After "an extensive public consultation process" since late July 2023, the Federal Trade Commission (FTC) and U.S. Department of Justice (DOJ) Antitrust Division on Dec. 18, 2023, jointly announced the release of final Merger Guidelines that would significantly expand the number and types of transactions subject to antitrust challenge. The Guidelines advance the view of the FTC and DOJ that prevailing approaches to merger review have been too permissive and not up to the task of identifying and preventing transactions that harm consumers and workers. Ironically, to "modernize" merger review standards, the Guidelines revert to arguably outdated enforcement standards, including thresholds for identifying deals subject to a structural presumption of illegality that the FTC and DOJ abandoned in the last revisions to the 2010 Merger Guidelines. Nevertheless, the agencies contend that the Guidelines reflect their "collected experience … over many years of merger review in a changing economy."
The Guidelines describe how the agencies evaluate whether transactions might "substantially … lessen competition, or tend to create a monopoly" and violate Section 7 of the Clayton Act. The detailed explanations in the Guidelines will help companies that have encountered a more hostile enforcement environment understand in advance the nature of the concerns that the DOJ and FTC might raise about contemplated transactions. The Guidelines are not binding in any way on courts considering DOJ or FTC challenges to mergers. However, past iterations of the Guidelines have proven to be persuasive to certain judges, and courts have incorporated certain standards and analyses from the Guidelines into their decisions. The DOJ and FTC likely hope – through release of "modernized" standards reflecting past enforcement practices – to persuade courts to begin to consider more favorably their more aggressive interpretations of the applicable laws. To date, the agencies have largely failed to convince courts to adopt their more expansive views, as reflected in their poor track record in recent litigated merger challenges.
The final Guidelines left largely intact the substance of the draft Guidelines released in July 2023. Notably, while the final Guidelines still note potential competitive harms from vertical transactions in which one competitor acquires assets on which other companies rely to compete, they eliminate a presumption of anti-competitiveness where the acquired company controlled 50 percent of the related market. The final Guidelines also eliminate a vague "catch-all" Guideline 13 for transactions that "otherwise substantially lessen competition" that failed to offer real guidance as to the nature of the agencies' potential competitive concerns. It also eliminated a trend toward consolidation as an independent basis for challenging a merger but still identifies such a trend as an "important factor" when the agencies evaluate the potential risk of a transaction under review.
This Holland & Knight alert provides a detailed summary of the Guidelines and the 11 principles on which they are based. Several principles, however, are worth highlighting at the outset, particularly for clients and colleagues in the healthcare and private equity sectors. Now that they have been adopted in the final Guidelines, these principles will have a significant impact on the ability to obtain clearances of proposed mergers.
A Brief Overview
Structural Presumptions
The Guidelines include several presumptions that would automatically render certain proposed mergers harmful to competition and make an extended review of transactions – to which these presumptions would be applicable – a near certainty. Among other things, these presumptions arise when the combined firm in a horizontal merger will have more than a 30 percent market share. The new presumptions are likely to have a chilling effect on potential acquisitions in the healthcare industry, as larger providers may be less likely to attempt to acquire even significantly smaller providers. Further, because there are often only a relatively small number of hospitals in a given market, the 30 percent market share threshold might be an impediment to a greater number of transactions, regardless of whether the transactions would be beneficial to the community.
Roll-Ups or Serial Acquisitions
To broaden the scope of transactions subject to review by the FTC and DOJ, the Guidelines focus on whether the transaction under review is part of the acquiring company's roll-up strategy of multiple acquisitions in a single industry. If so, the FTC and DOJ may then consider the cumulative effect of the pattern or strategy on competition, rather than just focusing on the impact of the individual transaction. This analysis seems to target the typical private equity strategy of acquiring strength in a given market through a series of smaller acquisitions, none of which individually would require a premerger notification filing under the Hart-Scott-Rodino (HSR) Act.
Labor Markets
The Guidelines focus on labor markets and a merger's impact on workers or other sellers or providers. Even if a proposed merger is unlikely to harm consumers, the FTC and DOJ still may challenge the merger if it will substantially lessen competition for workers in the relevant industry.
Minority Ownership Interests
The Guidelines focus on transactions that involve less than full control of a target firm. Parties cannot assume that they will avoid FTC and DOJ scrutiny merely by taking a relatively small ownership interest in a target firm. The Guidelines require the FTC and DOJ to assess whether a proposed transaction will result in either cross-ownership or common ownership that could be harmful to competition. An increased review of the potential effects of such transactions may impact the acquisition of noncontrolling interests in joint venture limited liability companies (LLCs) or partnerships, which typically would not be reportable under the HSR Act.
