Revised Merger Guidelines Would Expand Reviews And Limit Combinations - M&A/Private Equity

Highlights

Proposed Merger Guidelines that would expand significantly the number and types of transactions subject to antitrust challenge were jointly announced by the Federal Trade Commission (FTC) and U.S. Department of Justice (DOJ).
The Guidelines advance the view of the FTC and DOJ that prevailing approaches to merger review have been too permissive and not up to the task of identifying and preventing transactions that harm consumers and workers.
The draft Guidelines are currently subject to a 60-day public comment period that will end on Sept. 18, 2023.

The Federal Trade Commission (FTC) and U.S. Department of Justice (DOJ) on July 19, 2023, jointly announced the release of proposed Merger Guidelines that would expand significantly the number and types of transactions subject to antitrust challenge. The proposed Guidelines advance the view of the FTC and DOJ that prevailing approaches to merger review have been too permissive and not up to the task of identifying and preventing transactions that harm consumers and workers. Ironically, to "modernize" merger review standards, the proposed Guidelines revert to arguably outdated enforcement standards, including thresholds for identifying deals subject to a structural presumption of illegality that the FTC and DOJ abandoned in the last revisions to the Merger Guidelines in 2010. The agencies also contend that the draft Guidelines "reflect the realities of how firms do business in the modern economy" and are capable of addressing modern competition, which "looks different than it did 50 – or even 15 – years ago," yet cite decades-old cases as support for many positions that likely do not reflect current interpretation of the applicable laws.

The draft Guidelines describe how the agencies evaluate whether transactions might "substantially . . . lessen competition, or tend to create a monopoly" and violate Section 7 of the Clayton Act. The detailed explanations in the revised Guidelines will help companies that have encountered a more hostile enforcement environment understand in advance the nature of the concerns that the DOJ and FTC might raise about contemplated transactions. The Merger Guidelines are not binding in any way on courts considering DOJ or FTC challenges to mergers, but past iterations of the Guidelines have proven to be persuasive to certain judges, and courts in the past have incorporated certain standards and analyses from the Guidelines into their decisions. The DOJ and FTC likely hope – through release of "modernized" standards reflecting past enforcement practices – to persuade courts to begin to consider their more aggressive interpretations of the applicable laws. The agencies have to date largely failed to convince courts to adopt their more expansive views, as reflected in their poor track record in recent litigated merger challenges.

The proposed Guidelines are currently subject to a 60-day public comment period that will end on Sept. 18, 2023. Public comments may be submitted on Regulations.gov, and Holland & Knight stands ready to work with clients who would like assistance in submitting comments.

The Proposed Merger Guidelines

This Holland & Knight alert provides a detailed summary of the draft Guidelines and the 13 principles on which they are based. Several principles, however, are worth highlighting at the outset, particularly for clients and colleagues in the healthcare and private equity sectors. If adopted in the final version of the Guidelines, these principles will have a significant impact on the ability to obtain clearances of proposed mergers.

