Revising the DOJ / FTC Horizontal Merger Guidelines

11

PLI BriefingPLI Briefing

January 25, 2010January 25, 2010

Revising the Revising the

DOJ/FTC Horizontal Merger Guidelines:DOJ/FTC Horizontal Merger Guidelines:

What is at Stake?What is at Stake?

Mary L. Mary L. AzcuenagaAzcuenaga M. Howard MorseM. Howard Morse

22

AGENDAAGENDA

1.1. Why merger guidelines are neededWhy merger guidelines are needed

2.2. History of the guidelinesHistory of the guidelines

3.3. The current guidelinesThe current guidelines

4.4. The merger guidelines review projectThe merger guidelines review project

5.5. The scope of the reviewThe scope of the review

6.6. Substantive focus of the reviewSubstantive focus of the review

7.7. PredictionsPredictions

33

Why Merger Guidelines?Why Merger Guidelines?

�� No bright line answers in the lawNo bright line answers in the law

�� Explain analytical framework used by DOJ/FTC to assess Explain analytical framework used by DOJ/FTC to assess

whether a merger or acquisition may lead to a whether a merger or acquisition may lead to a

substantial lessening of competitionsubstantial lessening of competition

�� How to determine whether a transaction will likely How to determine whether a transaction will likely

increase market power and result in higher prices, less increase market power and result in higher prices, less

innovation, lower quality or less serviceinnovation, lower quality or less service

44

The Past as PreludeThe Past as Prelude

19841984

DOJ Merger DOJ Merger

GuidelinesGuidelines

____________________

6/14/846/14/84

Paul McGrathPaul McGrath

__________________

Treatment of Treatment of

ImportsImports

Most Recent Most Recent

Analysis of NonAnalysis of Non--

Horizontal MergersHorizontal Mergers

19821982

FTC Statement FTC Statement

Concerning Concerning

Horizontal Horizontal

MergersMergers

__________________

6/14/826/14/82

James MillerJames Miller

____________________

Considerable Considerable

Weight to DOJ Weight to DOJ


Greater Greater

Consideration of Consideration of

Evidence Beyond Evidence Beyond

Market ShareMarket Share

19821982

DOJ Merger GuidelinesDOJ Merger Guidelines

__________________

6/14/826/14/82

William BaxterWilliam Baxter

________________

Hypothetical Monopolist Hypothetical Monopolist

(SSNIP)(SSNIP)

HerfindahlHerfindahl--Hirschman Hirschman

Index (HHI)Index (HHI)

Expanded Discussion of Expanded Discussion of

Other FactorsOther Factors

19681968

DOJ Merger DOJ Merger


__________________

5/30/685/30/68

Donald TurnerDonald Turner

________________

Issuance of Issuance of


Concentration and Concentration and

Market Share Market Share

ThresholdsThresholds

55

The Past as Prelude (cont’d)The Past as Prelude (cont’d)

2010/20112010/2011

??

____________________

Christine VarneyChristine Varney

Jon LeibowitzJon Leibowitz

____________________

??

20062006

DOJ/FTC Commentary DOJ/FTC Commentary

on the Horizontal on the Horizontal

Merger GuidelinesMerger Guidelines

______________________

3/27/063/27/06

Thomas BarnettThomas Barnett

Deborah Deborah MajorasMajoras

____________________

Integrated ApproachIntegrated Approach

Unilateral Effects Unilateral Effects

TheoriesTheories

ExamplesExamples

19971997

DOJ/FTC Horizontal DOJ/FTC Horizontal


________________

4/8/974/8/97

Joel KleinJoel Klein

Robert PitofskyRobert Pitofsky

________________________

EfficienciesEfficiencies

19921992

DOJ/FTC Horizontal DOJ/FTC Horizontal


________________

4/2/924/2/92

James RillJames Rill

Janet Janet SteigerSteiger

________________

Joint DOJ + FTC Joint DOJ + FTC


Timely, likely and Timely, likely and

sufficient entrysufficient entry

Coordinated Coordinated

Interaction /Interaction /

Unilateral EffectsUnilateral Effects

66

Market Share ThresholdsMarket Share Thresholds

�� 1968 1968

�� Highly Concentrated (4 firm CR >75%)Highly Concentrated (4 firm CR >75%)

�� 10% + 2%10% + 2%

�� Less Highly Concentrated (4 firm CR <75%)Less Highly Concentrated (4 firm CR <75%)

�� 5 % + 5%5 % + 5%

�� 10% + 4%10% + 4%

�� 1982 1982

�� Highly Concentrated (postHighly Concentrated (post--merger HHI>1800)merger HHI>1800)

�� Change > 100 Change > 100 –– likely to challengelikely to challenge

�� Change 50 Change 50 –– 100 ?100 ?

