On April 20, 2010, the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice jointly released their proposed revisions to the Horizontal Merger Guidelines for public comment.  The updated guidelines are the result of a series of joint public workshops over the past six months, as well as the agencies' collective experiences since 1992, when they last revised the guidelines.  The proposed revisions reflect the agencies' current approach to review of horizontal mergers, that is, mergers between actual or potential competitors, including refinements previously identified in their 2006 "Commentary on the Horizontal Merger Guidelines."  Interested parties may submit comments on the proposed revisions through May 20, 2010.

The proposed guidelines reflect current practice by the agencies, as well as clarify the current guidelines.  Highlights of the proposed guidelines 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 the 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 the agencies use to the extent 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 market definition may not be necessary.
• Evidence of Head-to-Head Competition Is Critical.  The agencies place great weight on 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 in the documents and data 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 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 proposed 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, of each of the players in that 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. 

Additional Information

This Update is only intended to provide a summary of the proposed Horizontal Merger Guidelines.   You can find discussions of other recent cases, laws, regulations, and rule proposals of interest to public companies on our Web site.