Structural Presumptions: The draft Guidelines include several presumptions that would automatically render certain proposed mergers harmful to competition and make an extended review of transactions – to which these presumptions would be applicable – a near certainty. Among other things, these presumptions arise when the combined firm in a horizontal merger will have more than a 30 percent market share, when a horizontal merger will eliminate a so-called maverick firm or when a vertical merger will result in the merged firm controlling more than 50 percent of a related market. The new presumptions are likely to have a chilling effect on potential acquisitions in the healthcare industry, as larger providers may be less likely to attempt to acquire even significantly smaller providers. Further, because there are often only a relatively small number of hospitals in a given market, the 30 percent market share threshold might be an impediment to a greater number of transactions, regardless of whether the transactions would be beneficial to the community.
Roll-ups or Serial Acquisitions: To broaden the scope of transactions subject to review by the FTC and DOJ, the draft Guidelines focus on whether the transaction under review is part of the acquiring company's roll-up strategy of multiple acquisitions in a single industry. If so, the FTC and DOJ may then consider the cumulative effect of the pattern or strategy on competition, rather than just focusing on the impact of the individual transaction. This guideline seems to target the typical private equity strategy of acquiring strength in a given market through a series of smaller acquisitions, none of which individually would require a pre-merger notification filing under the Hart-Scott-Rodino (HSR) Act.
Labor Markets: The draft Guidelines focus on labor markets and a merger's impact on workers or other sellers. Even if a proposed merger is unlikely to harm consumers, the FTC and DOJ still may challenge the merger if it will substantially lessen competition for workers in the relevant industry.
Minority Ownership Interests: The draft Guidelines focus on transactions that involve less than full control of a target firm. Parties cannot assume that they will avoid FTC and DOJ scrutiny merely by taking a relatively small ownership interest in a target firm. The draft Guidelines require the FTC and DOJ to assess whether a proposed transaction will result in either cross-ownership or common ownership that could be harmful to competition. An increased review of the potential effects of such transactions may impact the acquisition of non-controlling interests in joint venture limited liability companies or partnerships, which typically would not be reportable under the HSR Act.
Acquisitions of Potential Entrants: The draft Guidelines consider whether a proposed merger will eliminate a reasonably probable future market entrant, particularly in a concentrated market. This potential consideration may present challenges for healthcare provider acquisitions, even by an out-of-market provider, which have not typically been considered high risk from an antitrust standpoint because the number of competitors in the market would not change. The draft Guidelines suggest that the agencies may consider whether a potential acquiror has the resources to enter the market by constructing a new facility rather than by acquiring an existing facility in the market.

The 13 Principles Behind the Merger Guidelines

As noted above, the draft Guidelines are based on 13 principles that the FTC and DOJ may use when analyzing whether a merger may substantially lessen competition. These principles are not mutually exclusive, and more than one guideline may apply to a given merger. Key portions of the 13 principles are summarized and highlighted below:

Guideline 1 – Mergers Should Not Significantly Increase Concentration in Highly Concentrated Markets: The draft Guidelines define concentration as the number and relative size of rivals competing to offer a product or service to a group of customers and explain that the FTC and DOJ examine whether a merger between competitors would significantly increase concentration and result in a highly concentrated market. But in a radical change, the draft Guidelines presume that a merger creating a firm with a market share of more than 30 percent is presumptively anticompetitive regardless of the overall level of concentration in the relevant market.

The agencies use an analytical tool for assessing market concentration called the Herfindahl-Hirschman Index (HHI), which is computed by adding up the squares of the market shares of each market participant. The 2010 version of the Merger Guidelines established a threshold HHI of 2,500 for a "highly concentrated" market in which harm to competition would be presumed. As an illustration, a market with one firm with a 40 percent market share and one firm with a 30 percent market share would, under 2010 standards, be highly concentrated (40² (1,600) + 30² (900) = 2,500), and any transaction that produced that outcome would have been a near-certain target of an extended investigation and a likely candidate for a DOJ or FTC enforcement action. The draft Guidelines reduce the threshold for a highly concentrated market to 1,800, the level applicable under the 1982 Merger Guidelines. Under the revised standard, any transaction in a market with two firms with a 30 percent market share (30² (900) + 30² (900) = 1,800) will face serious headwinds at the DOJ or FTC, even if the acquiring company in the transaction at issue would not itself hold a 30 percent market share. This reduced HHI threshold for identifying highly concentrated markets is sure to expand the number of transactions subject to months-long reviews by the DOJ and FTC.

