All quiet on the merger front…right? US antitrust agencies issue joint 2020 Vertical Merger Guidelines

The Federal Trade Commission (FTC) and the Antitrust Division of the US Department of Justice (DOJ) released their first-ever joint Vertical Merger Guidelines¹ on June 30, 2020.  The Guidelines effectively memorialize the agencies’ existing approach to vertical merger enforcement, building on the DOJ’s 1984 Non-Horizontal Merger Guidelines² and aiming to provide predictability and an analytical framework to private businesses and practitioners engaged in M&A activity. 

Although they generally reflect the status quo, the Guidelines were significantly marked up from the Draft Guidelines released in January 2020,³ in response to a considerable volume of public comments reflecting a broader and growing public debate over the direction that antitrust enforcement should take.  In the end, the Guidelines rely heavily on the agencies’ 2010 Horizontal Merger Guidelines for key concepts in antitrust law (including market definition, entry, and a market’s vulnerability to anticompetitive coordination), and emphasize the procompetitive benefits of vertical mergers, suggesting, consistent with existing practice, that the agencies are considerably less likely to object to a vertical merger than to a horizontal one.

The Guidelines focus heavily on two primary concerns in vertical mergers: (i) foreclosure or raising rivals’ costs, and (ii) access to competitively sensitive information.  They offer relatively detailed analysis and numerous examples of the ways in which each of these two problems can lead to post-merger unilateral effects (which are anticompetitive effects that the merged firm could bring about on its own), but also mention the possibility that the same two problems could facilitate coordinated effects.  Under the category of “vertical mergers,” the Guidelines include not only “strictly” vertical mergers (combining firms or assets at different stages of the same supply chain), but also “diagonal” mergers (combining firms or assets at different stages of competing supply chains), and the more amorphous “mergers of complements.”

According to the Guidelines, a vertical merger may lead to foreclosure or raising rivals’ costs by increasing a merged firm’s incentive and ability to hinder or prevent rivals’ access to products or services (such as necessary inputs), or to distribution channels.  The Guidelines contemplate a fact-specific assessment of the likely net effect of a vertical merger on competition in a relevant market, taking into account all changes caused by the merger to the merged firm’s unilateral incentives.  In appropriate cases, the agencies may also employ economic models based on available evidence.  The Guidelines offer several detailed illustrative examples of how foreclosure or raising rivals’ costs could lead to unilateral anticompetitive effects, including foreclosure of inputs to downstream competitors, raising input costs of downstream competitors or distribution costs of upstream competitors, requiring potential entrants to enter simultaneously at two levels of a distribution chain, and disadvantaging competing suppliers of one input to a downstream product by raising the price of another, related input to the same downstream product.  The ability of a vertically merged firm to hinder a maverick competitor at one level of the distribution chain may also facilitate anticompetitive coordination among the remaining suppliers in the maverick’s market.

A vertical merger may also give the post-merger firm access to competitively sensitive information about its rivals at one or both levels of the distribution chain, for example in situations where one of the premerger firms is a customer or supplier of the other premerger firm’s competitors.  The Guidelines contemplate that the agencies will investigate whether and how access to such competitively sensitive information may lead to unilateral effects (by enabling the merged firm to reduce the extent to which it competes with rivals whose information it now has), or coordinated effects (by facilitating the formation and operation of tacit anticompetitive agreements among competitors).  Consistent with the Horizontal Merger Guidelines and current practice, the Guidelines state that the agencies are more likely to challenge a merger on the basis of coordinated effects where the relevant market shows signs of vulnerability to coordinated conduct (i.e., generally, concentrated markets for homogenous products with relative price transparency, relatively inelastic demand and/or a history of collusion).

The Guidelines emphasize the potential significance of pro-competitive effects that vertical mergers are often understood to have, provided they can be demonstrated and tied specifically to the merger.  Examples of such procompetitive effects include a vertically merged firm’s ability to streamline production, inventory management, or distribution, and to create innovative products in ways that would be unlikely through arm’s-length contracts with suppliers or customers.  In particular, the Guidelines emphasize the potential significance of a vertical merger’s elimination of double marginalization (effectively, cutting out the middleman), which should factor into the agencies’ initial determination of the merger’s competitive effects rather than merely be considered as an efficiency offsetting competitive harms.  

In an apparent nod to critics of the agencies’ relatively limited enforcement efforts against vertical mergers, the final version of the Guidelines removed the “safe harbor” provision that had been included in the Draft Guidelines, according to which the agencies would be unlikely to challenge a vertical merger when the merging parties have less than a 20 percent share of a relevant or “related” market.  Consistent with the Horizontal Merger Guidelines and actual practice, the Guidelines also disavow exclusive reliance on market share and concentration statistics as screens for competitive harm.  Also consistent with the Horizontal Merger Guidelines, the Guidelines omit any discussion of remedies.

Dissents

In a sign of the growing political rift around questions of antitrust enforcement, the FTC’s vote to issue the Guidelines was split 3-2, with the two Democratic appointees, Commissioners Rebecca Kelly Slaughter and Rohit Chopra, issuing detailed dissents.  Commissioner Slaughter⁴ objected to the procedural decision not to allow a second round of public comment on the Draft Guidelines and noted a number of substantive concerns with the final Guidelines, including an over-emphasis on the purported benefits of vertical mergers, the failure to articulate more precisely which merger characteristics are more likely to raise problems, an over-simplified and overly optimistic analysis of the elimination double marginalization, and the omission of a meaningful discussion of such important issues as buy-side power, regulatory evasion, and remedies.

In a separate dissent,⁵ Commissioner Chopra criticized the Guidelines for relying on theoretical assumptions about the benefits of vertical mergers (including the elimination of double marginalization) rather than empirical data based on modern market realities, and for failing to address directly the ways in which vertical transactions may suppress new entry or otherwise present barriers to entry.  Focusing particularly on the digital economy, Commissioner Chopra voiced concerns over the Guidelines’ failure to address the potentially significant anticompetitive consequences of vertical mergers in markets characterized by a substantial first-mover advantage, the dominance of platforms over entire ecosystems, and network effects.

Time will tell whether the views of the dissenters will gather more steam.  For the moment, however, the Guidelines portend a future for vertical merger enforcement consistent with the agencies’ practice of the last few decades.

Find out more about the implications of the Guidelines by contacting either of the authors.