Mergers and acquisitions will continue to face strong headwinds at the Federal Trade Commission (FTC) and the US Department of Justice (DOJ) under new proposed Merger Guidelines released on July 19, 2023.

The Proposed Guidelines detail how the agencies will evaluate horizontal (transactions with competitors), vertical (transactions integrating firms up/down a supply chain) and other transactions. The public has 60 days to comment on these Proposed Guidelines, but it is unlikely that there will be significant substantive changes given the Biden administration’s aggressive antitrust enforcement stance. When finalized, the Proposed Guidelines will replace the current 2010 Horizontal Merger Guidelines and the short-lived 2020 Vertical Merger Guidelines which the FTC withdrew in September 2021.

The Proposed Guidelines embody the antitrust agencies’ aggressive posture towards merger enforcement under the Biden administration. They reflect the agencies’ view that they have expansive statutory authority to challenge mergers under new and untested legal theories. Courts, however, have specifically rejected several of the theories in these Proposed Guidelines in recent merger enforcement losses suffered by the FTC and DOJ.

This On the Subject highlights the most significant changes in the Proposed Guidelines and what steps companies contemplating mergers and other transactions should take in the face of these changes.

IN DEPTH

THE LACK OF A “UNIFYING THEME” IS A FUNDAMENTAL CHANGE

Although many of the theories in the Proposed Guidelines are not new, the Proposed Guidelines represent a fundamental change to the agencies’ approach and standards it will use when evaluating mergers.

The current 2010 Horizontal Merger Guidelines state at the outset that their “unifying theme” is to prevent mergers that enable companies to “raise price, reduce output, diminish innovation, or otherwise harm customers.”[1] The rest of those guidelines outline a systematic approach to evaluating mergers consistent with this theme: (i) identifying the relevant market; (ii) identifying market participants and levels of concentration; and (iii) evaluating the merger’s likely unilateral or coordinated competitive effects (i.e., the likelihood that the merger will increase price, reduce output or diminish innovation).

The Proposed Guidelines do away with this unifying theme. To challenge a merger, it appears the FTC and DOJ no longer need to explain how a merger will lead to anticompetitive effects. Instead, to challenge a merger, the antitrust agencies merely need to satisfy one of several independent bases under which a merger is presumed to be anticompetitive:

• Guideline 1: A “significant” increase in concentration in a “highly concentrated market”

• Guideline 2: A combination of “substantial” competitors

• Guideline 3: A “meaningful” increase in the risk of coordination (presumed if Guideline 1 is met, and the agencies express skepticism such presumption could ever be rebutted)

• Guideline 4: Elimination of a potential entrant in a “concentrated” market (where a firm that has capabilities that would reasonably enable it to enter is presumed to be an entrant, regardless of its intentions)

• Guideline 5: Control of products/services rivals may use to compete if the acquisition might make it “harder” for the competitor to compete

• Guideline 6: Control of 50% share in an upstream market

• Guideline 7: Entrenchment or extension of a “dominant” position

• Guideline 8: Furthering a “trend toward concentration”

Guidelines 9 through 12 apply this framework to specific settings such as patterns of smaller mergers (i.e., “roll-up” transactions), mergers involving multisided platforms, mergers affecting labor markets and acquisitions of partial ownership or minority interests. Guideline 13 provides a catch-all for the FTC and DOJ to challenge other mergers that do not fall into one of the aforementioned buckets.

Notably, the scenarios in these Proposed Guidelines are all defined broadly. It is likely that many mergers will meet one or more of these bases. Thus, the Proposed Guidelines provide antitrust enforcement agencies with multiple independent avenues to challenge a merger. The burden is then shifted to the merging parties to demonstrate on rebuttal why their merger will not harm competition—and, at the same time, the Proposed Guidelines narrow the scope of merger defenses such as entry, efficiencies and failing firms.

REVIEW OF SELECTED CHANGES THAT REFLECT AGGRESSIVE MERGER ENFORCEMENT

Substantial Reduction in Threshold for Presuming Competitive Harm in Horizontal Mergers

Under the Proposed Guidelines, the agencies will presume that mergers with a post-merger Herfindahl-Hirschman Index (HHI) index of more than 1,800 or a combined market share of 30% or more and that involve an HHI increase of more than 100 will substantially lessen competition. Notably, the Proposed Guidelines create a new alternative presumption of harm based on market share—a concept not previously tested by courts. This effectively means that a 6-to-5 merger in a market of six equally sized competitors would be presumed unlawful (and that the same may be true of some mergers in markets starting with even more competitors). This is a significant change from the current 2010 Guidelines which apply a presumption only to mergers resulting in a 2,500 post-merger HHI, and an HHI increase of 200, which presumes that a merger of two firms in a market of five equally sized participants is unlawful (i.e., a 5-to-4). This change will significantly increase the number of mergers that the antitrust agencies would presume to lead to competitive harms and thus could challenge. Under this new standard, it will be important for merging parties to try to include all competitors they face in the relevant “market” to lower the combined shares. Considerable document review and data analysis may be necessary to credibly define the market.

