Crackdown: FTC and DOJ aim to rewrite merger guidelines

April 2022  |  FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

April 2022 Issue

A vital component of any competition regime, the merger review process can help to prevent consumer harm from transactions that are likely to reduce competition among rival firms or even foreclose competitors.

Reflecting this importance, in January 2021 the US Federal Trade Commission (FTC) and Department of Justice (DOJ) Antitrust Division announced a comprehensive review of horizontal and vertical merger guidelines, to assist in the identification of anticompetitive transactions and “modernise enforcement of the antitrust laws regarding mergers”.

As a first step of the review, the DOJ and FTC are seeking public comment on mergers and their competitive effects via a request for information (RFI) to the general public that will inform revision of the merger guidelines. The comment period is open until 21 March 2022.

In ‘The Request for Information on Merger Enforcement’, 15 areas of particular interest to the agencies are detailed: (i) purpose, harms and scope; (ii) types and sources of evidence; (iii) coordinated effects; (iv) unilateral effects; (v) presumptions; (vi) market definition; (vii) potential and nascent competition; (viii) remedies; (ix) monopsony power and labour markets; (x) innovation and intellectual property; (xi) digital markets; (xii) special characteristics of markets; (xiii) barriers to firm entry and growth; (xiv) efficiencies; and (xv) failing and flailing firms.

Initially issued in 1968 and reviewed and updated intermittently in the decades since, this latest review of the merger guidelines is particularly timely, with global dealmaking in 2021 soaring to $5.8 trillion (the highest level ever recorded) and the FTC and DOJ receiving more than double the number of merger filings received on average in any of the past five years.

“Major technological and economic changes, meanwhile, have led to shifts in how businesses compete and grow, creating new interconnections and dynamics across multiple dimensions,” says Lina M. Khan, chair of the FTC. “For us to accurately detect and analyse potentially illegal transactions in the modern economy, ensuring that our merger guidelines reflect these new realities is critical.”

Benefits of an open economy

The agencies’ review of the merger guidelines is taking place against the backdrop of a broader reassessment of the effects of mergers across the US economy.

As noted by president Biden in his July 2021 executive order ‘Promoting Competition in the American Economy’, industry consolidation and weakened competition have “denied Americans the benefits of an open economy”, with “workers, farmers, small businesses and consumers paying the price” due to diminished opportunity, higher prices, lower wages and lagging innovation.

“A lack of competition also appears to have left segments of our economy more brittle, as consolidated supply and reduced investment in capacity can render us less resilient in the face of shocks,” adds Ms Khan. “These facts invite us to assess how our merger policy tools can better equip us to discharge our statutory obligations and halt this trend.”

In the view of Joel Mitnick, a partner at Cadwalader, the FTC/DOJ review is a marked departure from previous revisions, which were generally based on largely objective criteria. “Merger guidelines are updated on an irregular basis, about once a decade,” he explains. “First written in the early 1980s, the guidelines attempted to quantify a merger’s impact on what Robert Bork termed, ‘consumer welfare’ – a standard focused on the likely quantifiable effects of a given merger on consumer prices.

“Instead, the current administration questions the very basis of the consumer welfare standard,” he continues. “They seek comment on replacing this standard with one that encompasses possible effects on more ‘social’ factors, including effects on labour markets, other supplier markets and environmental, social and governance (ESG) policies.

Durability and legitimacy

The durability and public legitimacy of an antitrust regime depends on the ability of enforcers to adapt to evolving markets – matching analysis to contemporary business strategy using tools that are dynamic and holistic rather than static and atomistic.

With this in mind, the agencies’ RFI sets out a broad set of topics, with three deemed particularly pivotal. First, are the guidelines adequately attentive to the range of business strategies and incentives that might drive acquisitions? Second, do the guidelines adequately assess whether mergers may lessen competition in labour markets, thereby harming workers? Third, are the guidelines unduly limited in their focus on particular types of evidence?

“The emerging ‘progressive’ antitrust movement seeks a more ‘holistic’ approach to antitrust than that reflected by the consumer welfare standard,” opines Mr Mitnick. “As the name implies, consumer welfare focused on the likely effects of mergers on downstream consumers. Progressives, by contrast, also ask about the likely effect of a merger on upstream suppliers.”

Timetable for the review

Following the initial comment period, the FTC and DOJ plan to release a draft of updated merger guidelines and seek further comment before finalising revisions by the end of 2022.

“Our review process will benefit immensely from the insights of those who have long studied the effects of M&A,” concludes Ms Khan. “The quality of our review and any subsequent revisions to the guidelines will depend on robust public participation, and we are especially eager to hear from a broad set of market participants.”

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Fraser Tennant