On April 20, 2010, the US Department of Justice (DOJ) and Federal Trade Commission (FTC) jointly released revisions to horizontal merger guidelines, which were last modified in 1997. (The DOJ and FTC are referred to in the Guidelines, and in this article, as the Agencies.) The public was invited to comment, with a deadline of May 20. However, as of May 21, only two comments were posted. Perhaps because of the underwhelming reaction, the deadline for public comment was extended to June 4.
Below are some key points in the proposed Horizontal Merger Guidelines:
- While continually citing the use of empirical evidence, the Guidelines conceded that "certainty about anticompetitive effect is seldom possible and not required for a merger to be illegal."
- The Agencies will review evidence of adverse competitive effects, including actual effects in consummated mergers, experience, and statistical evidence of market shares and concentration. (Section 2.1)
- The Agencies will look at the impact of a merger on "targeted customers," i.e., customers who may be subject to a price increase resulting from a merger (even though non-targeted customers may not receive a price increase). (Section 3)
- Market definition, in which the relevant market is defined as a step in determining competitive effects, is "not an end in itself; it is one of the tools" the Agencies use to assess competitive effects. (Section 4)
- The proposed Guidelines spend much time on the price a hypothetical monopolist would impose, "a small but significant and non-transitory increase in price." The reader can tell that this is an important concept, as the proposed Guidelines even give it an acronym - "SSNIP." The SSNIP test compares the prices that would likely prevail absent the merger with the SSNIP. (Section 4.1)
- The Agencies will also look at market shares and market concentration. The proposed Guidelines reaffirm the use of the venerable Herfindahl-Hirschman Index ("HHI"), which calculates market concentration by adding the sum of the squares of the individual firms. The change in concentration can then be calculated based on the change in the HHI. The proposed Guidelines provide ranges in which changes in the HHI will warrant further analysis by the Agencies. (Section 5.3)
- The Agencies will also review what it described as "unilateral effects" of a merger resulting from the elimination of competition from a merger. These "unilateral effects" include unilateral pricing of closely related or substitute products of the merged entities, suppression of output, and reduction of innovation and product variety. (Section 6)
- Not only will the Agencies look at competitive effects involving current market participants, but the Agencies will also look at the barriers to entry into the market and the actual history of entry into the market. (Section 9)
- The Agencies will also look at factors favoring a merger, such as efficiencies (Section 10) and the merger of a failing business (Section 10). But the proposed Guidelines make clear that the Agencies will be skeptical of claims of efficiencies resulting from a merger. They will only credit "merger-specific efficiencies", i.e., those efficiencies likely to result from the merger and unlikely to be achieved in the absence of the merger.
- Similarly, the Agencies set a high standard before crediting claims that a merging entity is failing and would not survive without the merger. The merging entity must be at or near insolvency, be unable to use bankruptcy to successfully reorganize, and have made unsuccessful good-faith efforts to look at alternatives.
The proposed Horizontal Merger Guidelines show fewer differences with the current Guidelines than expected, perhaps because the Guidelines were last revised under the previous Democratic Clinton Administration in 1997.
As noted, the deadline for comment has been extended to June 4, perhaps due to the lack of a response to date. It is understandable that, coming out of a recession that has severely impacted M&A activity, the proposed Guidelines may be receiving less attention than expected. Nevertheless, the Guidelines are important. First, they are one of the first attempts by the Obama Administration to put its imprint on antitrust law enforcement. There was an expectation that the Obama Administration would be more aggressive in enforcing antitrust laws than the Bush Administration (although some claim the Bush Administration was more aggressive than commonly believed). Second, even though the effects of the recession are still severe, the M&A market will, it is hoped, revive, which will make the Guidelines critical for M&A practitioners and their clients.
The proposed Horizontal Merger Guidelines can be found at: http://www.ftc.gov/os/2010/04/100420hmg.pdf.
Comments on the proposed Horizontal Merger Guidelines can be found at: http://www.ftc.gov/os/comments/hmgrevisedguides/index.shtm.