�� Change < 50 Change < 50 –– unlikely to challengeunlikely to challenge

�� HHI Between 1000 and 1800HHI Between 1000 and 1800

�� Change > 100 more likely than notChange > 100 more likely than not

�� Change < 100 unlikely to challengeChange < 100 unlikely to challenge

�� UnUn--concentrated (postconcentrated (post--merger HHI <1000)merger HHI <1000)

�� Unlikely to challengeUnlikely to challenge

�� Leading firm ProvisoLeading firm Proviso

�� 2010 ?2010 ?

�� 15% + 3%15% + 3%

�� 20% + 2%20% + 2%

�� 4% + 4%4% + 4% �� 15% + 1%15% + 1%

�� 25% + 1%25% + 1%

77

The Likelihood of ChallengeThe Likelihood of Challenge

�� 1968 “will ordinarily challenge”1968 “will ordinarily challenge”

�� 1982 “likely to challenge”1982 “likely to challenge”

“more likely than not”“more likely than not”

“unlikely to challenge”“unlikely to challenge”

�� 19841984 “likely to challenge”“likely to challenge”

“unless the Department concludes … that the merger is not likely“unless the Department concludes … that the merger is not likely substantially substantially

to lessen competition”to lessen competition”

“will not challenge … except in extraordinary circumstances”“will not challenge … except in extraordinary circumstances”

�� 19921992 “presumed likely to create or enhance market power or facilitate“presumed likely to create or enhance market power or facilitate its exercise”its exercise”

“potentially raise significant competitive concerns, depending o“potentially raise significant competitive concerns, depending on [other] n [other]

factors”factors”

“unlikely to have adverse effects and ordinarily requires no fur“unlikely to have adverse effects and ordinarily requires no further analysis”ther analysis”

88

The Likelihood of Challenge (cont’d)The Likelihood of Challenge (cont’d)

�� 19921992 “The Guidelines are designed primarily to articulate the analyt“The Guidelines are designed primarily to articulate the analyticalical

framework… not to describe how the Agency will conduct the framework… not to describe how the Agency will conduct the

litigation of cases that it decides to bring… do not attempt to litigation of cases that it decides to bring… do not attempt to assign assign

the burden of proof”the burden of proof”

“market share and concentration data provide only the starting “market share and concentration data provide only the starting

point for analyzing the competitive impact of a merger”point for analyzing the competitive impact of a merger”

99

A Response to Court DecisionsA Response to Court Decisions

�� 19681968

�� Philadelphia National Bank (1963)Philadelphia National Bank (1963)

�� Von’s Grocery (1966)Von’s Grocery (1966)

�� Pabst (1966)Pabst (1966)

�� Proctor & Gamble (1967)Proctor & Gamble (1967)

“the only consistency is that the government always wins”“the only consistency is that the government always wins”

�� 19821982

�� General Dynamics (1974)General Dynamics (1974)

�� 19841984

�� 19921992

�� Baker Hughes (1990) / Baker Hughes (1990) / SyufySyufy (1990)(1990)

�� 20102010

�� SungardSungard (2001) / Arch Coal (2004) / Oracle (2004) / Western Refinery (2(2001) / Arch Coal (2004) / Oracle (2004) / Western Refinery (2007)007)

1010

The Current 5The Current 5--Step Analytical FrameworkStep Analytical Framework

CONCENTRATION

depends on

product / geographic market definition,

only a “starting point for analysis”

ENTRY

timely, likely and sufficient

to deter or counteract effects

UNILATERAL MARKET POWER

orCOORDINATED INTERACTION

EFFICIENCIES

lower costs, increased output or new products

enhance competition

BOTTOM LINE:

will prices rise, quality fall,

service decline or innovation slow

to detriment of consumers ?

1111

Why Review the Guidelines Now?Why Review the Guidelines Now?

