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Final Merger Guidelines Reconfirm Regulators’ Aggressive Antitrust Enforcement Agenda

January 18, 2024
6 minute read

Final Merger Guidelines Reconfirm Regulators’ Aggressive Antitrust Enforcement Agenda

January 18, 2024
6 minute read

Authored By

Emily Fons

Emily K. Fons

Special Counsel

Practices

On December 18, 2023, the Federal Trade Commission and the Department of Justice Antitrust Division (together, the Agencies) jointly released the final Merger Guidelines (the Guidelines). As we wrote in August 2023, the Guidelines reflect the Biden Administration’s goal of strengthening antitrust enforcement.

While the final version of the Guidelines reflects minor changes from the July drafts following a public comment period, the Guidelines continue to reflect a significant overhaul of the 2010 Horizontal Merger Guidelines and the 2020 Vertical Merger Guidelines they replace. Down from thirteen (13) guiding principles to eleven (11) due to consolidation of a few principles, the main takeaways remain largely unchanged from the draft guidelines.

Key Takeaways

  1. Structural Presumptions. The Agencies will continue to use the Herfindahl-Hirschman Index (HHI) to measure market concentration before and after mergers and use that measure to identify mergers that presumptively harm competition. However, the Guidelines set forth much lower thresholds for presumptive harm than the previous iterations; a market is now considered to be highly concentrated if it has an HHI of greater than 1800, down from 2500 in the 2010 guidelines. If a change in HHI due to a proposed merger would result in an increase of more than 100 in a concentrated market, the transaction is “presumed to substantially lessen competition or tend to create a monopoly.” Further, the Agencies now will be able to establish a rebuttable presumption a second way—if the merged firm’s market share surpasses 30% and the HHI increases by more than 100, the transaction also meets the structural presumption. These lower thresholds will result in more mergers meeting structural presumptions of an unlawful merger and may result in more challenges.
  2. Trends Toward Concentration. The Agencies also will look at patterns and historical merger activity within an industry to determine if there is a trend toward consolidation of players within the market, citing Congressional intent to stop anticompetitive tendencies at their incipiency. This means that the Agencies will look at merger activity of other market participants as it reviews a merger, and it will analyze the proposed transaction’s expected impact on potential future consolidation within the industry. It remains to be seen how this Guideline will be applied and under what circumstances a trend toward concentration could result in a merger investigation. In any event, merging parties should be aware that the Agencies will consider consolidation by their fellow market players in addition to the merger at hand.
  3. Existing Dominant Positions. The Guidelines also make clear that the Agencies will apply enhanced scrutiny when a merging firm has a “dominant” market position. The final Guidelines, however, eliminate the draft guidelines’ 30% market share threshold for identifying dominant firms and now direct the Agencies to “assess whether one of the merging firms has a dominant position based on direct evidence or market shares showing durable market power” to determine if the transaction will entrench that dominance or expand it into other markets. The Guidelines also state that the degree of scrutiny will increase with the size of the dominant firm’s market share.
  4. Vertical Transactions. While the Guidelines continue to reflect increased interest in vertical transactions, the final version removes the formal presumption of harm for certain types of such transactions. Under the draft guidelines, if a vertical merger had resulted in the merged firm having control of 50% or more of a given market, then the merger would have been presumed to substantially lessen competition. While the bright-line rule of 50% has been moved to the footnotes of Guideline 5 as an explanatory example of an inference of harm, the Agencies will still evaluate whether mergers could threaten competition by: (1) limiting rivals’ access to products or services, (2) granting the merged firm access to rivals’ competitively sensitive information, or (3) creating barriers to entry and competition. Notably, the FTC secured its first “win” in a vertical merger case just days before publishing the final Guidelines; a federal appeals court sided with the FTC in finding biotech company Illumina’s acquisition of Grail (a cancer testing company) as “likely to substantially lessen competition” in early cancer screening tests by hindering potential rivals of Grail from developing similar tests. Illumina subsequently announced that it would divest ownership of Grail.
  5. Nascent Competitive Threat. The Guidelines introduced new language surrounding nascent competitive threats, defined as “firms that could grow into a significant rival, facilitate other rivals’ growth, or otherwise lead to a reduction in its power.” These firms do not directly enter the dominant firm’s market, but instead have only partially overlapping products or customers that can grow into longer-term threats to the dominant firm. Declining to use the familiar language of “vertical” and “horizontal,” the Agencies refer to this as “ecosystem competition.” While the dominant firm may not be competing with the nascent firm with respect to all products and services, it is still partially restrained by the nascent firm’s combination of products and services. The Agencies noted that nascent competitive threats are particularly likely to emerge during technological transitions, and they will be taking particular care to preserve opportunities for more competitive markets to emerge during such transitions.
  6. Private Equity Roll-Ups and Serial Acquisitions. FTC Chair, Lina Khan, has continuously expressed her concern that private equity firms are engaging in “roll-up” acquisitions to achieve a large market share in a single industry through a series of smaller transactions. The Agencies will now look beyond the deal at hand to search for “a pattern or strategy of growth through acquisition by examining both the firm’s history and current or future strategic incentives” to identify “any overall strategic approach to serial acquisitions”— even if prior acquisitions were not reportable under the Hart-Scott-Rodino (HSR) Act.
  7. Labor Markets. The Guidelines confirm that the Agencies will evaluate whether mergers substantially lessen competition for workers. The Agencies’ goal is to protect not just competition for products and services, but also for labor. The Guidelines state that when a merger may result in lower wages, slow wage growth, worse benefits or working conditions, the merger may substantially lessen competition in the labor market.
  8. Rebuttal Evidence. The Agencies interspersed language throughout the final Guidelines recognizing that inferences of competitive harm may be rebutted. Further, the Guidelines dedicate a section to discussing various defenses and outline the Agencies’ expectation for what constitutes clear and convincing evidence for each example. However, the rebuttal evidence must be very strong to counteract the statutory presumption that a merger violates antitrust laws.

Conclusion

The Guidelines signal the Agencies’ intention to aggressively review proposed transactions by applying novel theories of competitive harm. However, importantly, the Guidelines are not the law and are not binding on courts considering challenges to mergers. The Agencies have the burden of convincing a judge that a transaction substantially reduces competition, and in the past several years, the Agencies often have come up short in that regard. The courts must now decide whether to depart from long-standing precedent and instead follow the new Guidelines.

Godfrey & Kahn is available to discuss the new Guidelines and assist clients in navigating the regulatory process for proposed transactions.

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