Mergers
Barbados Fair Trading Commission
Program in Competition Law and Policy
Barbados – March 30 - 31, 2011
Sean Dillon
Bureau of Competition
United States Federal Trade Commission
The views expressed herein are those of the author and do not necessarily represent the views of
the United States, the Federal Trade Commission or any individual Commissioner.
Reasons for Adopting Merger Review
• Some mergers result in use of
market power
o Higher prices
o Reduced output
o Fewer choices
o Reduced incentive to innovate
• “Greed is Good”…!
o When firms compete to make more
money consumers benefit
Mergers: the Bad and the Good
• Some are harmful:
o Create market
power
o If entry is
restricted & not
otherwise efficient
 Raise prices
 Reduce output
 Inhibit innovation
 Reduce efficiency
o Very difficult to
remedy after it has
taken place
• Many are
beneficial:
o Create efficiency
o Encourage
investment
o Allow the
introduction of new
products and
services
• Most are, at worst,
neutral
Sorting the Good from the Bad
• Most mergers do not threaten
competition
o U.S. Statistics:
 1128 mergers notified in Fiscal Year 2010
($63 million size-of-transaction filing
threshold)
 Only 46 Second Requests for additional
information issued (FTC and DOJ)
 41 enforcement actions – including
settlements and court filings (FTC and
DOJ)
Relevant Statutes
• Clayton Act: Section 7 prohibits mergers or
acquisitions “where the effect of such acquisition
may be substantially to lessen competition, or to
tend to create a monopoly.” 15 U.S.C. § 18.
• FTC Act: authorizes the FTC to enforce the
antitrust laws through a variety of means.
• “Congress has empowered the FTC . . . to weed
out those mergers whose effect ‘may be
substantially to lessen competition’ from those
that enhance competition.” FTC v. H.J. Heinz,
246 F.3d 708, 713 (D.C. Cir. 2001).
What does “substantially lessen
competition” mean?
• U.S. Horizontal Merger Guidelines
issued by FTC and DOJ in 1992 (revised
in 1997 and 2010)
• Applies economic thinking to law
• Guidelines are not legally binding, but
provide predictability to the business
community
• But guidelines approach followed by:
o FTC & DOJ in deciding whether to challenge
o Courts in deciding cases
The Merger Guidelines Approach
• Five Part analysis
o Market definition (Product and
Geographic Markets)
o Market Structure
o Competitive effects
o Entry Conditions
o Efficiencies
Defining Relevant Markets
• Asks the question, “in what market will the merger
substantially lessen competition?”
• Two components:
o Product Market
o Geographic Market
• Relevant market defined by where consumer may
turn in response to hypothetical monopoly pricing
o 5% test
• Same test for product and geographic markets
• Relevant Product Market
o Can be informed by competitive effects evidence
o Defining the relevant product market is “not an
end in itself: it is one of the tools that the
agencies use to assess whether a merger is likely
to lessen competition”
Examples of Relevant Product Markets
• Nestle/Dreyer’s – “super premium ice
cream”
• Whole Foods/Wild Oats – “premium
natural and organic supermarkets”
• Google/Doubleclick – “Internet display
advertising”
• Staples/Office Depot – “office supply
superstores”
• Swedish Match/National Tobacco – “loose
leaf chewing tobacco”
Measure Concentration
• Who’s in the market?
• Sum of market shares squared used to
calculate concentration using HerfindahlHirschman Index, before and after merger
o A market of 4 firms with market shares of 30,30,20,
and 20 would have an HHI of 2600
o 302 + 302 + 202 + 202 = 900 + 900 + 400 + 400 = 2600
• Sources of market share information
Concentration Continued
• If one of the firms with 30 percent
market share merged with one of
the 20 percent market share firms,
the new HHI would be 3800, an
increase of 1200 points.
(30+20)2 + 302 + 202 = 2500 + 900 +
400 = 3800
Concentration Continued
• Rebuttable presumptions
o Over 2500: (and increases by 200):
concentrated, market power will
increase
o 1500-2500: moderately concentrated
o Under 1500: not concentrated, no
further analysis required
Competitive Effects
• This is where the action is in merger
analysis
• Two types of effects:
o 1. Unilateral Effects: can merged firm
exercise market power?
o 2. Potential Collusion: will reduction in
number of competitors make collusion
likely?