�� To incorporate learning and experience gained To incorporate learning and experience gained

since 1992since 1992

�� To describe agency practice more accuratelyTo describe agency practice more accurately

�� To improve the usefulness of the guidelines as a To improve the usefulness of the guidelines as a

practical toolpractical tool

1212

The Merger Guidelines Review ProjectThe Merger Guidelines Review Project

�� Announced September 22, 2009Announced September 22, 2009

�� 20 Questions Posed20 Questions Posed

�� Invitation for Public Comment by Nov. 9, 2009Invitation for Public Comment by Nov. 9, 2009

�� 49 comments submitted to date49 comments submitted to date

�� Five Workshops December Five Workshops December -- JanuaryJanuary

1313

Scope of the ReviewScope of the Review

�� ““The Agencies anticipate retaining …”The Agencies anticipate retaining …”

�� the basic ‘hypothetical monopolist” testthe basic ‘hypothetical monopolist” test

�� the the HerfindahlHerfindahl--Hirschman Index (HHI) to measure concentrationHirschman Index (HHI) to measure concentration

�� the basic structural presumptionsthe basic structural presumptions

�� the basic timeliness, likelihood, sufficiency approach to entrythe basic timeliness, likelihood, sufficiency approach to entry

�� the fundamental approach to efficiencies and the failing firm dethe fundamental approach to efficiencies and the failing firm defensefense

�� See also C. Varney, “Merger Guidelines Workshops” (Sept. 22, 200See also C. Varney, “Merger Guidelines Workshops” (Sept. 22, 2009)9)

“Although I am not prejudging the process … I would not anticipa“Although I am not prejudging the process … I would not anticipate te

departing form some of the basic elements in the current Guidelideparting form some of the basic elements in the current Guidelines”nes”

1414

Questions for Public CommentQuestions for Public Comment

� Areas of Focus

1.1. FiveFive--step analytical approachstep analytical approach

2.2. Direct evidence of competitive effectsDirect evidence of competitive effects

actual effects, natural experiments, postactual effects, natural experiments, post--merger plans, evidence merger plans, evidence

from customers, headfrom customers, head--toto--head competition, historic actual and head competition, historic actual and

attempted coordinationattempted coordination

� Market Definition

3.3. Use of “critical loss analysis,” priceUse of “critical loss analysis,” price--cost margins to define marketscost margins to define markets

4.4. “Next best substitute” / smallest market” principle“Next best substitute” / smallest market” principle

5.5. 5% or 10% SSNIP5% or 10% SSNIP

6.6. Geographic markets based on location of affected customers as Geographic markets based on location of affected customers as

well as location where product is producedwell as location where product is produced

1515

Questions for Public Comment (cont’d)Questions for Public Comment (cont’d)

� Market Shares

7.7. Measurement of market sharesMeasurement of market shares

8.8. Market shares in dynamic markets technological changeMarket shares in dynamic markets technological change

9.9. HHI levelsHHI levels

� Unilateral effects

10.10. Recent learningRecent learning

localized effects, auctions, diversion ratios, simulation localized effects, auctions, diversion ratios, simulation

models, repositioningmodels, repositioning

11.11. Price discriminationPrice discrimination

1616

Questions for Public Comment (cont’d)Questions for Public Comment (cont’d)

�� OtherOther

12.12. Large buyersLarge buyers

13.13. Uncommitted vs. committed entryUncommitted vs. committed entry

14.14. Fixed vs. marginal cost efficienciesFixed vs. marginal cost efficiencies

15.15. NonNon--price effects / innovationprice effects / innovation

16.16. Minority interestsMinority interests

17.17. Failing firm / exiting assetsFailing firm / exiting assets

18.18. Remedies Remedies –– preserving prepreserving pre--merger competition, shortcomings merger competition, shortcomings

of behavioral remediesof behavioral remedies

19.19. ExamplesExamples

20.20. Retrospective studiesRetrospective studies

1717

Topics Discussed at the WorkshopsTopics Discussed at the Workshops

�� December 3 December 3 –– Washington, DCWashington, DC

�� Overview, Historical Perspectives, Role of GuidelinesOverview, Historical Perspectives, Role of Guidelines

�� Direct Evidence of Competitive EffectsDirect Evidence of Competitive Effects

�� Market DefinitionMarket Definition

�� Unilateral EffectsUnilateral Effects

�� December 8 December 8 –– New York, NYNew York, NY

�� International / State AuthoritiesInternational / State Authorities

�� Market Concentration and the Structural PresumptionMarket Concentration and the Structural Presumption

