Last week, the U.S. Federal Trade Commission (FTC) and Department of Justice (DOJ) proposed 13 new federal guidelines for mergers and acquisitions—the first comprehensive update to the guidelines in over a decade and the latest installment in the federal government’s efforts to curb anti-competitive behavior, including the increasingly scrutinized behavior of actors in digital markets. The draft guidelines touch on an array of concerns: private equity roll-ups, labor markets, competitive bottlenecks, and access to a rival’s data, to name just a few. While the proposed guidelines will not be formally effective for a few more months, they already reflect current enforcement policies. Critics of the proposed guidelines argue the guidelines are an effort to move the country back in time and rely on outdated case law that has not kept pace with evolving technologies and market structures. If ultimately adopted, the proposed guidelines will have significant implications especially relevant to Big Tech and private equity.
New merger guidelines are released periodically. The FTC and DOJ’s Antitrust Division review federal merger guidelines with some regularity to ensure the guidelines align with the shifting realities of the modern economy, as the guidelines are meant to be a contemporary interpretation of existing law and a window into how the antitrust agencies analyze mergers. The FTC and DOJ have amended the guidelines several times since they were first released in 1968, including most recently in the 2010 horizontal merger guidelines and the 2020 vertical merger guidelines, the latter of which were withdrawn in 2021.
These latest proposed merger guidelines are a response to President Joe Biden’s sweeping 2021 executive order outlining 72 actions by 12 federal agencies aimed at promoting competition. Among other measures, the executive order directed the FTC and DOJ to rewrite their guidelines on antitrust enforcement.
The proposed merger guidelines, which address both vertical and horizontal merger enforcement, also reflect FTC Chair Lina Khan’s strategy to utilize existing antitrust laws broadly and creatively in the context of mergers and acquisitions. Chair Khan, in an NPR interview, recently pointed to seismic shifts in the U.S. economy from digitization, concentration of labor markets leading to lower wages, and industry rollups through serial acquisitions. She also acknowledged that while consumer harm is the main guiding light in evaluating mergers, existing law and the proposed guidelines take into account potential harm to workers, entrepreneurs, small businesses and startups.
Attorney General Merrick Garland’s comments echo those of Chair Khan. He emphasized that “unchecked consolidation threatens the free and fair markets upon which our economy is based,” and praised “[t]hese updated Merger Guidelines” because they “respond to modern market realities and will enable the Justice Department to transparently and effectively protect the American people from the damage that anticompetitive mergers cause.”
Summary of the Updated Guidelines
In crafting the proposed guidelines, the FTC and DOJ focused on three core goals. The first goal is that the guidelines should reflect the law as written and interpreted by the highest courts, which is why the proposed guidelines cite cases to clarify the connection between the law and the analytic frameworks contained in the guideline’s application section. The second goal is that the guidelines should be accessible, which the FTC and DOJ hope will increase transparency and awareness. And finally, the agencies sought to assure that the guidelines provided frameworks that reflect modern economic realities.
The 13 new proposed guidelines specify that:
- Mergers should not significantly increase concentration in highly concentrated markets.
- Mergers should not eliminate substantial competition between firms.
- Mergers should not increase the risk of coordination.
- Mergers should not eliminate a potential entrant in a concentrated market.
- Mergers should not substantially lessen competition by creating a firm that controls products or services that its rivals may use to compete.
- Vertical mergers should not create market structures that foreclose competition.
- Mergers should not entrench or extend a dominant position.
- Mergers should not further a trend toward concentration.
- When a merger is part of a series of multiple acquisitions, the agencies may examine the whole series.
- When a merger involves a multi-sided platform, the agencies examine competition between platforms, on a platform, or to displace a platform.
- When a merger involves competing buyers, the agencies examine whether it may substantially lessen competition for workers or other sellers.
- When an acquisition involves partial ownership or minority interests, the agencies examine its impact on competition.
- Mergers should not otherwise substantially lessen competition or tend to create a monopoly.
Although these 13 proposed guidelines are not groundbreaking in the abstract, they reflect major policy changes at the FTC and DOJ that are already underway.
