C lient A lert
August 2010
Contacts
Washington Office
1900 K Street, NW
Washington, DC 20006-1109
FTC and DOJ Publish Revised Horizontal
Merger Guidelines
On August 19, 2010, the Federal Trade
ÆÆ
de-emphasize market definition,
D. Bruce Hoffman
(202) 955-1619
[email protected]
Commission and the U.S. Department
and provide more guidance on the
of Justice (collectively “the Agencies”)
fact-specific analyses and theoretical
released the final version of the
concepts the Agencies actually use
David A. Higbee
(202) 955-1957
[email protected]
revised Horizontal Merger Guidelines
in merger review;
Ray V. Hartwell III
(202) 955-1629
[email protected]
replace the 1992 Merger Guidelines.
(the “2010 Merger Guidelines”). The
2010 Merger Guidelines update and
ÆÆ
evidence the Agencies consider in
merger review;
Since the issuance of the first Horizontal
Merger Guidelines in 1968, the Agencies
ÆÆ
Merger Guidelines, but which have
the Agencies review mergers between
developed in enforcement practice
companies that compete for the same
over time, such as mergers’ effects
customers (so-called “horizontal” com-
on innovation, and the analysis of
petitors). However, commentators had
mergers between buyers; and
noted that the 1992 Merger Guidelines
no longer reflected the Agencies’
add concepts not previously covered
or given much attention in the 1992
have sought to provide a guide to how
ÆÆ
implement some new concepts,
enforcement policy. The 2010 Merger
such as using merger review to
Guidelines in many respects more
enforce Section 2 of the Sherman
accurately reflect the Agencies’ current
practices in reviewing horizontal mergers.
The 2010 Merger Guidelines substan-
Act’s prohibition on the unlawful
acquisition or maintenance of
monopoly power.
tially change the text of the 1992 Merger
The 2010 Merger Guidelines are
Guidelines. In most respects, however,
substantially longer and more complex
the changes appear to embody existing
than the 1992 Merger Guidelines. They
Agency practice rather than significantly
also adopt a tone that is slightly less
altering merger review policy. Notably,
favorable to mergers than the 1992
the 2010 Merger Guidelines:
Merger Guidelines, notably with respect
ÆÆ
raise the concentration thresholds at
which mergers are considered likely
to create anticompetitive effects, to
more closely track actual Agency
practice;
Hunton & Williams LLP
provide details on the types of
to firms with high margins (such as many
technology companies). Whether these
changes will have any significance for
merger enforcement remains to be seen.
A more detailed description fol-
the de-emphasis on market definition
The Agencies also explain that the
lows, tracking the structure of
described below, has any influence on
potential sources of these types of
the 2010 Merger Guidelines.
the courts in litigated merger cases.
information include the merging parties
Section 1: Overview
Section 2: Evidence of Adverse
Competitive Effects
The 2010 Merger Guidelines begin
themselves, customers and other
industry participants and observers.
These types of evidence from this
with an overview outlining the
The 2010 Merger Guidelines include
variety of sources are all widely used
philosophy behind the Guidelines.
a new section entitled “Evidence of
in practice by both the Agencies and
The revisions do not dramatically
Adverse Competitive Effects,” which
counsel to merging parties, and many
change the Guidelines’ substance, but
outlines the type of evidence Agency
were discussed in the Commentary to
do adopt a somewhat more skeptical
staff typically take into account, and
the Merger Guidelines issued by the
tone toward mergers. For example,
the weight they accord that evidence.
Agencies in 2006. Thus, the addition
The Agencies explain that they
cantly change the Agencies’ approach,
consider “any reasonably available
and may be helpful to parties and
and reliable evidence” in determining
counsel by enhancing transparency.
the overview notes that mergers
should not be permitted to “entrench”
market power (an addition to the
prior “create or enhance” language);
it adds “diminish[ing] innovation”
and “reduced product variety” to
the taxonomy of anticompetitive
effects of mergers; and it asserts that
“[e]nhanced market power may also
make it more likely that the merged
entity can profitably and effectively
engage in exclusionary conduct.”