Guideline 2 – Mergers Should Not Eliminate Substantial Competition between Firms: The draft Guidelines focus on the extent to which the merging firms compete with each other. To make this assessment, the FTC and DOJ will consider a variety of evidence showing the extent to which the merging parties monitor each other's prices or activities and/or react to each other's conduct. The agencies will also consider the impact of earlier merger, entry or exit events, customers' willingness to switch between different products, the merger's impact on rivals and the impact of removing a competitor from the market via the proposed merger. The draft Guidelines also include an appendix that explains how the FTC and DOJ evaluate competition between merging firms, including specific factors they consider depending on whether the merging firms set the terms offered to customers, whether customers' terms are set via bargaining or auctions, whether the merging firms decide how much to produce or how much production capacity to maintain and whether the proposed merger implicates innovation or product-variation issues.
Guideline 3 – Mergers Should Not Increase the Risk of Coordination: The draft Guidelines examine whether a merger increases the risk of anticompetitive coordination, which may implicate a variety of factors, including price, product features, customers, wages, benefits or geography. The draft Guidelines focus on both explicit and tacit coordination and assess whether the merger will increase or stabilize coordination or make it more effective than before the merger. The draft Guidelines presume that coordination will occur post-merger if any of the following primary factors are present: 1) a highly concentrated market, 2) prior examples of actual or attempted coordination among market participants or 3) a "maverick" firm is being eliminated by the merger. Even if no primary factor is present, the draft Guidelines still require an analysis of the following secondary factors to determine if a merger will substantially lessen competition: a) market concentration, b) market transparency, c) competitive responses, d) aligned incentives and e) advantages of coordination. Not all of these secondary factors must be present for the FTC and DOJ to determine that a merger may substantially lessen competition.
Guideline 4 – Mergers Should Not Eliminate a Potential Entrant in a Concentrated Market: The draft Guidelines analyze whether the proposed merger will eliminate a potential market entrant. The more concentrated the market, the lower the probability of entry needs to be for the FTC and DOJ to conclude that the proposed merger raises anticompetitive concerns. The draft Guidelines focus on both actual potential competition and perceived potential competition. Actual potential competition assesses whether the proposed merger will eliminate a reasonably probable future market entrant. Perceived potential competition focuses on whether the proposed merger will eliminate current competitive pressure due to the elimination of a firm that was perceived to have been a potential market entrant.
Guideline 5 – Mergers Should Not Substantially Lessen Competition by Creating a Firm That Controls Products or Services That Its Rivals May Use to Compete: The draft Guidelines focus on the merger's impact on rivals and whether the merged firm will have control over a rival's access to products, services, or customers, or will have the incentive to control any of those things. If the merged firm will have the ability or incentive to make it harder for rivals to compete, the proposed merger may substantially lessen competition. The adverse impact on rivals includes an assessment whether the merged firm would obtain access to rivals' competitively sensitive information like projections, entry plans, or product innovations or improvements.
Guideline 6 – Vertical Mergers Should Not Create Market Structures That Foreclose Competition: Vertical mergers involve firms operating at different levels of the supply chain. When assessing a vertical merger, the draft Guidelines analyze how the merger would restructure a vertical supply or distribution chain. If the merged firm will control more than 50 percent of a given market, that alone under the revised Guidelines provides grounds to conclude that the merger may substantially lessen competition. Below 50 percent, the draft Guidelines consider other non-exhaustive factors to determine if a vertical merger is potentially anticompetitive, including whether the merger is part of a trend towards vertical integration, whether the merger is intended to foreclose rivals, whether the relevant market is already concentrated or the merged firm will have a dominant position and whether the merger will make entry harder.