New Structural Presumption for Vertical Mergers

The Proposed Guidelines announce a new structural presumption applicable to vertical mergers. If a merger leads to a company controlling 50% or more market share in the related upstream input product (the “foreclosure share”), the agencies will presume that the merger will harm competition in the downstream market that uses that input. Below the foreclosure share, the new guidelines would allow the FTC and DOJ to assert a structural presumption when considering a trend toward vertical integration, the nature and purpose of the merger, whether the relevant market is already concentrated, whether the merged firm already has a dominant position or if the merger increases barriers to entry.

For vertical mergers that do not meet this structural presumption, the Proposed Guidelines look at whether the merger increases the incentive and ability of the combined firm to make it difficult for rivals to compete. The Proposed Guidelines state that the agencies will give little weight to speculative claims about potential reputational harms that parties often suggest will prevent them from harming rivals through increased price or decreased quality or preventing rivals’ access to the related product. Unlike the 2020 Vertical Merger Guidelines, the Proposed Guidelines make no mention of the potential procompetitive effects of vertical integration, such as the elimination of double marginalization. This change is unsurprising given the skepticism current FTC and DOJ leadership have expressed towards efficiencies.

Aggressive Theories on Potential Competition

The Proposed Guidelines significantly lower the threshold for concluding that acquisitions of a potential competitor will lead to competitive harm. At the outset, the Proposed Guidelines state that any merger that eliminates a potential entrant in a “concentrated” market—defined as a market with an HHI of just 1,000 (or the equivalent of 10 equally sized competitors)—can substantially lessen competition.

The Proposed Guidelines also make it significantly easier to label a merging party as a “potential competitor.” The mere fact that a merging company has the capability or the resources to enter a particular market or is perceived by industry participants as a potential entrant is enough to label it a potential competitor—regardless of any evidence of actual intent to enter or concrete actions taken towards entry. This expansive definition of potential competition would likely allow the agencies to assert that certain companies are potential entrants in a broad range of markets. The Proposed Guidelines also state that subjective evidence that a company considered entry (e.g., evidence of a build-buy analysis) can prove that entry is likely absent the transaction.

Mergers Involving Already “Dominant” Companies Will Face Heightened Scrutiny

In a new theory that is not reflected in the 2010 Guidelines, the Proposed Guidelines take aim at mergers that entrench or extend a company’s dominant position. Companies with as little as 30% market share are labeled as “dominant”—a threshold that is inconsistent with modern US antitrust case law. This theory is designed to capture mergers that are not strictly horizontal or vertical but involve a firm with significant share combining with a firm with complementary products or services that may allow the “dominant” company to bundle products or rebates and increase switching costs for customers. The Proposed Guidelines also state that a “dominant” firm’s acquisition of a nascent competitor will face significant scrutiny—even when the nascent threat is uncertain or may take several years to develop.

Serial Transactions and Roll-Up Strategies Specifically Targeted

The Proposed Guidelines state that “a firm that engages in an anticompetitive pattern or strategy of multiple small acquisitions in the same or related business lines may violate [the antitrust laws], even if no single acquisition on its own would risk substantially lessening competition or tending to create a monopoly.” The agencies will look closely at companies’ “roll-up” strategies in which a single buyer acquires many different companies in the same market. The Proposed Guidelines also state that the agencies will challenge transactions in markets before they become “highly concentrated” if the industry is “trending towards concentration.” This guideline is likely to especially impact transactions involving private equity, large healthcare companies, Big Tech, and aerospace and defense contractors.

STEPS COMPANIES SHOULD TAKE TO GET DEALS DONE UNDER THESE NEW GUIDELINES

While the Proposed Guidelines reflect a fundamental shift from the 2010 Guidelines, they are not a paradigm shift from the current antitrust enforcement environment; rather, they codify the more aggressive approach towards mergers under the Biden administration, providing the FTC and DOJ with an expanded toolbox to investigate and challenge potentially problematic mergers. But simply because a merger falls within one or more of the Proposed Guidelines’ categories does not mean a transaction is dead on arrival. In many cases, it may still be possible to obtain clearance. The FTC and DOJ lack the resources to fully investigate and challenge all the many mergers that fall under these new theories and will need to exercise discretion based on their enforcement priorities. The FTC and DOJ only conduct in-depth investigations for less than 2% of all notified transactions.[2] The transactions that the antitrust agencies are challenging today will likely be similar to the transactions that the antitrust regulators challenge when the Proposed Guidelines are finalized.