A major theme of the 2010 Merger
whether a merger under consideration
is likely to cause anticompetitive
effects, but this new section “discusses
several categories and sources
of evidence that the Agencies, in
their experience, have found most
informative….” The enumerated
types of evidence include:
ÆÆ
Guidelines, starting with the
overview, is that Agency staff do not
mechanically follow the five-step
of this new section should not signifi-
ÆÆ
Section 3: Targeted Customers and
Price Discrimination
The 2010 Merger Guidelines include
an expanded discussion of price
discrimination — the ability of merging
firms to identify particular customers or types of customers who will
for consummated mergers,
tolerate higher prices. This reflects
evidence of actual competitive
current Agency practice, which has
effects;
long considered price discrimination
evidence that the parties currently
assessment of competitive effects.
in both market definition and the
approach outlined in the 1992 Merger
set their prices above incremental
Guidelines, but instead engage in
cost;
Section 4: Market Definition
natural experiments or “direct
The 2010 Merger Guidelines downplay
tools. It has long been the case that
comparisons based on experi-
the importance of market definition.
Agency staff focus their analysis on
ence”;
However, the final version of the
a more amorphous, fact-specific
inquiry using a variety of analytical
the issues of most importance in
each merger review, as opposed to
ÆÆ
2010 Merger Guidelines downplays
ÆÆ
proceeding rigorously through the
1992 Merger Guidelines’ steps as
ÆÆ
market share and concentration in
market definition to a lesser extent
one or more relevant market(s);
than originally proposed when the
the closeness of competition
if they were a checklist. Thus, this
among the parties (e.g., whether
change in language largely reflects
they are or are likely to become
long-standing practice, though it also
“head-to-head” competitors); and
seems to be an attempt to grant even
Federal Trade Commission released
the proposed revisions to the 1992
Merger Guidelines for public comment
in April 2010. The final 2010 Merger
Guidelines explain that the market defi-
whether the transaction would
nition exercise is “not an end in itself,
will be interesting, however, to see
eliminate a “maverick” player in
but is useful to the extent it illuminates
whether this change, combined with
the market.
the merger’s likely competitive effects.”
more discretion to the Agencies. It
ÆÆ
The 2010 Merger Guidelines note that
2
Client Alert
market definition serves two primary
test, which is used to determine
amount of SSNIP to use, “[t]he higher
purposes. First, it “helps specify the
the appropriate relevant antitrust
the pre-merger margin, the smaller
line of commerce and section of the
product market. The 1992 Merger
the recapture percentage necessary
country in which the competitive
Guidelines explained that a relevant
for the candidate market to satisfy
concern arises.” Second, it “allows
product market is “a product or group
the hypothetical monopolist test.”
the Agencies to identify market par-
of products such that a hypothetical
ticipants and measure market shares
profit-maximizing firm that was the
and market concentration,” a neces-
only present and future seller of
sary step for market concentration
those products (‘monopolist’) likely
analysis. The 2010 Merger Guidelines
would impose at least a ‘small but
One of the most anticipated changes
emphasize that “competitive effects
significant and nontransitory’ increase
was the Agencies’ upward revision
can inform market definition,” sug-
in price” (“SSNIP”). The 2010 Merger
of the concentration thresholds used
gesting that in some instances the
Guidelines expand and update this
in assessing whether a proposed
impact that a reduction in the number
definition, stating that the test is used
transaction would likely result in
of rivals offering a product or group
“to identify a set of products that are
anticompetitive effects. The Agencies
of products has on price may support
reasonably interchangeable with a
use the Herfindahl-Hirschman Index
finding that those products constitute
product sold by one of the merging
(“HHI”) to calculate market concentra-
a relevant market. The revisions
firms.” The 2010 Merger Guidelines
tion. The HHI is calculated by summing
suggest that this type of analysis is
also provide specific examples of the
the squared market shares of all
most likely to be used when there are
test’s application and of factual varia-
participants in a relevant market.
multiple “alternative and reasonably
tions that might affect how it is applied.
Section 5: Market Participants,
Market Shares and Market
Concentration
As a practical matter, the 1992 HHI lev-
plausible candidate markets [whose]
The 2010 Merger Guidelines reinforce
els did not comport with the Agencies’
the importance of the hypothetical
actual enforcement actions, as the
monopolist test in merger analysis.
Agencies generally challenge only
The final version of the 2010 Merger
mergers that significantly exceeded
Guidelines expands on the proposed
these thresholds. For example, a joint
the relevant market(s) is difficult.