�� Minority Interests / Failing FirmsMinority Interests / Failing Firms

�� Merger RemediesMerger Remedies

1818

Topics Discussed at the Workshops (cont’d)Topics Discussed at the Workshops (cont’d)

�� December 10 December 10 –– Chicago, ILChicago, IL�� EntryEntry

�� Direct Evidence of Competitive EffectsDirect Evidence of Competitive Effects


�� EfficienciesEfficiencies

�� January 14 January 14 –– Stanford, CAStanford, CA�� Direct Evidence of Competitive EffectsDirect Evidence of Competitive Effects

�� Price Discrimination / Large BuyersPrice Discrimination / Large Buyers


�� Market Dynamics and InnovationMarket Dynamics and Innovation

�� January 26 January 26 –– Washington, DCWashington, DC�� Market Concentration and the Structural PresumptionMarket Concentration and the Structural Presumption

�� Price Discrimination / Large BuyersPrice Discrimination / Large Buyers

�� EntryEntry

�� Efficiencies / Merger RemediesEfficiencies / Merger Remedies

1919

PredictionsPredictions

�� When will new guidelines be issued?When will new guidelines be issued?

�� Will there be opportunity for comment on a draft?Will there be opportunity for comment on a draft?

�� Refinement rather than radical changeRefinement rather than radical change

�� Greater insight into agencies’ approachGreater insight into agencies’ approach

�� New economic toolsNew economic tools

�� Same outcomes but with better understandingSame outcomes but with better understanding

�� More guidance aimed at influencing courtsMore guidance aimed at influencing courts

2020

� Mary L. AzcuenagaBaker & McKenzie LLP

[email protected]

202-835-6143

� M. Howard MorseDrinker Biddle & Reath LLP

[email protected]

202-842-8883

2121

Mary L. AzcuenagaMary L. Azcuenaga

Mary L. AzcuenagaMary L. Azcuenaga joined Baker & McKenzie in Washington, D.C., as a Partner in thjoined Baker & McKenzie in Washington, D.C., as a Partner in the e Antitrust and Competition Practice Group in 2008. Prior to joinAntitrust and Competition Practice Group in 2008. Prior to joining Baker & McKenzie, Ms. ing Baker & McKenzie, Ms. Azcuenaga was a partner at Heller Ehrman LLP, where she served fAzcuenaga was a partner at Heller Ehrman LLP, where she served for six years as coor six years as co--chair of the firmwide Antitrust and Trade Regulation Practice Grchair of the firmwide Antitrust and Trade Regulation Practice Group. Prior to joining oup. Prior to joining Heller Ehrman, she served as a Commissioner of the U.S. Federal Heller Ehrman, she served as a Commissioner of the U.S. Federal Trade Commission for Trade Commission for nearly 14 years.nearly 14 years.

Ms. Azcuenaga focuses her practice in the area of antitrust, parMs. Azcuenaga focuses her practice in the area of antitrust, particularly mergers and ticularly mergers and acquisitions and the intersection of antitrust and intellectual acquisitions and the intersection of antitrust and intellectual property law. She property law. She represents clients throughout the Hartrepresents clients throughout the Hart--ScottScott--Rodino process and the antitrust review of Rodino process and the antitrust review of mergers and acquisitions before both the department of Justice amergers and acquisitions before both the department of Justice and the FTC. She hasnd the FTC. She haslitigated at the trial and appellate level, including the represlitigated at the trial and appellate level, including the representation of clients in the defense and prosecution of entation of clients in the defense and prosecution of

antitrust counterclaims in patent litigation.antitrust counterclaims in patent litigation.

Before her appointment as a Commissioner of the FTC, Ms. AzcuenaBefore her appointment as a Commissioner of the FTC, Ms. Azcuenaga spent more than eleven years at the FTC ga spent more than eleven years at the FTC

in various litigating and supervisory positions. In that capaciin various litigating and supervisory positions. In that capacity and as a Commissioner, she reviewed and handled ty and as a Commissioner, she reviewed and handled

matters in a full range of industries, including but not limitedmatters in a full range of industries, including but not limited to the pharmaceutical, medical devices, to the pharmaceutical, medical devices,

biotechnology laboratory products, biobiotechnology laboratory products, bio--engineered products, biometrics, software, internet infrastructuengineered products, biometrics, software, internet infrastructure, wireless re, wireless

infrastructure, data storage, data and einfrastructure, data storage, data and e--mail security, highmail security, high--quality radio frequency and microwave components, quality radio frequency and microwave components,

defense, information technology applications and consulting, condefense, information technology applications and consulting, construction materials, consumer and industrial struction materials, consumer and industrial

tools, large industrial equipment, electric utility, natural gastools, large industrial equipment, electric utility, natural gas, fishing, retail, cable television, and cruise line , fishing, retail, cable television, and cruise line

industries.industries.