Nevertheless, under the Proposed Guidelines, and also under the proposed changes to the premerger filings under the Hart-Scott-Rodino (HSR) Act, it will be critical for merging parties to conduct more thorough antitrust risk assessments earlier in the deal process and evaluate applicability to each of these categories. Under the proposed changes to the HSR reporting process, the antitrust enforcement agencies will receive significantly more information upfront to evaluate the applicability of these guideline categories to the reported transactions. Thus, it is important to engage antitrust counsel and economic experts earlier in the deal process, even for acquisitions of a small competitor or transactions that do not appear problematic on their face. Sellers considering multiple bidders will need to carefully weigh each bidder’s level of antitrust risk against these various theories of harm—and strategic bidders will need to respond by demonstrating a viable plan to secure regulatory approval. Under the Proposed Guidelines, even bidders who are not in the same market as the target assets, but who have large market shares in complementary or adjacent markets or have the resources to potentially enter the market, will face increased scrutiny from the FTC and DOJ.

Companies will need to pay careful attention to internal business document creation to mitigate the risk that the information in the documents will lead to greater scrutiny under these new guideline categories. For example, it is standard practice for many companies considering an acquisition to conduct “Build vs. Buy” analyses to determine whether to enter a market through organic growth or an acquisition. But, if such an analysis was included in the “Item 4 documents” that accompany an HSR filing, under the Proposed Guidelines, the mere consideration of a Build/Buy may lead to agency focus on potential competition theories. Firms should also limit the extent to which past acquisitions or contemplated future acquisitions are discussed within a single document because such discussions may alert agencies to a roll-up strategy which merits more intense scrutiny beyond the instant transaction. Ordinary course business documents should identify all competitors and potential entrants and detail their capabilities and resources. Merger efficiencies should be considered and documented early in the deal process before an agency investigation commences. It is important for the parties to articulate in these documents the ways in which the stated efficiencies can only happen because of the merger, are quantifiable and will achieve benefits that will be passed on to customers and/or employees. Regular document creation trainings and legal audits of business documents—including ordinary course documents created outside the deal process—are crucial for companies that actively buy and sell businesses.

THE PROPOSED GUIDELINES ARE UNLIKELY TO BE WELL RECEIVED BY COURTS

It is important to recognize that the Proposed Guidelines are not the law. The Proposed Guidelines cite cases from 30 to 40 years ago that are not consistent with how courts today evaluate mergers. Courts may very well reject some of the aggressive theories in these Proposed Guidelines, as they have been doing in recent cases. For example:

• The judge in Meta/Within[3] rejected the FTC’s theories on potential competition, dismissing the FTC’s actual potential competition theory that Meta’s internal discussions about potentially converting its musical rhythm VR app to a fitness VR app were sufficient evidence that Meta would enter but for the acquisition of Within and its perceived potential competition theory that other VR competitors considered Meta to be a potential entrant.

• The judge in United Healthcare/Change Healthcare[4] repudiated the DOJ’s speculative theories that, post-merger, United would have the incentive to disadvantage rivals who relied on Change’s electronic data clearinghouse. The judge noted that the DOJ’s argument “rests on speculation rather than real-world evidence that events are likely to unfold as the government predicts.” The judge also credited firewalls and other customer contractual commitments as sufficient to prevent anticompetitive harm to rivals. In contrast to this opinion, the Proposed Guidelines state that any transaction involving access to rivals’ competitively sensitive information may substantially lessen competition and assert that the FTC and DOJ are unlikely to credit commitments of the merging firms to protect rivals.

• The judge in Microsoft/Activision[5] acknowledged potential irreparable reputational harm as a reason why Microsoft lacked the incentive to foreclose rivals’ access to Activision’s Call of Duty videogame, in contrast to the Proposed Guidelines’ approach, which would label such harms as speculative and deserving of little weight.

• The judge in Booz Allen Hamilton/EverWatch[6] rejected the DOJ’s proposed antitrust market, which was limited to one government procurement for one customer. This decision would be inconsistent with the Proposed Guidelines’ emphasis on narrow product markets, including markets limited to a single customer even where “competitive constraints from significant substitutes are outside the group.” In denying a preliminary injunction to enjoin the transaction, the judge also stressed that there was no evidence that the proposed acquisition would likely lead to substantial anticompetitive effects.

Judges today rarely cite even the more broadly accepted and bipartisan 2010 Horizontal Merger Guidelines. The Proposed Guidelines, which were voted on by only Democratic FTC commissioners, will likely be viewed as a political advocacy document rather than a persuasive articulation of antitrust law—especially since the 2020 Vertical Merger Guidelines released under the Trump administration were withdrawn less than two years after their release. Therefore, merging parties must be prepared to defend their deal and, in some cases, litigate the fix (proposed remedies) in court—where merger case law governs, not these Proposed Guidelines. Merging parties should signal this intention to defend their deal in court to the enforcement agencies through the language in deal agreements (e.g., long end dates, antitrust efforts provisions) and in interactions with agency staff and front office management (e.g., formal presentations, responses to Second Requests).