Acquisitions of Potential Entrants
The Guidelines consider whether a proposed merger will eliminate a reasonably probable future market entrant, particularly in a concentrated market. This potential consideration may present challenges for healthcare provider acquisitions, even by an out-of-market provider, which have not previously been considered high risk from an antitrust standpoint because the number of competitors in the market would not change. The Guidelines suggest that the agencies may consider whether a potential acquiror has the resources to enter the market by constructing a new facility, rather than by acquiring an existing facility in the market.
The Guidelines' Principles
As noted above, the Guidelines are based on 11 principles that the FTC and DOJ may use when analyzing whether a merger may substantially lessen competition. These principles are not mutually exclusive, and more than one guideline may apply to a given merger. Key portions of the 11 principles are summarized and highlighted below:
Guideline 1: Mergers Raise a Presumption of Illegality When They Increase Concentration in Highly Concentrated Markets
The Guidelines define concentration as the number and relative size of rivals competing to offer a product or service to a group of customers and explain that the FTC and DOJ examine whether a merger between competitors would significantly increase concentration and result in a highly concentrated market. But in a radical change, the Guidelines declare any merger creating a firm with a market share of more than 30 percent presumptively anticompetitive regardless of the overall level of concentration in the relevant market.
The agencies use the Herfindahl-Hirschman Index (HHI), an analytical tool for assessing market concentration, which is computed by adding up the squares of the market shares of each market participant. The 2010 Merger Guidelines established a threshold HHI of 2,500 for a "highly concentrated" market in which harm to competition would be presumed. As an illustration, a market with one firm with a 40 percent market share and one firm with a 30 percent market share would, under 2010 standards, be highly concentrated (402 (1,600) + 302 (900) = 2,500), and any transaction that produced that outcome would have been a near-certain target of an extended investigation and a likely candidate for a DOJ or FTC enforcement action. The Guidelines reduce the threshold for a highly concentrated market to 1,800, the level applicable under the 1982 Merger Guidelines. Under the revised standard, any transaction in a market with two firms with a 30 percent market share (302 (900) + 302 (900) = 1,800) will face serious headwinds at the DOJ or FTC, even if the acquiring company in the transaction at issue would not itself hold a 30 percent market share. This reduced HHI threshold for identifying highly concentrated markets is sure to expand the number of transactions subject to months-long reviews by the DOJ and FTC.
Guideline 2: Mergers Can Violate the Law When They Eliminate Substantial Competition Between Firms
The Guidelines focus on the extent to which the merging firms compete with each other. To make this assessment, the FTC and DOJ will consider a variety of evidence showing the extent to which the merging parties monitor each other's prices or activities and/or react to each other's conduct. The agencies will also consider the impact of earlier mergers, entry or exit events, customers' willingness to switch between different products, the merger's impact on rivals and the impact of removing a competitor from the market via the proposed merger. The Guidelines also include a section that explains how the FTC and DOJ evaluate competition between merging firms, including specific factors they consider depending on whether 1) the merging firms set the terms offered to customers, 2) customers' terms are set via bargaining or auctions, 3) the merging firms decide how much to produce or how much production capacity to maintain and 4) the proposed merger implicates innovation or product-variation issues.
Guideline 3: Mergers Can Violate the Law When They Increase the Risk of Coordination
The Guidelines examine whether a merger increases the risk of anticompetitive coordination, which may implicate a variety of factors, including price, product features, customers, wages, benefits or geography. The Guidelines focus on both explicit and tacit coordination and assess whether the merger will increase or stabilize coordination or make it more effective than before the merger. The Guidelines indicate that coordination may occur post-merger if any of the following primary factors are present: 1) a highly concentrated market, 2) prior examples of actual or attempted coordination among market participants or 3) a "maverick" firm is being eliminated by the merger. Even if no primary factor is present, the Guidelines still require an analysis of the following secondary factors to determine if a merger will substantially lessen competition: market concentration, market observability, competitive responses, aligned incentives and advantages of coordination. Not all of these secondary factors must be present for the FTC and DOJ to determine that a merger may substantially lessen competition. The Guidelines contain a section explaining how the merging parties can try to rebut a determination by the agencies that a merger may substantially lessen competition through coordination.
Guideline 4: Mergers Can Violate the Law When They Eliminate a Potential Entrant in a Concentrated Market
The Guidelines analyze whether the proposed merger will eliminate a potential market entrant. The more concentrated the market, the lower the probability of entry needs to be for the FTC and DOJ to conclude that the proposed merger raises anticompetitive concerns. The Guidelines focus on both actual potential competition and perceived potential competition. Actual potential competition assesses whether the proposed merger will eliminate a reasonably probable future market entrant. Perceived potential competition focuses on whether the proposed merger will eliminate current competitive pressure due to the elimination of a firm that was perceived to have been a potential market entrant.
