On Dec. 18, 2023, the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) issued new Merger Guidelines that explain how both agencies will analyze whether potential transactions may violate the antitrust laws. The Merger Guidelines provide important insight into the types of transactions the agencies likely will investigate and may challenge and so are relevant to potentially merging parties, the business community and the public at large. The Merger Guidelines have been in place since the 1960s and have been modified periodically over time, most recently in 2020 for Vertical Merger Guidelines and in 2010 for Horizontal Merger Guidelines.
These new Merger Guidelines follow the DOJ and FTC’s release of draft Merger Guidelines in July 2023, as summarized in a prior alert. Those draft Merger Guidelines were subject to public comment through Sept. 18, 2023, and the agencies then took three months to incorporate and respond to those comments. The final Merger Guidelines retained the substantive emphases and changes in approach laid out in the draft Merger Guidelines, although the final Merger Guidelines were restructured and relabeled in several material ways.
What do the revised Merger Guidelines say?
After an overview section, the Merger Guidelines start by discussing “frameworks” the agencies use to assess whether mergers raise prima facie concerns under the antitrust laws. Each of these frameworks is enunciated as a distinct guideline about a type of merger the agencies believe merits scrutiny. The six frameworks are summarized below:
- Guideline 1: Mergers Raise a Presumption of Illegality When They Significantly Increase Concentration in a Highly Concentrated Market. As in prior versions of the Merger Guidelines, the agencies explain that they will presume mergers between competitors that significantly increase concentration will substantially lessen competition. Importantly, the revised Merger Guidelines follow the draft Merger Guidelines in lowering the existing threshold used by the agencies for this presumption to apply. The 2010 Horizontal Merger Guidelines provided that mergers resulting in a highly concentrated market, defined as having more than 2,500 points on the Herfindahl-Hirschman Index (HHI), and which involved a change in HHI greater than 200 were presumed likely to enhance the merged firm’s market power. The revised Merger Guidelines instead will apply the presumption if the merger results in a market with 1,800 HHI points and a change in HHI greater than 100, and apply a presumption not just that market power will be increased, but that the transaction will substantially lessen competition or tend to create a monopoly. The revised Merger Guidelines also will presume a merger substantially lessens competition if the combined firm has a market share of greater than 30% and the merger results in a change in HHI greater than 100. The result of these changes is that the agencies will presume the need to challenge more mergers based solely on the market structure.
- Guideline 2: Mergers Can Violate the Law When They Eliminate Substantial Competition Between Firms. As always, the agencies will look for instances of head-to-head competition between the parties to a transaction to determine whether there is “substantial competition between the merging parties” that would be eliminated by the merger. While examples of head-to-head competition have long been important to the agencies, the Merger Guidelines’ statement that a loss of “existing competition between the merging firms can demonstrate that a merger threatens competitive harm independent from an analysis of market shares” at least arguably decouples the analysis of head-to-head competition from other traditional modes of merger analysis. The 2010 Horizontal Merger Guidelines, for example, viewed examples of head-to-head competition as “inform[ing] market definition,” not necessarily as “independent” from market share analysis. The revised Merger Guidelines also break new ground by looking more broadly at the ways merging parties have shaped each other’s behavior, including, for example, in research and development efforts.
- Guideline 3: Mergers Can Violate the Law When They Increase the Risk of Coordination. The Merger Guidelines state, as recognized in existing law, that mergers can make coordination among rivals “more stable or effective” by reducing the remaining number of firms in the market. The Merger Guidelines also display an interest in preventing “tacit coordination,” i.e., observing or responding to rivals in a way that “does not rise to the level of an agreement and would not itself violate the law.” A version of this latter concern also was present in the 2010 Horizontal Merger Guidelines, but the revised Merger Guidelines emphasize the agencies’ current focus on the possible harms arising out of information exchanges, consistent with the agencies’ recent statements in other contexts such as enforcement against board interlocks. Likewise, the revised Merger Guidelines note that “[p]ricing algorithms” and “programmatic pricing software or services” can make markets more observable and thus susceptible to coordination, which is again consistent with recent DOJ investigations and enforcement actions.
- Guideline 4: Mergers Can Violate the Law When They Eliminate a Potential Entrant in a Concentrated Market. The Merger Guidelines signal an increased willingness to pursue potential competition theories, where the agencies would argue that one or both of the merging firms would have entered or expanded their presence in a relevant market but for the merger. Harm to potential competition also has been a focus of FTC/DOJ enforcement efforts in recent years.
- Guideline 5: Mergers Can Violate the Law When They Create a Firm That May Limit Access to Products or Services That Its Rivals Use to Compete. The current leadership of the antitrust agencies withdrew the agencies’ 2020 Vertical Merger Guidelines, but the revised 2023 Merger Guidelines reflect the agencies’ evolving and continued interest in theories of competitive harm that span multiple levels of the parties’ relationships. In particular, the new Merger Guidelines describe the agencies’ intention to evaluate whether transactions may result in vertically integrated firms that could foreclose rivals from necessary inputs. Likewise, the Merger Guidelines demonstrate a concern that vertically integrated firms could gain access to rivals’ competitively sensitive information. The DOJ has pursued these theories (at times unsuccessfully) in recent merger challenges and apparently will continue to do so.
