08.26.2010

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Updates

Recently the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice jointly released their new Horizontal Merger Guidelines (the 2010 guidelines).  As we noted in our April 29, 2010 update, the 2010 guidelines are the result of a series of joint public workshops over the past nine months, as well as the culmination of the agencies' collective experiences since 1992, when they last revised the guidelines.

The 2010 guidelines reflect the agencies' current approach to reviewing horizontal mergers—that is, mergers between actual or potential competitors—and include refinements previously identified in the agencies' 2006 "Commentary on the Horizontal Merger Guidelines."  2010 guideline highlights include:

  • Government Analysis Is Fact-Specific.  The government's merger analysis does not use a single methodology, but is a fact-specific process through which the agencies use various tools to analyze whether a merger may substantially lessen competition.  The agencies' analysis is intended to be flexible.

  • Market Definition Is a Means to an End—Not the End.  Market definition, which identifies the area of effective competition between the merging companies—and through it, the market's size, participants and degree of concentration—is a tool that the agencies use to the extent that it may predict a merger's likely competitive effects.  Market definition is a part of, but not the result of, the analysis.  In some cases, determining the market definition may not be necessary.

  • Evidence of Head-to-Head Competition Is Critical.  The agencies place great weight on the evidence of head-to-head competition between the merging companies, that is, the extent to which one merger partner has in the past responded directly to the other's prices, product launches, technical innovations and marketing and advertising campaigns.  This evidence is typically found in the documents and data that is contemporaneously created and regularly used by the companies' managers.  During merger review, in decisions whether to challenge a transaction, the agencies give no weight to company presentations that ignore these documents and data.  Thus, where the companies believe the government is likely to investigate a proposed merger, company counsel should review this internal documentation as early as possible during negotiation and due diligence.

  • Key Customers Should Be on Board.  The agencies seek the views of important customers of the merging companies.  Where there is strong evidence that key customers regard the merging companies as the closest competitors in the relevant market, the agencies may challenge the transaction despite the existence of more distant competitors.  Accordingly, merger planning should include an early and well-thought-out program to educate key customers about the competitive benefits of the proposed merger.

  • Industries That Use Bargaining and Auctions May Face More Detailed Scrutiny.  The agencies pay special attention to markets that are characterized by bargaining and auctions between buyers and sellers, usually of intermediate goods.  They believe that the anticompetitive effects in these markets are likely proportional to the frequency with which, before the merger, one of the merging parties had been the runner-up when the other won the business.  Here too, early customer education may be critical to successful merger review.

  • Degree of Concentration Is a Significant Factor in Determining Anticompetitive Effect, but Thresholds Increase.  The degree of concentration in the relevant market, both before and after a proposed merger closes, continues to play an important role as an signal of the merger's anticompetitive (or lack of anticompetitive) effect.  On this point, the 2010 guidelines increase the relevant market concentration thresholds, called the Herfindahl-Hirschman Index, which adds together the square of the market concentration, out of a total of 100 for the entire market.

    As described in the table below, "Unconcentrated Markets"—those in which anticompetitive effects are unlikely—increase from below 1000 to below 1500.  "Moderately Concentrated Markets" those that raise potentially competitive concerns increase from between 1000 and 1800 to between 1500 to 2500.  "Highly Concentrated Markets"—those in which mergers potentially raise significant competitive concerns—increase from above 1800 to above 2500.  Although these increases suggest a more tolerant attitude toward horizontal mergers, in reality they reflect the agencies' current practice.
 Market  Current Threshold  New Threshold
 Unconcentrated  <1000  <1500
 Moderately Concentrated  1000-1800  1500-2500
 Highly Concentrated  >1800  >2500

Additional Information

This Update is only intended to provide a summary of the Horizontal Merger Guidelines.  You can read the full text of the Federal Trade Commission and Department of Justice's 2010 guidelines at http://www.ftc.gov/opa/2010/08/hmg.shtm.