A long-awaited overhaul of the guidelines used by anti-trust regulators to evaluate the impact of mergers between rival firms on competition has arrived.
The Horizontal Merger Guidelines detail how the Federal Trade Commission and the Department of Justice evaluate the likely competitive impact of mergers between competitors under federal antitrust laws. They also convey the agencies’ general views on antitrust policy and enforcement and are closely watched by businesses and courts.
For companies, the final version is somewhat a mixed bag. On the plus side, observers say the revised guidelines are more transparent and better reflect the agencies’ actual practice. On the other hand, some say they offer less certainty for companies as to whether a deal will pass muster.
While marking a major departure from what was previously on paper, the revised guidelines, published Aug. 19, largely bring the written guidelines in line with the agencies’ current approach to merger analysis. The guidelines were last updated nearly two decades ago.
“This puts in writing what merger enforcers were already doing,” says Robert Lande, a director of the American Antitrust Institute and a law professor at the University of Baltimore.
Likewise, David Wales, a partner in the law firm Jones Day, previously a senior official at both the FTC and the DoJ, says the changes “are more a reflection of how out of date the written guidelines were than a sea change in merger enforcement.”
In press releases touting the new guidelines, the agencies say they will give businesses a better understanding of how they evaluate proposed mergers.
However, at least one FTC official disagrees. Although he voted in favor of their issuance, Commissioner J. Thomas Rosch in a statement criticized the guidelines as “flawed both as a description of how the staff (at the Commission at least) conducts ex ante merger review and what the agencies should tell courts about merger analysis.”
While the revised guidelines don’t hold any huge surprises, observers say they give the agencies far more flexibility and, according to at least some, that means less predictability for companies.
“This formalizes the shift from a more structured process … to a more flexible process that gives the agencies more discretion and provides less certainty for companies,” says Paul Denis, co-chair of the anti-trust and competition group at law firm Dechert, and who helped draft the 1992 version of the guidelines while working in the DoJ’s anti-trust division.
Steven Newborn, co-head of Weil Gotshal’s global anti-trust and competition practice and former director of litigation at the FTC’s Bureau of Competition, agrees. “The revised guidelines don’t give companies the degree of predictability that the previous version did about whether a deal is likely to be challenged,” he says.
Most notably, the revised guidelines downplay market definition, which has historically been the starting point for merger analysis, in favor of more fact-based evidence for determining whether a merger will harm competition.
“This formalizes the shift from a more structured process … to a more flexible process that gives the agencies more discretion and provides less certainty for companies.”
Co-Chair Anti-Trust Group,
The guidelines expressly state that merger analysis “does not consist of uniform application of a single methodology. Rather, it’s a fact-specific process through which the agencies, guided by their extensive experience, apply a range of analytical tools to the reasonably available and reliable evidence to evaluate competitive concerns in a limited period of time.”
That revision may have been made with the courts in mind. “Most cases in the past have been won or lost based on market definition,” says Wales. As examples, he cites two past unsuccessful merger challenges by the agencies: the FTC’s failed 2007 bid to block grocer Whole Foods from buying rival Wild Oats, and the DoJ’s 2004 failed attempt to block Oracle’s 2004 takeover of PeopleSoft.
“There’s a serious emphasis on proximity, or closeness of competition,” says Denis. The problem that poses for companies is that, “there are a lot of different ways to get at it, depending on the market, and you don’t know which way they’ll use in any given deal.”
The changes are the product of a nearly yearlong effort that included workshops and a public comment period to solicit feedback. The final version doesn’t stray too far from the draft published in April, although some language was tweaked based on comments received.
The new guidelines include an entirely new section that discusses the types and sources of evidence that the agencies might use to predict the likely competitive effects of mergers. They also greatly expand the discussion of how the agencies evaluate unilateral competitive effects, or whether merging parties would have sufficient market power after the deal to decrease competition.
Denis says the additional guidance should be welcome. “The 1992 guidelines were pretty opaque on that area, and the agencies have refined the art of that analysis a great deal in the last 18 years.”
CHAIRMAN LEIBOWITZ REMARKS
Statement of Chairman Leibowitz on the Release of the 2010 Horizontal Merger Guidelines:
The process for modifying the Horizontal Merger Guidelines has concluded more successfully than I could have predicted at the outset. The result is a clear and systematic description of the techniques the FTC and the Antitrust Division of the Department of Justice use to review mergers, and a document that has received bi-partisan and unanimous support from the Commission. Because of the hard work of all involved at both agencies, private parties and judges will be better equipped to understand how the
agencies evaluate deals. That improvement in clarity and predictability will benefit everyone.
In revising the Guidelines, the Commission jointly with the Antitrust Division solicited public comments on a number of questions, and held a series of public workshops around the country. Fifty-one parties filed comments in response to those questions, and the agencies incorporated the input they received through those responses and workshops into the draft of the Guidelines that the Commission put out for public comment in April. The Commission received 31 public comments on that draft from a
wide variety of sources, including lawyers, economists, corporations, trade associations, and public interest groups. Those comments played a critical role in staff’s compilation of the final Guidelines we release today.
The Guidelines have been improved through this process in ways—large and small—that are too numerous to mention. But several major advances stand out: first, the Guidelines emphasize the competitive effects of a deal over the more rigid, formulaic approach imposed by some interpretations of the 1992 Guidelines. Second, for the first time the Guidelines provide a clear description, and many examples, of the range of evidence the agencies consider when evaluating the competitive effects of a transaction. Third, the Guidelines explain in more detail the role of market-concentration measures and revise the concentration thresholds from which the agencies will draw inferences about the likely effects of a merger on market power. Finally, the new Guidelines contain revised discussions of several factors that may be important in analyzing a merger, among them innovation and product variety, coordinated effects, price discrimination, and market entry.
With these and other changes, the new Guidelines provide a clearer and more accurate explanation to merging parties, courts, and antitrust practitioners of how the agencies review transactions. We thank everyone who participated in this process.
Statement From FTC Chair Leibowitz (Aug. 19, 2010)
Another helpful change is an increase in the market concentration levels that are likely to warrant further scrutiny or challenge from the agencies, as measured under the Herfindahl-Hirschman Index. Other revisions include:
An updated section on coordinated effects;
An updated explanation of the hypothetical monopolist test used to define relevant anti-trust markets and how the agencies implement it;
New sections on powerful buyers, mergers between competing buyers, and partial acquisitions; and
An updated discussion of how the agencies evaluate whether entry into the relevant market is so easy that a merger is not likely to enhance market power.
The big question now is how the changes will play out if a deal ends up in court. Until that gets sorted out, some expect closing a transaction to be a longer, more costly process.
Companies may have to jump through more hoops to get the agencies comfortable that a proposed transaction doesn’t raise anti-trust issues. For instance, Newhouse says companies should expect “broad data requests from the agencies” that will require hiring economists and lawyers to draft responses, which will raise costs.
Ilene Knable Gotts, a partner with law firm Wachtell, Lipton, Rosen & Katz and a former FTC attorney, says the bottom line is, “If your transaction involves two competitors, expect the deal to take longer to get approved and to cost more.”
Still, a major open question is how the courts, which have relied heavily on the old guidelines, will treat the new guidelines. “It may take quite some time for the courts to adopt them,” says Wales. “In the meantime, they may continue to rely on the old guidelines,” along with decades of case law, all of which point to defining the relevant market as the first step in analyzing a deal’s likely competitive effects.
Moreover, observers say the courts may have a harder time applying the more flexible approach under the revised guidelines. For the agencies, says Denis, “this could be as much a sword as it is a shield.”