Coordinated Interaction
• The theory: Merger may make
coordination more likely
• The criteria:
o Agree
o Detect
o Punish
Factors Facilitating Coordinated Pricing
• Market Structure
• Homogeneous goods
• Similar costs and production methods
• Observable prices and other
information is easy to obtain
Is The Merger Likely To Lead To
Coordinated Effects?
• Is there a plausible “story” to be told that:
o The market is conducive to coordination – i.e.,
that firms in the post-merger market will be in
position to reach terms of coordination, to
monitor each others’ compliance, and to react
to deviations such that cheating is inhibited
o That the merger enhances the likelihood,
scope, and/or success of coordination.
 Does the merger eliminate a “maverick” who serves to
disrupt coordination?
 Does the merger enhance the profitability or ease of
coordination?
Unilateral Effects
• Would it be possible for the merged firm
to raise prices no matter what anyone
else does?
• Upward Pricing Pressure (UPP) analysis –
the value in sales diverted is measured in
proportion to the lost revenues
attributable to the reduction in unit sales
resulting from the price increase
• Most recent cases have been unilateral
effects cases.
Unilateral Effects Stories
• Monopoly/Dominant Firm
o Easiest case
o Market Definition/Critical Loss Becomes
the key question
• Localized Competition Eliminated
o Differentiated Products
o Differentiated Firms
• In both types of cases, fringe expansion
and repositioning are the key to telling a
coherent story.
Entry Conditions
• If other firms can enter the relevant market easily
in response to anticompetitive price increases, it’s
less likely to happen
• Under 1992 Merger Guidelines, three elements to
be analyzed:
o Likelihood = Are firms going to enter the market if
prices increase and create an opportunity for them?
o Timeliness = Would that entry occur relatively
quickly (2 years)?
o Sufficiency = Will the timely and likely entry be
sufficient to prevent or quickly reverse the
anticompetitive effects of the transaction?
Do Efficiencies Exist?
• Will merger create efficiencies that benefit
competition and consumers
• Elements of the defense:
o
o
o
o
Verifiable
Cognizable
Merger specific
Rebut anticompetitive effect
• Rarely justifies merger to monopoly
• No court has ever approved an otherwise
anticompetitive merger based on
efficiencies
“Failing Firm” Defense
• Only saves an anticompetitive
merger when:
o Failure is imminent
o Bankruptcy reorganization not possible
o No alternative buyer
o Assets would exit the market
• Frequently claimed; rarely
successful
Recent Merger Cases
• HSR Filed Mergers
o CCC/Mitchell (automobile estimating and total loss
valuation systems)
o CSL/Talecris Biotherapeutics (plasma derivative
protein therapies)
o Thoratec/HeartWare (life-saving heart pumps)
• Consummated Mergers
o Polypore/Microporous (battery separators)
o Ovation (drug for premature infants with congenital
heart defects)
o LabCorp (clinical testing services)
o ProMedica Health System (acute care hospitals)
Non-Horizontal Mergers
• Past is not prologue
• “both horizontal and vertical mergers must
be reviewed with rigor. . . . I will not shy
away from considering whether the vertical
integration resulting from a merger or
acquisition is likely to substantially lessen
competition.” – AAG Christine Varney
Vertical Mergers
• Two Types:
o Upstream – Downstream
o
Complements in Demand
• Consumer harm unlikely without premerger market power.
• Vertical mergers have important
efficiencies.
• Structural analysis does not give answer.
o High concentration and margins do not make
harm likely, because they make efficiencies
important.
Efficiencies from Vertical Mergers
• Substitute for vertical contracts, if latter
not allowed or incomplete, or have high
negotiating & monitoring costs.
• Eliminate double markup. Merged firm
reduces price and expands output.
• Eliminate inefficient input choices when
factor proportions are variable.
• Integration of products results in better
product.
Anticompetitive Theories
• Facilitate collusion
• Reduce rivals’ incentives to compete
• Evasion of price regulation
• Foreclosure