As an example, the new guidelines lower the market concentration thresholds for horizontal mergers. This bucks the trend of previous guidelines. The 2010 horizontal merger guidelines, using the Herfindahl-Hirschman Index (HHI), defined a market as “highly concentrated” if four (or fewer) equal sized firms remained after a merger. And indeed, in recent years the antitrust agencies have rarely, if ever, challenged mergers if more than four significant competitors remained in the market after the merger. The new guidelines lower the HHI thresholds as well as the “delta” (the change in concentration). Under the new guidelines, a merger that results in ten competitors of equal size (each with 10% market share) could get scrutinized, and a merger that reduces the number of significant competitors from six to five could be challenged. As a result, while there was very little antitrust enforcement against mergers that left 5 competitively significant firms in an industry over the last decade or so, the proposed guidelines suggest that this may be about to change, which may have profound effects on companies in more highly concentrated industries and markets.
Further, the proposed guidelines take specific aim at mergers between platforms—those businesses that provide products or services to two or more groups or “sides” who may benefit from each other’s participation. These mergers may attract scrutiny if they involve: two platforms merging; a platform acquiring one of its participants; an acquisition of a company that facilitates participation on multiple platforms; or the acquisition, by a platform, of a company that provides important inputs for platform services. And while foundational cases emphasize that the antitrust laws are designed to protect “competition, not competitors,” the proposed guidelines would radically expand the theories of harm to include mergers’ impact on current and potential competitors. Other changes in the proposed guidelines would address: (1) acquisitions of minority interests; (2) mergers and competition in the labor market; (3) series of acquisitions; and (4) digital markets.
Ultimately, these guidelines will likely result in greater agency scrutiny of merging parties earlier in the regulatory review process, which will likely result in increased enforcement and litigation. Further, in the words of Chair Kahn, the existence of these guidelines may deter even talks about potential anti-competitive mergers and acquisitions, without the need for regulatory action.
Focus on Specific Industries
The proposed guidelines are not necessarily industry-specific but are especially noteworthy for the tech and private equity sectors.
The tech industry has grown to be a significant part of the economy. The older guidelines, however, did not focus on this industry. This gap has proven significant as acquisitions by tech companies have frequently involved early-stage companies with little or no revenue. Under the traditional analysis, acquisitions of small companies with little or no market share were deemed to be competitively insignificant. But experience has shown that these acquisitions include early-stage competitors, and thus may have an impact on competition much larger than the apparent market shares.
The guidelines also reflect a concern with repeated small acquisitions, particularly by private equity firms, that are part of an effort to “roll up” a fragmented industry. Under traditional analysis, acquisitions have been generally viewed one at a time and in isolation. Section 7 of the Clayton Act has language about the tendency of mergers to create monopoly. The 2010 guidelines expressly stated that the Clayton Act was an “incipiency” statute, saying that it was “ congressional intent that merger enforcement should interdict competitive problems in their incipiency and that certainty about anticompetitive effect is seldom possible and not required for a merger to be illegal.” The new guidelines take this a step further by calling out acquisitions that, viewed in isolation, do not appear to impact competition but are part of a conscious attempt to consolidate an industry.
The updated guidelines came a few weeks after the agencies put out new proposed merger notification rules under the Hart-Scott-Rodino Act that would dramatically increase the information required in reportable mergers, and also the time and expense involved. The revised HSR rules also had a focus on private equity transactions, both in terms of identifying “interlocking directorates” and prior acquisitions that could be part of a roll-up.
As we noted at the outset, the guidelines reflect the administration’s view that there is a concentration problem in the economy. Earlier guidelines contained incremental changes. The current guidelines attempt to do much more. The DOJ and FTC have taken the position that the current guidelines are a return to the law as it exists. However, the fact that the administration has focused on what it regards as underenforcement of the antitrust laws leads to a concern that the new guidelines may be more politics than law. In addition, to the extent the new guidelines cite old cases, they may run headlong into the views of the courts. The courts have for the most part tended to narrow antitrust enforcement and have overruled older antitrust cases. Thus, the guidelines may not meet acceptance in the courts, which could ultimately weaken their importance as an enforcement tool.
The public can provide comments to the draft guidelines until Sept. 18, 2023.
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