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Master the Antitrust Master the Antitrust Basics Brown Bag SeriesBasics Brown Bag Series
Lesson V – Clayton Act Section 7
Thomas D. Fina
Allen Bachman
Howrey LLP
OverviewOverview Substance – Clayton Section 7
• 1992 Merger Guidelines
• Market Definition
• Competitive Effects
• Unilateral effects
• Coordinated effects
• Remedies
• Litigation
Key issue – is the transaction likely to lead to higher prices, lower quality or reduced innovation?
Focus – practical tips on how to analyze a merger
Overview cont.Overview cont.
Not going to cover in any detail:
• Market definition (see December 13, 2006, presentation by Meg Guerin Calvert)
• HSR and merger process (next month’s seminar)
Appendices
• Bibliography
• Sample merger analysis memo
• Sample data request
Clayton Act Section 7Clayton Act Section 7
Overview of Legal Standards Overview of Legal Standards
Clayton Act Section 7Clayton Act Section 7 Prohibits acquisitions of stock or assets where “the effect
of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” 15 U.S.C. § 18 (2000).
Primary concern is the creation of market power• Power to restrain output and raise prices above competitive levels
• Power to reduce quality while maintaining prices
• Power to reduce the amount and/or pace of innovation while maintaining prices
“Horizontal” mergers, i.e., combinations of direct competitors, are far more likely to raise competitive concerns than are “Vertical” transactions.
Clayton Act Section Clayton Act Section 7 Enforcement7 Enforcement
Department of Justice Antitrust Division
Federal Trade Commission
State Attorneys General
Private Lawsuits
• (§ 4 and § 16)
Twin Pillars of Merger AnalysisTwin Pillars of Merger Analysis
FTC/DOJ Horizontal Merger Guidelines
• Guide agency review of each and every transaction
• Private Practice: satisfying the Merger Guidelines' criteria is critical to obtaining clearance without litigation.
• Agency Staff: satisfying the Merger Guidelines is a necessary part of establishing a case with the “front office.”
Judicial Decisions
• The Clayton Act itself is rather ambiguous.
• The courts have developed a large body of case law interpreting the statute.
• Courts rely on the Merger Guidelines, but are not bound by them.
Evaluating the Competitive Impact of a Evaluating the Competitive Impact of a TransactionTransaction
DOJ/FTC Horizontal Merger Guidelines
• Identify the relevant product and geographic markets and the firms participating in those markets
• Assess market concentration
• Determine the likely competitive effects
• Analyze whether entry would maintain competition
• Efficiencies
Merger Guidelines Commentary
• The analysis need not be linear. It may be appropriate to begin by analyzing the competitive effects.
Relevant Geographic MarketRelevant Geographic Market
The region in which the seller operates and to which the purchaser can practically turn for supplies
Classic examples of national markets
• Prescription Drugs
• Software
Classic examples of regional markets
• Hospitals
• Grocery Stores
• Gas Stations
Relevant Product MarketRelevant Product Market
Reasonable Interchangeability
• Compare the use and function of the merging parties’ products with other products.
• Assess the degree to which buyers are willing to substitute those similar products for the parties’ products.
Examples of Product Market Distinctions
• Chewing Tobacco vs. Moist Snuff (Swedish Match)
• Office Superstores vs. Smaller Retailers (Staples)
Market Definition – Final ThoughtsMarket Definition – Final Thoughts
Lack of clearly defined markets inhibits reliance on market share presumptions and hinders the strength of any theories of competitive harm.
• Cruise Lines
• Oracle
Market ShareMarket Share
Identify market participants
Identify each participant’s share of the relevant market
Analyze the extent to which the merger will increase concentration
Philadelphia National Bank Philadelphia National Bank PresumptionPresumption
Mergers resulting in an “undue” increase in concentration are presumed harmful.
• No clear guidance on how much is “undue”
• Market shares provide a “static analysis.”
• They offer only a “snapshot.”
• The courts and agencies have increasingly backed away from exclusive reliance on market shares.
Philadelphia National Bank Philadelphia National Bank Presumption (cont.)Presumption (cont.)
Presumption can be overcome with evidence clearly showing that the merger is not likely to have anticompetitive effects.
• Market shares are merely the starting point.
• Competitive effects analysis is “dynamic.”
• The ultimate issue remains “what will happen in the future?”
Theories of Competitive HarmTheories of Competitive Harm
Coordinated Effects
• Would post-merger market conditions make coordination on price or output more likely after the merger?
Unilateral Effects
• Would post-merger market conditions make it possible for individual firms to raise prices?
• Will the merger eliminate a constraint?
Coordinated EffectsCoordinated Effects
Will the merger increase the likelihood of explicit collusion or tacit coordination?
Examples of tacit coordination • Parallel pricing
• Output restrictions
• Arch Coal
Will the merger eliminate a maverick?
