DOJ and FTC Issue New Horizontal Merger Guidelines
By Bradley C. Weber , Locke Lord Bissell & Liddell LLP, Dallas, TX
The Department of Justice and the Federal Trade Commission (the “Agencies”) recently issued their much-anticipated revisions to the Horizontal Merger Guidelines (the “Guidelines”). The Guidelines outline the main analytical techniques, practices, and enforcement policies the Agencies use to evaluate mergers and acquisitions involving actual or potential competitors under the federal antitrust laws. The new Guidelines are the first major revisions since the Agencies issued the 1992 Horizontal Merger Guidelines (the “1992 Guidelines”) 18 years ago. The primary goal of the new Guidelines is to provide the public with a better understanding of how the Agencies identify and challenge competitively harmful mergers, while avoiding unnecessary interference with mergers that are not likely to have any anticompetitive impact on the marketplace.
The Agencies emphasized that the new Guidelines do not signal an abrupt change in the way they will police horizontal mergers. Rather, they are intended to shed light on the current way the Agencies actually analyze these transactions, reflecting nearly two decades in the evolution of economic and legal thinking. And while they do not carry any legal weight, it is likely that they will influence judges and assist the courts in developing an appropriate framework for interpreting and applying the antitrust laws to horizontal mergers.
One of the changes in the new Guidelines is the much greater emphasis they place on the types of evidence the Agencies will consider in analyzing how a merger will impact consumers. These potential effects include increased prices, diminished access to products or services, and decreased product innovation. The new Guidelines are also different from the 1992 Guidelines in other ways, including that they:
- Clarify that merger analysis is flexible and does not use a single methodology. The Agencies will use a variety of tools to analyze the available evidence in determining whether a merger may substantially lessen competition. The more flexible approach set out in the new Guidelines differs from the five-step analytic process described in the 1992 Guidelines.
- Introduce a new Section 2 on “Evidence of Adverse Competitive Effects,” which discusses several categories and sources of evidence that the Agencies have found to be informative in predicting the likely competitive effects of mergers. For example, the Guidelines remind that “documents created in the normal course are more probative than documents created as advocacy materials in merger review.”
- Explain that “market definition” is not an end itself or a necessary starting point for a merger analysis, and that market concentration is a tool that is useful to the extent it illuminates the merger’s likely competitive effects. This is in contrast to the 1992 Guidelines, which describe a five-step analytic process that begins with defining “the relevant product market with respect to each of the products of the merging firms.”
- Provide an updated explanation of the “hypothetical monopolist test” used to define relevant antitrust markets and how the Agencies implement that test in practice. The Agencies use the hypothetical monopolist test to identify a set of products that are reasonably interchangeable with a product sold by one of the merging firms. The hypothetical monopolist test requires that a product market contain enough substitute products so that it could be subject to post-merger exercise of market power significantly exceeding that existing absent the merger.
- Update the concentration thresholds that determine whether a transaction warrants further scrutiny by the Agencies. The Guidelines now reflect the long-prevailing view of the Agencies that somewhat greater market concentration is required before mergers can pose a genuine risk of anticompetitive effects. Market concentration will continue to be measured by the Herfindahl-Hirschman Index (“HHI”), calculated by summing the squares of each merging firm’s market share, but the threshold at which the Agencies see the potential for harm has been raised from the levels in the 1992 Guidelines.
- Provide an expanded discussion on the unilateral effects that could result from a merger of two competing firms. These include unilateral price effects in markets with differentiated products and unilateral effects arising from lessened innovation or reduced product variety.
- Provide an updated section on coordinated effects. The Agencies will look closely to determine whether a merger increases the risk of explicit collusion among competitors or, as can be observed in many markets, parallel conduct on pricing or terms of sale. The new Guidelines provide numerous examples of market conditions that are conducive to coordinated conduct among market participants. The Agencies are likely to challenge a merger if they conclude it will enhance the market’s vulnerability to coordinated conduct.
- Provide a more concrete discussion of how the Agencies analyze the potential impact of other parties’ entry into the relevant market, including the timeliness, likelihood, and sufficiency of entry. The Guidelines explain that the Agencies will now demand reliable evidence that entry is likely to happen if post-merger pricing rises or output falls to supra-competitive levels.
- Add a new section dealing with “powerful buyers” and the constraints they may place on the merging parties to raise prices. The Guidelines also add new sections on mergers between competing buyers and partial acquisitions.
What this means for hospital mergers
In 1996, the Agencies issued their Statements of Antitrust Enforcement Policy in Health Care (the “Health Care Statements”), which sets forth a “safety zone” for general acute-care hospital mergers. Under this safety zone test, a merger between two general acute-care hospitals will rarely (if ever) be challenged by the Agencies if: one of the hospitals subject to the transaction is more than five years old and “(1) has an average of fewer than 100 licensed beds over the three most recent years, and (2) has an average daily inpatient census of fewer than 40 patients over the three most recent years, absent extraordinary circumstances. The antitrust safety zone will not apply if that hospital is less than 5 years old.” The Health Care Statements also explain that hospital mergers falling outside of this safety zone will be analyzed by the Agencies using the steps set forth in the 1992 Guidelines. The new Guidelines do not change the Agencies’ policy regarding hospital mergers that fall within the antitrust safety zone. The new Guidelines will, however, apply to hospital mergers, like other mergers, which are outside of that safety zone.
In the realm of hospital mergers, the new Guidelines echo the concepts that the FTC used to challenge a merger between three Chicago-area hospitals – Evanston Hospital, Glenbrook Hospital, and Highland Park Hospital – which combined to form Evanston Northwestern Healthcare Corporation in 2000. In that case, the FTC filed an administrative complaint four years after the transaction occurred and based its challenge largely on direct evidence that the merger of the three hospitals allowed Evanston Northwestern to raise prices. The FTC argued that the observed price increases themselves defined the relevant market as inpatient hospital services sold to managed care plans in a tightly-drawn area of Chicago’s northern suburbs. The FTC further argued that evidence of higher prices caused by the merger was so convincing that defining the relevant market was unnecessary. The new Guidelines assert that “evidence of competitive effects can inform market definition,” and that “some analytical tools used by the agencies to assess competitive effects do not rely on market definition.” This is precisely what happened in the Evanston Northwestern case, in which the FTC had the benefit of watching prices rise after the merger had occurred.
Familiarity with the new Guidelines is essential to businesses that anticipate Agency scrutiny of horizontal mergers. And although the general standards to be employed in merger review may be more transparent under the new Guidelines, their emphasis on real-world evidence and real-world competitive effects means, in practical terms, that the Agencies’ ultimate decision to approve, challenge, or require more information on a proposed merger will be driven heavily by the facts specific to the merging parties, their competitors, and the antitrust markets in which they operate.
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