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— Regulatory —
The agencies issued the guidelines in 1992. They are now considering whether revisions are necessary to describe current agency merger review practice and incorporate what the agencies have learned over the past 18 years. The agencies will conduct "workshops" where a lot of intensive economic and legal debate will occur about how best to predict likely effects of a merger on competition. In other words, a lot of academic chatter about an already esoteric exercise, which at the end of the day is a guessing game, that can seriously impact the fate of a deal. What will it all mean for businesses? Unfortunately, the answer to that question requires as much conjecture as merger analysis itself, but here are some real-world relevancies to consider.
First is how Wal-Mart Stores Inc. may change the merger review landscape as much as it has changed mass retail. Modern merger review is primarily all about whether the combined firm will have the ability to raise prices above competitive levels. The emergence of large buyers like Wal-Mart, Costco Wholesale Corp., Best Buy Co. and others in various mass retail channels has largely countered that ability when sales must go through these stores, even when mergers may occur in concentrated industries. The agencies could conclude the real-world impact of these large buyers minimizes risks of merging firms that are dependent on these channels, easing merger standards in these circumstances. Second is how the agencies define markets. The agencies attempt to define markets as narrowly as possible to predict the potential impact of a merger on competition, based on an economic test that frequently excludes all substitute products. The test also frequently irritates the merging companies, which often can demonstrate that they compete against products excluded from the agency-defined market. An example would be a market for "super premium ice cream," ignoring the tubs of ice cream sitting in the same frozen grocery cooler. The upshot of narrow markets that ignore substitutes is a more difficult merger review, leading to delay, divestitures or outright challenge to the transaction. The agencies do not appear to be backing off this test, but instead seem keen to justify it. Third is the impact of "market share" in merger analysis. The current guidelines suggest the agencies have little if any concern that a merged firm can raise prices if the combined market share is less than 35%. But agency practice with respect to this guideline mirrors the treatment Capt. Barbossa affords the principle of parlay in "Pirates of the Caribbean." Case law is replete with agency attempts to enjoin mergers below this threshold. However it may turn out, the agencies at least acknowledge the need to address the 35% test and will hopefully arrive at something approximating a rule bringing predictability to businesses contemplating a combination below the threshold. Also notable is the intent of the agencies to address the significance of market share in dynamic technology markets. The agencies may finally recognize that market share could mean little for businesses that run the daily race for their lives based on the next innovation, regardless of how sales of their current technology are measured. When all is said and done, the current guidelines no longer provide much predictability to merging businesses about the outcome of antitrust review because the agencies often apply principles and analysis that are not contained in the guidelines. Conversely, the current guidelines do not allow for a variety of meaningful marketplace evidence that is important to assessing competitive effects. All agree the guidelines need change on both scores, and the agencies should be credited with their joint effort to modernize the merger review framework. Hopefully, at nightfall the exercise will yield merger review based more on market realities than the current theoretical economics that has created a thriving industry of insulated academics making predictions untethered to the real world the merging businesses face. Michael Cohen is an antitrust partner with Paul, Hastings, Janofsky & Walker LLP in the firm's Washington office. |
The U.S. Department of Justice and the Federal Trade Commission jointly announced they will assess whether to revise their Horizontal Merger Guidelines over the coming months. The guidelines attempt to give corporations and counsel transparency and predictability regarding merger clearance in the U.S. 
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