• An unpredictable or uncooperative competitor
Unilateral EffectsUnilateral Effects
Markets with differentiated products • Products sold by different competitors are not perfect substitutes.
• Example: branded products
• Are the merging parties’ products next best substitutes?
• Sales that would have been lost to the competitor from a unilateral price increase are now retained.
• Compare McDonald’s buying Burger King vs. McDonald’s buying Pizza Hut.
Markets with undifferentiated products • Example: Commodities• Unilateral price increases are more likely when competitors cannot
respond to a reduction in output.
• Capacity
So Now What Do I Do?So Now What Do I Do?
Work “Backwards” into the Work “Backwards” into the TransactionTransaction
• What are the likely competitive effects?
• Don’t get bogged down on structural analysis
• Market definition
• Market shares
• HHIs
• Brown Shoe v. United States, 370 U.S. 294 (1962)• (upholding challenge to merger creating competitor
with 5% share)• Whirlpool / Maytag (2006)
• (DOJ permitted merger in washer/dryer industry with combined share of approximately 50-70%)
ScreensScreens
Rationale for deal?
Are customer complaints likely?
Any group of customers likely to be harmed?
Concentration level: 4 to 3 and 3 to 2 deals can be difficult.
Consumer goods or politically sensitive?
Enforcement history
Get Your Hands DirtyGet Your Hands Dirty
Developing a sound understanding of the facts is essential.
“We learned long ago that facts are stubborn things in merger enforcement. No economic theory or story-based advocacy about a merger will give you a reliable answer unless the facts firmly support it.”
Former FTC Chairman Tim Muris, August 7, 2001
Step 1 -- DocumentsStep 1 -- Documents The parties’ documents are key. What do they
say?
• Offering Memorandum (if any)
• Strategic plan (if any)
• Board / management presentations
• How does management rationalize the investment?
• SEC filings / publicly available documents
• Investor presentations
Documents cont.Documents cont.
Use the documents to identify:
• Potential overlaps
• Rationale for transaction
• Industry competitive dynamics
• Competitors
• Barriers to entry
Develop outline of questions for client
Identify “good” docs / “bad” docs
Step 2 – Identify the OverlapsStep 2 – Identify the Overlaps
Identify overlaps
• At product level
• Amount of revenue (quantity) by overlap product
Step 3 -- Interview ManagementStep 3 -- Interview Management
What is the rationale for the transaction? Typical reasons include:
• Efficiencies (Whirlpool; Arch Coal)
• Product extension (Pepsi/Quaker)
• Geographic expansion (retail)
• Defensive (airlines)
Step 3 -- Interview Management contStep 3 -- Interview Management cont..
Are customer complaints likely?
Do the complaints sound in antitrust?
• “I like my sales representative.”
vs.
• “The merger combines my two primary suppliers.”
Step 3 -- Interview Management cont.Step 3 -- Interview Management cont.
Is there any identifiable class of customers who may be injured by the transaction?
• Large customers vs. small customers
• Buyer power
• Vertical integration
• Induce new entry
• Locked in customers / group with higher switching costs?
Step 3 -- Interview Management cont.Step 3 -- Interview Management cont.
Competitors and estimated market shares
Estimated efficiencies
Entry
• Barriers?
• Recent examples?
• Ability of customers to sponsor?
Is either party a maverick?
Step 3 -- Interview Management contStep 3 -- Interview Management cont..
Unilateral effects
• Are overlapping products differentiated?
• Are merging parties next-best substitutes and/or close in competitive space?
Ability of competitors to reposition?
• Easier in industrial products
• More difficult where brands/consumer goods are involved
Step 3 -- Interview Management contStep 3 -- Interview Management cont..
Coordinated interaction
• Industry structure / concentration
• Transparency of pricing
• Ability to detect cheating
• Numerous small transactions?
• Large lumpy sales?
• Ability to punish cheating
• History of collusion in industry?
Step 4 – History of EnforcementStep 4 – History of Enforcement
Have the agencies challenged prior transactions?
Have industry conditions changed since prior enforcement actions?
Step 5 – Is There a Fix?Step 5 – Is There a Fix?
Agencies strongly prefer structural remedies to conduct remedies.
Is there a potential fix if an overlap raises competitive concerns?
ConclusionConclusion
BibliographyBibliography
ABA Section of Antitrust Law, Antitrust Law Developments (5th ed. 2002)
ABA Section of Antitrust Law, The Merger Review Process: A Step-by-Step Guide to Federal Merger Review, 3d ed. (2006)
ABA Section of Antitrust Law, Mergers & Acquisitions: Understanding the Antitrust Issues, 2d ed. (2004).
U.S. Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines, April 1992 (revised April 1997).
U.S. Department of Justice and Federal Trade Commission, Commentary on the Horizontal Merger Guidelines, March 2006.