Guideline 5: Mergers Can Violate the Law When They Create a Firm That May Limit Access to Products or Services That Its Rivals Use to Compete
The Guidelines focus on the merger's impact on rivals and whether the merged firm will have control over a rival's access to products, services or routes to market, or will have the incentive to control any of those things. If the merged firm will have the ability or incentive to make it harder for rivals to compete, the proposed merger may substantially lessen competition. The adverse impact on rivals includes an assessment whether the merged firm would obtain visibility into rivals' competitively sensitive information like projections, entry plans, or product innovations or improvements. The Guidelines also analyze horizontal and vertical issues when assessing the merger's impact on rivals. When considering vertical issues, the Guidelines infer that, if the merged firm will control over 50 percent of a related product market, the firm has or is approaching monopoly power. A market share below 50 percent still may be anticompetitive under the Guidelines, depending on the importance of the product at issue.
Guideline 6: Mergers Can Violate the Law When They Entrench or Extend a Dominant Position
The Guidelines examine whether one of the merging firms already has a dominant position in the relevant market that will be entrenched or extended via the merger. Mergers that entrench or extend a dominant position may also violate Section 2 of the Sherman Act. A dominant market position arises either from direct evidence or market shares showing durable market power. Entrenchment of market dominance may take the form of creating or raising barriers to entry or eliminating nascent competitors. Barriers to entry include, but are not limited to, increasing switching costs, interfering with competitive alternatives and depriving rivals of certain benefits. Extension of market dominance assesses whether the merged firm could extend its dominant position in one market into a related market, thereby substantially lessening competition or tending to create a monopoly in that related market.
Guideline 7: When an Industry Undergoes a Trend Toward Consolidation, the Agencies Consider Whether it Increases the Risk a Merger May Substantially Lessen Competition or Tend to Create a Monopoly
To assess whether a market is trending towards concentration such that a merger would substantially lessen competition, the Guidelines analyze consolidation trends in the industry. This requires an assessment of any trends towards concentration or vertical integration in the industry, whether there has been any consolidation of bargaining leverage and whether there have been multiple industry mergers, either at once or in succession.
Guideline 8: When a Merger is Part of a Series of Multiple Acquisitions, the Agencies May Examine the Whole Series
Because a single, relatively small merger may not itself substantially lessen competition or tend to create a monopoly and because the FTC and DOJ are concerned about so-called "roll ups" and have been focused on private equity investors, the Guidelines examine whether an individual transaction is part of an overall pattern or strategy of multiple acquisitions. If so, the Guidelines describe how the antitrust agencies will consider the pattern or strategy's cumulative effect on competition, rather than just the individual transaction's impact.
Guideline 9: When a Merger Involves a Multisided Platform, the Agencies Examine Competition Between Platforms, on a Platform or to Displace a Platform
The Guidelines focus on competition between platforms, on platforms and to displace platforms. After outlining common characteristics of multisided platforms, the Guidelines explain that they are focused on "any line of commerce," which can mean just one side of a multisided platform. With respect to preserving competition between platforms, the Guidelines seek to avoid the elimination of competition arising from a variety of mergers, including a merger between two platform operators, a merger between a platform operator and a significant platform participant, a merger involving a firm that provides services to multiple platforms and a merger involving a firm that provides important inputs to one or more platforms. With respect to preserving competition on platforms, the Guidelines focus on mergers between platform operators and platform participants. Finally, with respect to preserving competition to displace the platform, the Guidelines focus on mergers that may eliminate new technologies or services that could impact the platform and its participants or create alternatives for them.
Guideline 10: When a Merger Involves Competing Buyers, the Agencies Examine Whether It May Substantially Lessen Competition for Workers, Creators, Suppliers or Other Providers
Consistent with other enforcement activities by the FTC and DOJ, the Guidelines focus on labor markets and a merger's impact on workers, creators, suppliers or other providers. The Guidelines thus continue the FTC and DOJ's desire to move away from the exclusive focus on a transaction's impact on consumer welfare to a more expansive consideration of its potential impact on other industry participants. The Guidelines therefore assess whether a merger between buyers, including employers, may substantially lessen competition or tend to create a monopoly.
Guideline 11: When an Acquisition Involves Partial Ownership or Minority Interests, the Agencies Examine Its Impact on Competition
Even if a transaction will not result in full control, the Guidelines analyze whether it will result in either cross-ownership or common ownership that could substantially lessen competition or tend to create a monopoly. Cross-ownership exists when an entity owns a noncontrolling interest in a competitor. Common ownership exists when investors own noncontrolling interests in entities with a competitive relationship that may be affected by the common ownership. Given the Guidelines' focus on transactions involving less than full control, parties cannot simply assume that small ownership interests will avoid FTC and DOJ scrutiny.