2010 Merger Guidelines revisions by
study by the Agencies on the levels of
giving the agencies added flexibility in
concentration in challenged mergers
The reduced emphasis on market
the amount of price increase that con-
between 1999 and 2003 revealed that
definition reflects current Agency
stitutes a SSNIP and giving pre-merger
more than 87% of mergers challenged
practice in which market definition
margins a role in the hypothetical
by the Agencies would have resulted
clearly matters, but competitive
monopolist test. Traditionally, the
in post-merger market concentration
effects theories are often viewed as
Agencies considered a SSNIP to be
above 2,400 and almost all of the chal-
more important. This downplaying
a price increase of approximately 5%.
lenges at concentration levels below
of market definition may also be an
Under the 2010 Merger Guidelines,
2,400 were in three specific industries:
attempt to address some of the recent
the percentage used for the SSNIP will
petroleum, supermarkets and banking.
difficulties the Agencies have faced
vary based on the characteristics of the
in litigation, since — in some tension
industry and may be higher or lower
The 2010 Merger Guidelines
with Agency views — courts have
than 5%. This variation on the SSNIP
update these thresholds to more
generally considered market definition
percentages reflects current Agency
closely reflect the Agencies’
to be an indispensable requirement
practice. For example, the FTC has
actual enforcement practice.
for a merger challenge, and resisted
publicly advocated for a 1% SSNIP
efforts to define narrow markets.
to apply in certain transactions in the
market shares lead to very different
inferences regarding competitive
effects.” In other words, the Agencies
are most likely to apply this type of
analysis in cases in which defining
petroleum and supermarket industries.
The 2010 Merger Guidelines also
address the “hypothetical monopolist”
www.hunton.com
In addition, the pre-merger margins of
the parties will be a key factor in what
Also consistent with actual practice,
the Agencies noted that in some
cases the change in the number of
competitors is more significant than
3
Market Description
1992 Merger Guidelines 2010 Merger Guidelines
HHI Thresholds
Unconcentrated
Under 1,000
HHI Thresholds
Under 1,500
the Agencies have added a new
section that brings innovation analysis — previously found only in other
guidance issued by the Agencies,
Market — A merger
such as the Antitrust Guidelines for
that results in an
the Licensing of Intellectual Property
unconcentrated market
and the Antitrust Guidelines for
is considered unlikely
Collaborations Among Competitors
to result in adverse
— into the Merger Guidelines them-
competitive effects.
Moderately Concentrated 1,000 to 1,800
1,500 to 2,500
selves. The revisions also include a
discussion of the effects of mergers
Market — A merger in a
on “product variety” — a relatively
moderately concentrated
untested area of merger analysis
market that results in
that has the potential to introduce
a change in the HHI of
uncertainty and confusion, since it is
more than 100 points
unclear whether adequate legal and
potentially raises signifi-
economic guidance exists for assess-
cant antitrust concerns.
ing optimal levels of product variety.
While the discussion of coordinated
Highly Concentrated
Above 1,800 with an
Above 2,500 with an
Market
HHI increase of:
HHI increase of:
50–100 points: poten-
100–200 points: poten-
does not appear to be greatly differ-
tially raises significant
tially raises significant
ent from that contained in the 1992
anticompetitive concerns; anticompetitive concerns;
interaction (joint action by competing
firms) in the 2010 Merger Guidelines
Merger Guidelines, the final 2010
Merger Guidelines update the list
More than 100 points:
More than 200 points:
of factors considered to increase
creates a presumption
will be presumed to
the likelihood of coordination and
that the merger will result be likely to enhance
therefore make the Agencies
in anticompetitive effects. market power.
likely to challenge the merger.
Section 8: Powerful Buyers
changes in the HHI, changes in
issue during merger review. Notably,
concentration are only one factor to
the revisions switch the order of effects
be considered, and such changes in
theories, moving unilateral effects
concentration may be more or less
ahead of coordinated interaction, which
significant in particular contexts.
appears to reflect the more robust
Sections 6 and 7: Unilateral and
Coordinated Effects
The 2010 Merger Guidelines also
provide an expanded discussion of
competitive effects (unilateral and
coordinated), which reflects the considerable emphasis Agency staff and
merging firms typically place on this
4
role unilateral effects have played in
merger enforcement since the issuance of the 1992 Merger Guidelines.
