‘Big is Bad’ Embraced and Scope of Scrutinized Transactions Expanded

Two years ago, we announced that an antitrust revolution was underway. We do not regret that call. The Federal Trade Commission (“FTC”) and Department of Justice (“DOJ”) (collectively, the “Agencies”) published their highly anticipated draft Merger Guidelines (“Guidelines”), subject to public comment until September 18. The Guidelines embrace a return to the precedent of the 1960s, moving away from a focus on the “consumer welfare” standard focused on price effects, and favoring fragmentation over efficiency.

The 51-page Guidelines detail a wide-range of competitive harms and circumstances that could possibly raise concerns, casting a wide net to capture even those transactions involving partial ownership stakes or no horizontal or vertical overlaps. The Agencies are paying more attention to serial acquisitions, labor competition, innovation, elimination of potential entrants, coordinated effects, firms with dominant positions, and foreclosure concerns. The Agencies’ focus on potential harms exceeds pricing effects to now include impacts on wages and employment terms, diminution of innovative effort, reduction of capacity investments (including lay-offs or hiring freezes), and limitations on product variety or features.  Transactions will now be considered presumptively unlawful (also known as the “structural presumption”) if the merged parties have a combined market share of more than 30 percent or concentration measurements exceed 1800 on the Herfindahl-Hirschman Index (“HHI”)¹ – a significantly lower threshold than the last merger guidelines (published in 2010). In parallel, the Agencies set the stage for defining narrower relevant markets (which itself would lead to increased concentration and market shares). Rebuttal evidence is largely discredited – the failing firm defense is very narrow, the Agencies note that entry in most industries takes a significant amount of time and is therefore insufficient, and efficiencies are deemed not cognizable if they will accelerate a trend toward concentration or vertical integration.

Some of the more notable expansions include:

• Presumption of coordinated effects based on high concentration (defined by the lower threshold of 1,800 HHI), while explicitly discrediting rebuttals based on structural conditions that prevent coordination - finding such conditions “exceeding rare in the modern economy.”
• Decreased concentration thresholds (1,800 HHI) and a 30 percent market share threshold to reach the structural presumption. To put it in perspective, a market with six equally sized firms would equate to 1,667 HHI. A market that has six meaningful competitors, one with 30 percent share, two competitors with 20 percent share each, and three competitors with 10 percent share each would result in a 2,000 HHI – making a transaction between any of these competitors presumptively unlawful under the new threshold.
• Concern regarding the elimination of potential entrants – even a perceived potential entrant. The strict failing firm defense combined with skepticism over the types of rebuttal evidence discounts the procompetitive benefits of accelerated innovation or more efficient uses of combined, often complementary, resources. This could have a significant chilling effect on America’s robust start-up community as exit strategies and timelines will be impacted. The Guidelines could have the inadvertent effect of diminishing competition as access to capital – the lifeblood of entrants – will become more challenging, ultimately increasing barriers to entry.
• Inquiry into the ability and incentive of firms to control products or services that rivals may use to compete – including products that are complementary to a rivals’ products if it enables rivals to obtain better terms from other providers. The Agencies will discount claims or commitments to protect or otherwise avoid harming rivals if the commitment does not align with the firm’s incentives and the Agencies give little weight to concerns about reputational harm or the claimed intent of companies or their executives.
• Presumption of harm in vertical transactions if the foreclosure share is above 50 percent; consideration of harm in transactions with less foreclosure if certain plus factors are present, including a trend towards vertical integration, transaction rationale, and increased barriers to entry.
• Concerns regarding transactions undertaken by a firm with a dominant position, defined as a firm holding more than 30 percent market share. This would also capture transactions in which a firm may seek to extend its dominance into a new market, for example, through bundling or conditioning purchases, but where no current horizontal or vertical relationship exists between the merging parties.
• Intention to stop trends toward concentration, which could condemn transactions where the HHI would increase by more than 200 even in industries that do not meet the new (lowered) threshold for concentration (1,800 HHI).
• Scrutiny of a pattern or strategy of growth through serial acquisitions, even if no single transaction itself substantially lessens competition. A strategy of consolidation could also be challenged under Section 2 of the Sherman Act or Section 5 of the FTC Act. The Agencies would examine the firm’s history and current or future strategic incentives. This focus is supported by proposed changes to the Hart-Scott-Rodino Act premerger notification (“HSR Changes”) that will require both parties to report transactions from the past ten years. 
• Specific focus on multi-sided platforms, including competition between platforms, on a platform, or to displace a platform.
• Concern whether transactions between competing buyers would substantially lessen competition for workers or other sellers.
• Examination of whether cross partial ownerships or minority interests reduce firms’ incentives to compete, including the impact of the right to appoint board members or observers, access to competitively sensitive information, and influence on operational decisions and capital budgets. The proposed HSR Changes seek to collect information upfront to assess the network of influence, requiring identification of directors and board observers and disclosures of the other entities which these individuals may influence.

Impact

Investors, boards and C-suites should anticipate significant delays and expenses associated with a far broader range of proposed transactions. Deal teams should be mindful of the transaction rationale (which merging parties would need to disclose in pre-merger notification filings) and transaction valuations – purchase prices that exceed the acquired firm’s stand-alone market value will be viewed as potential evidence that the acquiring firm expects to benefit from reduced competition.

A broader range of transactions will undergo fact-intensive scrutiny.  The metes and bounds of merger scrutiny will be constrained only by Agency resources – and the FTC has requested an increase of $160 million for a total budget of $590 million in FY2024 (compared to a budget of $331 million in FY2020). Over the past decade, only two to four percent of reported transactions were scrutinized beyond the initial 30-day waiting period through in-depth merger investigations, referred to as “Second Requests.”  

The Agencies will likely adhere more stringently to the lowered structural presumption, resulting in more litigated merger challenges.  Merging parties will have to turn to the courts to determine the bounds of what constitutes a probable substantial lessening of competition. While the Guidelines focus on transactions that may substantially lessen competition, they neglected to explain what may means – Section 7 of the Clayton Act “involves probability, not certainties or possibilities (emphasis added).”

We would be happy to discuss the implications of the draft proposed Merger Guidelines and proposed HSR Changes with you in more detail. Please contact Ausra O. Deluard (ausra.deluard@dentons.com) for further insights tailored to your business strategy and market dynamics.

1. The HHI is calculated by summing the squares of the individual firms’ market shares. But see Douglas H. Ginsburg & Joshua D. Wright, Philadelphia National Bank: Bad Economics, Bad Law, Good Riddance, 80 Antitrust L.J. 201, 204, 208, 209 (2015) (“There is simply no general theoretical relationship between market concentration and price in markets for differentiated products, where it is well understood that market share data are not necessary to evaluate the potential for unilateral price effects.”).↩