Guideline 7 – Mergers Should Not Entrench or Extend a Dominant Position: The draft Guidelines examine whether one of the merging firms already has a dominant position in the relevant market that will be reinforced via the merger. A dominant market position arises either from direct evidence of the power to raise prices or reduce output or from one of the merging firms having more than a 30 percent market share. And reinforcement of market dominance may take many forms, including increased barriers to entry, increased switching costs, interference with competitive alternatives, adverse impacts on rivals and the elimination of nascent competitors. The draft Guidelines also appear to give new emphasis to the portion of Section 7 of the Clayton Act that prohibits mergers which "tend to create a monopoly."
Guideline 8 – Mergers Should Not Further a Trend Toward Concentration: To assess whether a market is trending towards concentration such that a merger would substantially lessen competition, the draft Guidelines look at the merger's potential foreclosure considering the market's structure – often using an HHI calculation – or exit events by other market participants. An HHI of more than 1,000 or a change in HHI greater than 200 may indicate a trend toward concentration.
Guideline 9 – When a Merger is Part of a Series of Multiple Acquisitions, the Agencies May Examine the Whole Series: Because a single, relatively small merger may not itself substantially lessen competition or tend to create a monopoly, and because the FTC and DOJ are concerned about so-called "roll ups" and have been focused on private equity investors, the draft Guidelines examine whether an individual transaction is part of an overall pattern or strategy of multiple acquisitions. If so, the draft Guidelines describe how the antitrust agencies will consider the pattern or strategy's cumulative effect on competition, rather than just the individual transaction's impact.
Guideline 10 – When a Merger Involves a Multi-Sided Platform, the Agencies Examine Competition Between Platforms, on a Platform, or to Displace a Platform: The draft Guidelines focus on competition between platforms, on platforms and to displace platforms. After outlining common characteristics of multi-sided platforms, the draft Guidelines explain that they are focused on "any line of commerce," which can mean just one side of a multi-sided platform. With respect to preserving competition between platforms, the draft Guidelines seek to avoid the elimination of competition arising from a variety of mergers, including a merger between two platform operators, a merger between a platform operator and a significant platform participant, a merger involving a firm that provides services to multiple platforms and a merger involving a firm that provides important inputs to one or more platforms. With respect to preserving competition on platforms, the draft Guidelines focus on mergers between platform operators and platform participants. Finally, with respect to preserving competition to displace the platform, the draft Guidelines focus on mergers that may eliminate new technologies or services that could impact the platform and its participants or create alternatives for them.
Guideline 11 – When a Merger Involves Competing Buyers, the Agencies Examine Whether It May Substantially Lessen Competition for Workers or Other Sellers: Consistent with other enforcement activities by the FTC and DOJ, the draft Guidelines focus on labor markets and a merger's impact on workers or other sellers. The draft Guidelines thus continue the FTC and DOJ's desire to move away from the exclusive focus on a transaction's impact on consumer welfare to a more expansive consideration of its potential impact on other industry participants. The draft Guidelines therefore assess whether a merger between buyers, including employers, may substantially lessen competition or tend to create a monopoly.
Guideline 12 – When an Acquisition Involves Partial Ownership or Minority Interests, the Agencies Examine Its Impact on Competition: Even if a transaction will not result in full control, the draft Guidelines analyze whether it will result in either cross-ownership or common ownership that could substantially lessen competition or tend to create a monopoly. Cross-ownership exists when an entity owns a non-controlling interest in a competitor. Common ownership exists when investors own non-controlling interests in entities with a competitive relationship that may be affected by the common ownership. Given the draft Guidelines' focus on transactions involving less than full control, parties cannot simply assume that small ownership interests will avoid FTC and DOJ scrutiny.
Guideline 13 – Mergers Should Not Otherwise Substantially Lessen Competition or Tend to Create a Monopoly: Finally, to provide the FTC and DOJ with continued flexibility, the draft Guidelines include a "catchall" provision that makes it clear that the Guidelines are not an exhaustive list of the ways in which a merger may substantially lessen competition or tend to create a monopoly. This allows the FTC and DOJ to pursue allegedly anticompetitive mergers even if they do not fit neatly into one of the other draft Guidelines.

The Public Comment Period

Holland and Knight's Antitrust Team is available to discuss the draft Guidelines and work with clients seeking to bring concerns about them to the attention of the FTC and the DOJ during the public comment period.

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