction that combines two of them has the potential to raise concerns about market power and unilateral effects or coordinated interaction. Key factors regarding whether a transaction will raise red flags are the companies’ documents and the views of customers regarding the transaction. There are no bright lines, however. In addition to the combined firm’s market share, the factors include whether: one of the merging parties was a maverick or innovator; the merging parties are each other’s the closest competitors; the market is vulnerable to coordination; there are entry barriers; or there are powerful buyers.
The agencies’ competitive effect centric analysis places more emphasis on the merging companies documents, customers’ views, industry data, and economic analysis. In fact, the 2010 Guidelines stress the use of economic models to examine a merger’s potential competitive effects. As a result, when data is available, effective arguments incorporate econometric analysis including the upward pricing pressure (UPP) methodology and diversion ratios, critical loss analysis, natural experiments, and merger simulation models.
Advocating for clearance of a transaction involves providing the government with a comprehensive analysis of the industry and the competitive dynamics, highlighting the reasons why the market is not vulnerable to anticompetitive effects and the transaction would not change these market characteristics. In order to be credible, the analysis has to be supported with references to ordinary course documents, industry information and statistics, as well as economic data or analyses. In addition, customer support (or at least not opposition) also is critical. Finally, since significant merger-specific efficiencies are weighed against potential adverse competitive effects, synergies and efficiencies can be important where the evidence of potential anticompetitive effects is not strong.
Bottom line: Because the 2010 Guidelines focus on whether adverse competitive effects are likely, effective advocacy in support of a transaction similarly focuses on the big picture and illustrates to the government why competitive effects are unlikely. The importance of documents to the agencies’ initial review (and ultimate analysis) of a merger underscores that it is critical to involve antitrust lawyers early in a transaction so that we can fully analyze the market, review the companies’ documents, assess the likely views of customers, and develop arguments in support of the transaction that are consistent with this evidence. This enables the antitrust lawyers to quickly educate the reviewing staff about the competitive dynamics in the market, address any potential concerns, and join issue on the areas that require additional advocacy.