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Newly Proposed Merger Guidelines Threaten to Dampen M&A Activity

August 1, 2023
8 minute read

Less than a month after publishing proposed new rules for HSR filings, the Federal Trade Commission (FTC) and the Department of Justice (DOJ) jointly unveiled their long-anticipated revised merger guidelines on July 19, 2023. These proposed guidelines mark a significant milestone in the regulation of corporate consolidation and reflect the current view of the FTC and DOJ that more recent approaches to merger review have been too permissive and have failed to block transactions that harm consumers and workers.

The FTC and DOJ have long published joint guidelines for both horizontal and vertical mergers, including most recently the 2010 Horizontal Merger Guidelines and the 2020 Vertical Merger Guidelines. The merger guidelines are not the law and are not binding on courts considering challenges to mergers, but past iterations of the guidelines have proven to be persuasive to certain judges, and courts in the past have incorporated certain standards and analyses from the guidelines into their decisions. Further, the guidelines are indicative of the evidence and analyses that the enforcers will consider during a merger investigation.

In the fall of 2021, the FTC under the Biden administration announced its withdrawal from the joint 2020 Vertical Merger Guidelines published under the Trump administration, citing concerns that the guidelines did not address current market realities. The FTC further stated that it was undergoing a total revision to the joint 2010 Horizontal Merger Guidelines, published under the Obama administration. Subsequently, the DOJ also issued a concurring public statement to work closely with the FTC to update the guidelines, and a public comment period ensued. The new guidelines were published in late July and again are subject to additional public comment. For the first time, the proposed guidelines combine policies for reviewing both horizontal and vertical mergers that threaten to bring a whole new swath of deals under regulatory scrutiny and consequently dampen M&A activity. 

Guiding Principles

The proposed guidelines set forth thirteen principles that the agencies intend to use when determining whether a deal could be anticompetitive and illegal. The initial twelve principles warn against deals that “significantly increase concentration,” eliminate potential entrants in concentrated markets, or further a trend toward concentration. They also warn against transactions that “increase the risk of anticompetitive coordination,” even in markets that are “not yet highly concentrated,” or that “entrench or extend a dominant position.” The draft guidelines also call for enforcement against deals that could eliminate potential or perceived entrants in a market. The agencies also warn that the initial twelve principles “are not mutually exclusive” and or exhaustive of the principle that “mergers should not otherwise substantially lessen competition or tend to create a monopoly.”

The following summarizes some of the most notable additions and changes under the newly proposed guidelines that may apply to a wide range of industries.

Structural Presumptions

The new guidelines take the position that “[i]n highly concentrated markets, a merger that eliminates even a relatively small competitor creates undue risk that the merger may substantially lessen competition.” The agencies assess market concentration using “structural presumptions” that flag transactions that are likely to be unlawful.

The agencies’ primary means for assessing market concentration is the Herfindahl-Hirschman Index (HHI), which is calculated using the anticipated market shares of market participants before and after the merger. While the 2010 guidelines considered a market “highly concentrated” if the HHI of the market was 2,500 or greater, the proposed guidelines deem a market highly concentrated with an HHI of 1,800 or greater. If a deal would result in an HHI above 1,800 and increase the markets’ existing HHI by 100, the agencies would recognize a “structural presumption that the merger may substantially lessen competition or tend to create a monopoly.” Notably, the agencies utilized the 1,800 HHI threshold prior to 2010 and determined this was too low when revising the guidelines at that time.

The newly proposed guidelines also include a second structural presumption that any deal resulting in a merged firm with more than a 30% market share and a change in HHI greater than 100 is presumed unlawful. This structural presumption would apply even if one party has de minimis market share or the relevant market is otherwise fragmented. 

The result of these changes is that far more mergers will meet structural presumptions under the newly proposed guidelines than under the 2010 Horizontal Merger Guidelines. Importantly, however, meeting the structural presumption does not mean that the transaction will be challenged; the agencies still retain discretion whether to challenge mergers meeting these structural presumptions. It will remain to be seen whether the agencies will exercise their prosecutorial discretion to challenge mergers at the low end of the structural presumption, which they have not typically done in the past.

Private Equity Roll-Ups and Serial Acquisitions

FTC Chair, Lina Khan, has repeatedly made clear her concern that private equity firms, through a strategy of growth involving acquisitions or “roll up” transactions, may acquire a large market share through several small, often non-HSR reportable, transactions.  The proposed guidelines instruct the agencies to look at deals (including but not limited to in the private equity context) in the aggregate to determine if such deals “further a trend toward concentration” or are part of a “pattern or strategy of multiple acquisitions.” The guidelines state “[t]he agencies may examine 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.” The proposed new rules for HSR filings contemplate that merging parties will have to provide additional information on past acquisitions in similar industries, which will give the agencies a window into a firm’s acquisition strategy. 

Transactions Involving Products or Services Rivals May Use to Compete, Including Vertical Mergers

Mergers involving parties at different points in the supply chain, commonly referred to as vertical mergers, will be scrutinized if the transaction would give a company control over “products or services rivals use to compete.” The guidelines state that a “merger should not substantially lessen competition by creating a firm that controls products or services that its rivals may use to compete.” Further, if firms at different points in the supply chain merge, the agencies will consider whether the merged firm will have control over a competitor’s access to products, services, or customers, or will have the incentive to control any of those things. Under the new guidelines, if a vertical merger would give control of more than fifty percent (50%) of a given market to the merged firm, the agencies would presume that the merger could substantially lessen competition. And even if the vertical merger resulted in less than fifty percent (50%) market share, the proposed guidelines state that the agencies will consider other non-exhaustive factors to determine if the merger is potentially anticompetitive, including whether the merger is part of a trend towards vertical integration, may foreclose rivals, whether the relevant market is already concentrated, or if the merged firm will gain a dominant position and make entry into the market more difficult.

This aspect of the draft guidelines is particularly interesting considering the agencies’ track record in challenging vertical merger deals — every case to go to trial in front of a federal judge since the agencies started challenging vertical deals under the Trump administration has failed.

Labor

A noteworthy addition to the proposed guidelines is the trend of expanding the investigative scope beyond the consumer welfare standard (i.e., the effect of a transaction on prices paid by consumers) to include a focus on labor markets (i.e., the effect of a transaction on wages or terms of employment). Even if a merger is unlikely to harm consumers, the agencies have recently shown a willingness to challenge a merger that may lessen competition for workers, which the newly proposed guidelines formalize. The guidelines state that when a merger between two employers may result in lower wages or slow wage growth, worse benefits or working conditions, or result in degradations of workplace quality, the merger may substantially lessen competition in the labor market. 

Minority Ownership

Historically, purchasers of minority interests in companies tended to avoid antitrust scrutiny. However, the proposed guidelines would require the FTC and DOJ to assess whether a proposed transaction will result in either cross-ownership or common ownership that could be harmful to competition. The guidelines state that a minority owner could still influence the target in ways that could dampen competition.

Public Input

Like the revisions to the HSR filing form, the proposed guidelines are currently subject to a 60-day public comment period that will end on September 18, 2023. Public comments allow interested parties to express their views and provide feedback on the potential impact of the proposed changes. The agencies will consider these comments before finalizing the guidelines. 

Conclusion

The proposed merger guidelines are another step taken by the federal antitrust agencies to reshape the landscape of antitrust enforcement and will have a profound impact on businesses engaging in mergers and acquisitions. For firms engaged in merger and acquisition activity, staying abreast of these changes and understanding their implications will be essential. Godfrey & Kahn is available to discuss the proposed guidelines and changes to the HSR filing form.

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