Last week, the U.S. Department of Justice ("DOJ") and Federal Trade Commission ("FTC") issued draft Vertical Merger Guidelines. Vertical mergers combine two or more companies operating at different levels of a supply chain for a related product, e.g., windshields and cars. This is the first revision to outdated vertical merger guidelines in more than 35 years, and follows DOJ's failed attempt to block AT&T's acquisition of Time Warner.

The Guidelines describe how the antitrust agencies evaluate vertical mergers, how in their view they should be evaluated by courts, and outline the following theories of harm:

• The merger incentivizes the merged company not to sell inputs or outputs to its rivals ("foreclosure").
• The merger incentivizes the merged company to charge higher price(s) for related product(s), or reduce service or quality.
• The merged company gains access to competitively sensitive information about its upstream or downstream competitors.
• The merger increases the likelihood of industry coordination.

The Guidelines also include a non-binding safe harbor below which the agencies are "unlikely" to challenge a vertical merger: if combined share is less than 20 percent (e.g., in cars) and the company’s related product (e.g., windshields) is used in less than 20 percent of that same market. The European Commission and France, by comparison, have adopted a 30 percent threshold.

The Guidelines also describe benefits and efficiencies the agencies may credit, including streamlined production, improved inventory management or distribution, and elimination of hurdles to creating innovative products. The agencies also consider whether a merger leads to lower prices from the merged company's incentive to charge a single profit-maximizing margin.

The Guidelines are open for public comment. Significant changes are unlikely given division about the proper level of enforcement in vertical mergers, as reflected in dissenting opinions from the FTC's Democratic commissioners. Although the Guidelines explain modern theories of harm from vertical mergers, unlike the agencies' Horizontal Merger Guidelines, these vertical Guidelines may be criticized as thin on practical guidance for companies going forward. Difficult questions remain, including how the agencies will apply the theories or distinguish procompetitive from anticompetitive deals, the outcome of which, in part, depends on complex economic modeling and other evidence that may be unavailable at early stages of a deal when parties evaluate risk and whether to go forward.

In the coming days, we will publish frequently asked questions that address the Guidelines in more detail.