Ms. Azcuenaga has authored numerous Federal Trade Commission opiMs. Azcuenaga has authored numerous Federal Trade Commission opinions and statements, articles, and nions and statements, articles, and

speeches, and has lectured widely in the field of antitrust.speeches, and has lectured widely in the field of antitrust.

Ms. Ms. AzcuenagaAzcuenaga is a graduate of the University of Chicago School of Law and Stis a graduate of the University of Chicago School of Law and Stanford University.anford University.

2222

M. Howard MorseM. Howard MorseHoward MorseHoward Morse is a Washingtonis a Washington--DC based partner and coDC based partner and co--chair of Drinker Biddle’s chair of Drinker Biddle’s Antitrust Practice Group. He regularly represents businesses befAntitrust Practice Group. He regularly represents businesses before the Federal Trade ore the Federal Trade Commission, the Department of Justice, and State Attorneys GenerCommission, the Department of Justice, and State Attorneys General in investigations al in investigations involving mergers, acquisitions and joint ventures as well as alinvolving mergers, acquisitions and joint ventures as well as alleged monopolization and leged monopolization and restraint of trade cases. He also counsels clients on antitrust restraint of trade cases. He also counsels clients on antitrust issues and represents issues and represents companies in private antitrust litigation.companies in private antitrust litigation.

Before joining the firm, Howard served for ten years at the FTC Before joining the firm, Howard served for ten years at the FTC as Deputy Assistant as Deputy Assistant Director for Policy and Assistant Director of the Bureau of CompDirector for Policy and Assistant Director of the Bureau of Competition. At the etition. At the Commission, he was responsible for more than 50 enforcement actiCommission, he was responsible for more than 50 enforcement actions including Hartons including Hart--ScottScott--Rodino Act civil penalty and merger enforcement actions in the pRodino Act civil penalty and merger enforcement actions in the pharmaceutical, harmaceutical, medical device, computer hardware and software, and other industmedical device, computer hardware and software, and other industries.ries.

Howard has been active for many years in the American Bar AssociHoward has been active for many years in the American Bar Association Section of Antitrust Law. He is currently ation Section of Antitrust Law. He is currently chair of the Section’s Federal Civil Enforcement Committee, whicchair of the Section’s Federal Civil Enforcement Committee, which monitors and reports on developments at the h monitors and reports on developments at the FTC and DOJ. He has previously served on the Section Council andFTC and DOJ. He has previously served on the Section Council and as chair of its Computer Industry, Intellectual as chair of its Computer Industry, Intellectual Property, and Exemptions and Immunities committees.Property, and Exemptions and Immunities committees.

Howard has testified before Congress, the Antitrust ModernizatioHoward has testified before Congress, the Antitrust Modernization Commission and the DOJ/FTC hearings on n Commission and the DOJ/FTC hearings on Competition and Intellectual Property Law and Policy in the KnowCompetition and Intellectual Property Law and Policy in the Knowledgeledge--Based EconomyBased Economy. He has published articles . He has published articles on such antitrust topics as innovation markets, vertical mergerson such antitrust topics as innovation markets, vertical mergers, “gun jumping,” and product market definition in , “gun jumping,” and product market definition in the pharmaceutical industry.the pharmaceutical industry.

Howard is listed as a leading antitrust lawyer in the Legal MediHoward is listed as a leading antitrust lawyer in the Legal Media Group’s Guide to the World’s Leading Lawyers a Group’s Guide to the World’s Leading Lawyers and in the and in the Chambers USA 2009 Guide Chambers USA 2009 Guide which describes him as “a tireless advocate for his clients" whowhich describes him as “a tireless advocate for his clients" who "impresses "impresses with his superb analytical and communications skills.”with his superb analytical and communications skills.”

Howard is a summa cum laude graduate of Dartmouth College and cuHoward is a summa cum laude graduate of Dartmouth College and cum laude graduate of Harvard Law School.m laude graduate of Harvard Law School.

Revising the DOJ / FTC Horizontal Merger Guidelines

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