January 16, 2024

Final Merger Guidelines Will Result in Increased Scrutiny for M&A Deals

At a Glance

  • DOJ/FTC issued the final version of the Merger Guidelines on December 18, 2023.
  • While some language has been clarified or removed since the July 2023 draft, much remains largely unchanged.
  • The Merger Guidelines reflect the current administration and agencies’ continued skepticism of merger activity and will likely result in more frequent and thorough investigations of transactions, more time needed for regulatory review, and more mergers likely to be scrutinized as presumptively unlawful. And if the agencies are able to convince the courts that some of their new standards are appropriate, more mergers may be blocked.

On December 18, 2023, the U.S. Department of Justice (DOJ) and Federal Trade Commission (FTC) jointly announced the issuance of the final version of new Merger Guidelines, after publishing a draft in July 2023. We previously reported on the more significant changes found in the draft Merger Guidelines.

Although the Merger Guidelines are not binding law, they are issued by the agencies to inform industry and antitrust practitioners how the agencies analyze mergers and acquisitions. The 2023 version of the Guidelines — the first official changes since 2010 and the most dramatic since 1982 — reflect the Biden administration’s continued skepticism of merger activity and its concern for increased market consolidation. As we previously advised, the new Guidelines will likely result in more proposed mergers being subjected to investigation and, if the courts adopt the lower thresholds, fewer mergers surviving scrutiny.

The final Guidelines now set out 11 (instead of 13) “Guidelines” that will apply to determine the competitive effects of a merger, and more than one “Guideline” may apply to a transaction. While some language has been clarified or removed since the July 2023 draft, much remains largely unchanged.

Key Takeaways Remain the Same

1. Lower Thresholds at Which a Merger Is Presumed Unlawful

The newly issued Guidelines lower the thresholds used to evaluate whether a merger triggers a rebuttable presumption that it may substantially lessen competition or tend to create a monopoly. In particular, the Guidelines:

  • lower from 2,500 to 1,800 the post-merger market concentration level — measured by the Herfindahl-Hirschman Index (HHI) — at which the agencies believe mergers create highly concentrated markets that prompt heightened agency scrutiny; and require a post-merger change of only 100 points, down from 200 points;
  • introduce a new market share threshold to assess whether a merger presents a threat of undue concentration; any merger resulting in a combined market share greater than 30%, with an HHI increase of 100 points, would be considered presumptively unlawful.

In the final version, the agencies have made a few clarifications to indicate that the structural presumption is subject to rebuttal evidence. Such rebuttal evidence is analyzed “to determine if it disproves or rebuts the prima facie case and shows that the merger does not in fact threaten to substantially lessen competition or tend to create a monopoly.” However, the Guidelines are also highly skeptical of this rebuttal evidence, as discussed below.

2. Express Focus on Mergers by Firms With “Dominant Positions”

The new Guidelines reinvigorate the Clayton Act’s application not only to mergers that substantially lessen competition, but also to those that “tend to create a monopoly.” This includes mergers that “entrench or extend a dominant position.” Among other things, the agencies will now consider:

  • whether one of the merged firms already has a dominant position; and
  • whether and the extent to which the merger may entrench a firm’s dominant position or extend it into a new market.

The final version of the Guidelines removes language from the draft stating that firms possessing at least 30% share in a relevant market would automatically be considered to have a dominant position. Instead, they evaluate “dominance” by examining direct evidence or market shares — a more ambiguous standard than the prior version.

3. Express Scrutiny of Serial Acquisitions

The final Guidelines (like the draft) expressly address situations where a firm engages in multiple acquisitions in the same or related business lines (e.g., “roll-up” strategies). The final Guidelines remove a statement that the agencies are concerned when the cumulative effect of these serial acquisitions is to harm competition, “even if no single acquisition on its own would risk substantially lessening competition.”

The agencies may evaluate the entire series of acquisitions as part of an industry trend or evaluate the overall pattern of serial acquisitions by the acquiring firm collectively. In addition, the agencies will examine the parties’ acquisition history (whether consummated or not) and their current or future strategic incentives and strategies.

As we previously advised, this in part is a direct response to private equity M&A activity and the DOJ-FTC’s skepticism towards the strategies that firms often employ in overlapping and adjacent business lines.

4. Additional Burdens on Establishing Procompetitive Efficiencies

Merging parties often present evidence to demonstrate that efficiencies, benefits and cost-savings generated by the merger will offset any potential harm from a transaction under review. The agencies have long been highly skeptical of this evidence, and parties have been largely unsuccessful in the courts at overcoming the agency’s evidence of likely anticompetitive effects with offsetting evidence of efficiencies and benefits.

