On June 30, 2020 the Department of Justice's Antitrust Division and the Federal Trade Commission (FTC) jointly issued new guidelines on how antitrust enforcers evaluate “vertical” mergers—mergers between suppliers and purchasers in the same or related markets—replacing their 1984 guidance on the topic. In a joint statement, the regulators said the new guides would “provide greater transparency and predictability to the marketplace when businesses combine at different levels of the supply chain,” adding that they “reflect our current enforcement approach” and the agencies' “commitment to challenge vertical mergers that are anticompetitive and would harm American consumers.” The announcement was the culmination of a two-year effort by the agencies, which included a number of hearings and receipt of over 70 comments since draft guidance was released in January, 2020. In moving from the January draft to the final guides, the enforcers eliminated a proposed “safe harbor” for vertical mergers, a 20% market share threshold under which deals would have been considered "unlikely to be anticompetitive."
Some key features of the new guidelines are that they:
- Take a broad view of relevant markets by analyzing not only the offerings of the merging parties, but “related products,” defined as “a product or service that is . . . complementary to the products and services in the relevant market,” suggesting a more sweeping view of the potential competitive impact of vertical mergers. For example, the guidelines add the topic of “diagonal mergers” — those between companies “at different stages of competing supply chains.”
- Focus on the traditional harms that can result from vertical integration of firms with market influence, including consideration of “raising rivals' costs” and “foreclosure” theories of harm. In particular, investigators examine the extent to which the transaction may facilitate the merged entity's ability to restrict access by rivals to a key input or reseller, or increase the cost of gaining such access. These theories of harm have long been the principal anticompetitive concerns in vertical merger analysis.
- Consider in detail potential procompetitive aspects and efficiencies of vertical transactions, including the possible elimination of profit margins at multiple levels of the supply chain, referred to as the elimination of double marginalization, or “EDM.”
Support for the new guidance was not unanimous, as two of the FTC's commissioners voted against their adoption. Their criticism of the guidance was that vertical merger enforcement has been too permissive, allowing rampant industry consolidation, and that the new guides “support the status-quo ideological belief that vertical mergers are presumptively benign, and even beneficial.”
The agencies' issuance of this new guidance—and particularly the dissenting views of two commissioners — is a reminder that acquisitions of suppliers or customers in the same or complementary supply chain may not be given a free pass by antitrust enforcers. The due diligence accompanying such deals should routinely include a competitive impact analysis by antitrust practitioners, and where appropriate, planning for their potential investigation by the antitrust agencies.
Originally published by Seyfarth Shaw, July 2020
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