The 2010 Merger Guidelines reflect
substantial changes to unilateral
effects analysis, including an
The 2010 Merger Guidelines include
a new section discussing powerful
buyers and their potential ability
to check anticompetitive conduct.
However, consistent with current
practice, the revisions note that
arguments that “power buyers” may
constrain post-merger price increases
are subject to a number of limitations.
Section 9: Entry
expanded discussion of bargaining
The 2010 Merger Guidelines provide
and auction models and the elimination
a simplified discussion of “ease of
of market share screens. Additionally,
entry” and its role in merger analysis.
Client Alert
The Agencies explain that they will
competing buyers from a small note
merger. Key factors will include
consider whether the prospect of entry
in the 1992 Merger Guidelines to an
whether the partial acquisition results
into the relevant market will deter or
entire section. In the revisions, the
in effective control of the target firm,
counteract any competitive effects.
Agencies note that just as mergers
the potential ability of the acquiring firm
In making this determination, the
of sellers can enhance market power
to influence the competitive conduct
Agencies will consider the timeliness,
on the selling side of the market,
of the target firm, whether the acquisi-
likelihood and sufficiency of entry. In
buyer mergers can lead to increased
tion will reduce the incentive of the
considering whether entry is “likely,”
market power, sometimes labeled
acquiring firm to compete, and whether
the 2010 Merger Guidelines also
“monopsony power.” In analyzing
it will give the acquiring firm access
eliminate the requirement from the
whether a merger will likely enhance
to competitively sensitive information
1992 Merger Guidelines that entry
buyer market power, the Agencies will
from the target firm. Through analysis
must occur within two years, in favor
follow a similar framework to analyzing
of these factors, the Agencies weigh
of a more amorphous approach,
mergers of competing sellers. The final
potential unilateral and coordinated
consistent with the tone and language
version of the 2010 Merger Guidelines
effects against any likely efficiencies,
of many of the other revisions.
adds that the Agencies will even use
though the 2010 Merger Guidelines
Importantly, the revisions note that
the “hypothetical monopsonist” test in
note that partial acquisitions usually
the Agencies will give substantial
analyzing mergers of competing buy-
do not enable many of the types of
weight to the actual history of entry
ers. The Agencies will also consider
efficiencies associated with mergers.
into the relevant market. Lack of prior
the presence of other buyers and effi-
successful and effective entry may
ciencies such as reduced transaction
indicate that entry is slow or difficult.
costs and volume-based discounts.
Sections 10 and 11: Efficiencies and
Failure and Exiting Assets
Also, consistent with the DOJ’s recent
***
The 2010 Merger Guidelines demonstrate that the Agencies currently
interest in the agriculture industry, this
engage in fact-specific, case-by-case
new section includes an example of a
analysis of each merger that comes
The 2010 Merger Guidelines
merger involving agricultural buyers.
before them, rather than the more
do not substantially change the
Section 13: Partial Acquisitions
rigid analytical process outlined in the
efficiencies, or of the “failing firm”
Finally, the 2010 Merger Guidelines
pleased to discuss how the revisions
and exiting asset defenses.
also reflect the Agencies’ increased
to the Horizontal Merger Guidelines
interest in recent years in partial acqui-
may affect your transactions or
sitions of competing firms. Here, the
other transactions in your industry.
former Guidelines’ discussion of
Section 12: Mergers of Competing
Buyers
1992 Merger Guidelines. We would be
2010 Merger Guidelines confirm that
The 2010 Merger Guidelines
the Agencies will analyze partial acqui-
elevate the discussion of mergers of
sitions much as they do a traditional
© 2010 Hunton & Williams LLP. Attorney advertising materials. These materials have been prepared for informational purposes only and are not legal advice. This
information is not intended to create an attorney-client or similar relationship. Please do not send us confidential information. Past successes cannot be an assurance
of future success. Whether you need legal services and which lawyer you select are important decisions that should not be based solely upon these materials.
Atlanta • Austin • Bangkok • Beijing • Brussels • Charlotte • Dallas • Houston • London • Los Angeles • McLean • Miami • New York • Norfolk • Raleigh • Richmond • San Francisco • Washington