- Guideline 6: Mergers Can Violate the Law When They Entrench or Extend a Dominant Position. The Merger Guidelines identify several ways that a merger may entrench or extend a dominant position of one of the parties, including by raising barriers to entry, eliminating nascent competitive threats, and extending a dominant position into another market. “Entrenchment” is one of a few expanded theories of harm included in the draft Merger Guidelines that remain prominent in the final Merger Guidelines.
The Merger Guidelines then explain how those frameworks apply in five specific market structures:
- Guideline 7: When an Industry Undergoes a Trend Toward Consolidation, the Agencies Consider Whether It Increases the Risk a Merger May Substantially Lessen Competition or Tend to Create a Monopoly. The agencies indicate that they will be more skeptical of mergers in industries with a “recent history” or “likely trajectory” of consolidation.
- Guideline 8: When a Merger Is Part of a Series of Multiple Acquisitions, the Agencies May Examine the Whole Series. In addition to considering (in Guideline 7) whether the industry as a whole is experiencing consolidation, the Merger Guidelines also focus on whether one of the merging parties has been engaged in a “pattern or strategy of multiple acquisitions in the same or related business lines.” This Guideline may have particular application in the private equity, pharmaceutical and technology spaces where serial acquisition strategies are common.
- Guideline 9: When a Merger Involves a Multi-Sided Platform, the Agencies Examine Competition Between Platforms, on a Platform, or to Displace a Platform. The Merger Guidelines signal the agencies’ continued interest in transactions involving platforms and networks of various kinds and impacting competition between platforms, on platforms and todisplace platforms.
- Guideline 10: When a Merger Involves Competing Buyers, the Agencies Examine Whether It May Substantially Lessen Competition for Workers, Creators, Suppliers or Other Providers. The Merger Guidelines maintain an interest in monopsony power — i.e., concentration of market power among buyers of goods or services. The agencies here underscore their concern with mergers that reduce competition between employers for employees. “Labor markets are important buyer markets … where employers are the buyers of labor and workers are the sellers.” Concern about a transaction’s impact on labor markets is a new theory of harm from previous versions of the Merger Guidelines.
- Guideline 11: When an Acquisition Involves Partial Ownership or Minority Interests, the Agencies Examine Its Impact on Competition. The Merger Guidelines also indicate that the agencies’ interest will not be limited to situations where one entity purchases control of another entity. Instead, the agencies also appear to be interested in situations where the buyer acquires “less-than-full control” but still has some decision-making authority, especially where the buyer also has investments in other companies within the same industry.
These 11 guidelines (which the agencies divide into the six “framework” guidelines, and the five “application” guidelines) are the heart of the new Merger Guidelines. But the Merger Guidelines also provide more information on the arguments that parties may assert in rebuttal to a finding that a merger is likely to substantially lessen competition (e.g., that one of the firms is failing, that entry into the relevant market is likely, and that the merger will have procompetitive benefits). The Merger Guidelines also provide more details on the tools the agencies will use in merger investigations (including the sources of evidence upon which they will rely, how they will evaluate head-to-head competition, and how they will engage in market definition). While the Merger Guidelines provide significant evolutions on these topics, the details of those developments are beyond the scope of this summary.
What are the key takeaways?
The Merger Guidelines are best understood not as a watershed change in merger enforcement, but as an enunciation of the changes that Jonathan Kanter (at DOJ) and Lina Khan (at FTC) have been pursuing since they began to lead the agencies. The Merger Guidelines, for example, underscore and formalize the agencies’ approach to challenging consolidation through transactions and focus on topics like potential competition, concern with vertical mergers, and willingness to think expansively about potential competitive harms. The merger challenges the agencies recently have brought have demonstrated the agencies’ interest in these theories, and the Merger Guidelines offer more structure to the thinking underlying those challenges.
It is additionally important that the Merger Guidelines, like prior Merger Guidelines, do not have the force of law — they instead are “a statement of the Agencies’ law enforcement procedures and practices” and “do not affect the rights or obligations of private parties.” While courts frequently have looked to prior iterations of the Merger Guidelines as persuasive authority, their persuasiveness came in part because they reflected recent case law and current economic thinking and were not limited to a particular administration’s views of antitrust law. To the extent these Merger Guidelines depart from longstanding interpretations of federal antitrust law (e.g., by asserting a string of acquisitions could violate Section 5 of the FTC Act), courts are less likely to give them deference. As in the merger challenges brought by Kanter’s DOJ and Khan’s FTC, the strength of the Merger Guidelines’ theories ultimately will be determined in the courts.
Regardless of whether the new Merger Guidelines ultimately are vindicated in the courts, they vividly demonstrate the agencies’ current enforcement agendas. And, as the parties’ recent decision to abandon the Illumina-Grail merger demonstrates, prolonged agency opposition to transactions can sometimes be enough to kill a deal even where there remains some question about whether courts would find that the transaction may substantially lessen competition.
McGuireWoods’ antitrust attorneys are available to consult with parties considering mergers, or third-party companies that have been drawn into merger investigations, about these developments.