The final Guidelines confirm that merging parties face a high bar to establishing an efficiencies defense and set new limits as to how merging parties can receive credit for procompetitive efficiencies, including because the agencies:

  • will not credit benefits outside the relevant market or that “reflect or require a decrease in competition in a separate market,” such as an increase in monopsony power;
  • will consider alternative ways of achieving the claimed benefits (e.g., contracts between the parties, “organic growth of one of the merging firms,” mergers with other firms, and a “partial merger involving only those assets” that generate the procompetitive efficiencies); and
  • will reject as cognizable and discredit any efficiencies that “merely benefit the merging firms” or result from “worsening of terms for the merged firm’s trading partners.”

5. Equal Application to Vertical Mergers and Consolidation

The new Guidelines apply equally to both vertical and horizontal transactions, and the agencies will no longer apply separate guidelines to vertical mergers.

In particular, the Guidelines specifically address vertical transactions that may serve to raise the costs to the buyer’s competitors at any level. Consistent with the draft, the final Guidelines establish a structural presumption based on the degree to which a vertical merger harms competition in a related market:

  • If the merged firm’s share of the related market is above 50%, the agencies will “generally infer, in the absence of countervailing evidence, that the merging firm has or is approaching monopoly power in the related market.”
  • Where the foreclosure share is less than 50%, the agencies may still find a substantial lessening of competition, “particularly when that related product is important to its trading partners.”

What’s Changed Since July?

Although the major developments have not substantially changed between the draft and now-final Guidelines, there are a few notable changes, including:

1. Additional and More Recent Case Law. The 2023 Guidelines, for the first time, cite case law to support the agencies’ guidance. Now, the final version includes more recent case law addressing mergers in our modern economy, in contrast to the draft that primarily relied upon cases that are decades old and predate the 2010 Horizontal Merger Guidelines.

2. Vertical Mergers. The final Guidelines remove the draft Guideline 6, which addressed vertical mergers and proposed a structural presumption based on the degree to which a vertical merger harms competition in a related market (i.e., the merged firm’s share of the related market is above 50% or the foreclosure share is less than 50%, but certain plus factors suggest the merger will substantially lessen competition). The final Guidelines still address vertical mergers in Guideline 5, which evaluates mergers that allow a firm to limit access to products or services that its rivals use to compete.

3. The “Catchall” Guideline. The final Guidelines remove the draft Guideline 13, which broadly stated that “mergers should not otherwise substantially lessen competition or tend to create a monopoly.” While that catchall guideline was removed, the Guideline still includes a caveat that Guidelines are not exhaustive.

4. Expansion of “Dominance.” In addressing mergers that entrench or expand a firm’s “dominant position,” the final Guidelines add new language about the elimination of nascent competitive threats, specifically using the concept of “ecosystem competition” — where an incumbent firm that offers a wide array of products and services may be partially constrained by combinations of products and services from other providers. The Guidelines define a nascent threat as a “firm that could grow into a significant rival, facilitate other rivals’ growth, or otherwise lead to a reduction in its power.” This allows the agencies to scrutinize not only the acquisition of a direct competitor but also the addition of a niche or partially overlapping service to a company’s ecosystem of services.

5. Procompetitive Efficiencies and Rebuttal Evidence. In addressing procompetitive efficiencies, the final Guidelines remove the language from the draft that “efficiencies are not cognizable if they will accelerate a trend toward concentration … or vertical integration.” However, as above, the final Guidelines make clear that parties will continue to face a high burden when presenting rebuttal evidence or evidence to demonstrate that efficiencies, benefits and cost-savings will offset any potential harm.

What’s Next?

Given the breadth of the changes, the Guidelines highlight the need for companies to plan carefully for M&A activity and to anticipate an increased likelihood of additional regulatory scrutiny and litigation.

One unknown about the Guidelines is their future treatment by the courts. Because the Guidelines are not law and generally are treated as only persuasive authority, DOJ and FTC will need to convince the courts that mergers with lower concentrations or lower market shares than under prior versions of the Guidelines are also unlawful under the expansive body of Clayton Act case law. If courts agree with the agencies’ new positions, it is likely that more mergers will be challenged (or abandoned during regulatory review), and merging parties should expect longer and more intensive investigations. If courts find these new thresholds and standards inconsistent with applicable law, however, these guidelines may carry less weight overall and, in particular, if merging parties are more confident that they may obtain relief in the courts if DOJ and FTC overreach during regulatory review. While only persuasive authority, most courts did accord the less restrictive 2010 Guidelines considerable weight in assessing merger cases before them. Time will tell if the new Guidelines are given similar weight in light of their more aggressive approach.

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