- On June 30, 2020, the Federal Trade Commission and the U.S. Department of Justice Antitrust Division issued new Vertical Merger Guidelines that outline how the federal antitrust agencies evaluate the potential competitive impact of vertical mergers.
- The Guidelines set out the Agencies’ analytical techniques, practices, and enforcement policy applied to vertical mergers and largely memorialize the principles, tools, and frameworks that the Agencies have historically used to assess mergers. This guidance is useful for all companies pursuing vertical transactions, including private equity sponsors doing so through bolt-on acquisitions.
- The Guidelines recognize that vertical mergers often benefit consumers but nonetheless caution that vertical mergers can have both unilateral and coordinated effects that might affect a combined firm’s ability and incentive to diminish competition in the relevant markets. The Guidelines describe how the Agencies evaluate these effects in a proposed transaction, including the types of evidence and procompetitive efficiencies that they will consider.
On June 30, 2020, the Federal Trade Commission (“FTC”) and the Antitrust Division of
the U.S. Department of Justice (“DOJ”) issued new Vertical Merger Guidelines that
outline how the federal antitrust agencies (the “Agencies”) evaluate the potential
competitive impact of vertical mergers. The Guidelines outline the Agencies’ analytical
techniques, practices, and enforcement policy when examining “strictly vertical”
mergers (mergers involving firms or assets operating at different levels of the
distribution chain), “diagonal” mergers (mergers that combine firms or assets at
different stages of competing supply chains), and vertical issues that can arise in
mergers of companies that produce complementary products.
While the final Guidelines reflect modifications to draft guidelines that the Agencies
published earlier this year, much of the guidance is not new, but instead reflects the
principles, tools, and frameworks that the Agencies have historically used to assess
mergers. These tools include the Agencies’ prior guidance in their Horizontal Merger
Guidelines, many sections of which are explicitly incorporated into the Vertical Merger
Guidelines. However, unlike the Horizontal Merger Guidelines, the Vertical Merger
Guidelines do not presume that a vertical merger will have anticompetitive effects.
Instead, the Agencies recognize that vertical mergers often benefit consumers, primarily
through cost savings to a merged firm from self-supplying inputs that would have been
purchased from independent suppliers absent the merger (a concept known as
elimination of “double marginalization”). Nonetheless, the Guidelines caution that
vertical mergers are “not invariably innocuous” and could injure competition in relevant
THE NEW GUIDELINES
The Guidelines address the following elements of the Agencies’ analysis:
Market Definition and Market Share
When analyzing a vertical merger, the Agencies identify the relevant market(s) in
which “the merger may substantially lessen competition” and specify one or more
products related to that market. A related product is a product that is supplied or
controlled by the merged firm and is positioned vertically or is complementary to the
products in the relevant market. Unlike in the horizontal merger context, market shares
are not dispositive in the vertical merger context, though they may provide evidence
about the likelihood, durability, or scope of anticompetitive effects in a relevant market.
Perhaps the most notable change from the draft Guidelines is that the final Guidelines
eliminated the draft’s presumptive “safe harbor” for a vertically combined firm with a
market share below 20%. While some might view this omission as indicating that
vertical mergers with low combined market shares may be challenged, it could suggest
that vertical mergers resulting in slightly above 20% market share may also be safe.
Notably, a recent study of the Agencies’ vertical merger settlements over the past 20
years indicated that neither the DOJ nor FTC has challenged a vertical merger resulting
in combined market shares below 40%.
Anticompetitive Effects of Vertical Mergers
In analyzing the effect that a transaction will have on competition, the Agencies focus
on the combined firm’s ability and incentive to diminish competition. That is, will the
merged firm be capable of foreclosing rivals or offering inferior terms for the related
product, and will it find it profitable to do so? Analysis of this key question includes a
focus on potential unilateral competitive effects and coordinated competitive effects.
The key unilateral effects that the Agencies focus on include:
- Foreclosure and raising rivals’ costs: The critical question here is whether the merged
firm could profitably use its supply of an input (the related product) to weaken
competitors in the relevant market. The merger will be less likely to cause concern if
rivals can switch suppliers or use alternatives to the related product without
affecting product price, quality, or availability in the relevant market.
- Access to competitively sensitive information: The Agencies will determine whether
the merged firm will gain access to its competitors’ competitively sensitive
information. This access may create an unfair advantage for the combined firm or
cause rivals to refrain from doing business with the combined firm. The Agencies
will examine whether such behavior will weaken the merged firm’s competitors.
The Agencies separately examine whether a vertical merger may lead to coordination by
(1) eliminating or hindering a “maverick” firm that otherwise restrains anticompetitive
coordination in the relevant market, or by (2) changing the market structure or the
merged firm’s access to confidential information, thus allowing market participants to
(a) reach a tacit agreement among market participants, (b) detect cheating on such an
agreement, or (c) punish cheating firms.
Evidence of Adverse Competitive Effects
The sources of evidence the Agencies use to assess vertical mergers include those set
forth in the Horizontal Merger Guidelines: documents and statements of the merging
parties, their customers, and other industry participants and observers. The Agencies
may also consider the actual effects of consummated mergers in the relevant markets
and evidence about the disruptive role of competitors in the relevant market. While
market shares and concentration in relevant markets will be considered, as noted above,
market shares may not be dispositive.
The Guidelines highlight the elimination of double marginalization as the principal
efficiency likely to result from vertical mergers, including from streamlined production,
inventory management, and distribution. The Guidelines also recognize that vertical
mergers may allow a combined firm to create innovative products in ways that might
not be achieved through arm’s-length contracts. Nonetheless, the Guidelines emphasize
that the Agencies will credit such procompetitive benefits only where they are “mergerspecific,” i.e., could not have been achieved independent of the merger.
HOW DEBEVOISE CAN HELP
The new Guidelines do not legally bind courts, but they provide detailed insight into
how the Agencies evaluate vertical mergers and serve as persuasive authority for courts
analyzing challenged vertical mergers. Although the Guidelines recognize the potential
procompetitive effects of vertical mergers, removal of the draft Guidelines’ presumptive
“safe harbor” and articulation of concerns over diagonal mergers and mergers of
complements indicate the potential for increased enforcement covering a wide array of
transactions. The Guidelines also leave several questions unanswered, including how the
Agencies approach remedies for vertical mergers.
Debevoise has extensive experience guiding clients through the HSR process and
obtaining FTC and DOJ approval for vertical and horizontal mergers. Our team is
available to answer questions about the Guidelines or analyze how they might apply to
particular proposed transactions.