Principles of Merger Analysis The Antitrust Masters Course V September 30, 2010 Andrea Agathoklis,...

Principles of Merger Analysis

The Antitrust Masters Course V

September 30, 2010

Andrea Agathoklis, Department of Justice

Norman A. Armstrong, Jr., Federal Trade Commission

Phillip A. Proger, Jones Day

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Agenda

A Look Back to Look Forward: The History of Merger GLs in the US and Elsewhere

Overview of the New Horizontal Merger GLs

Applying the New Merger GLs: a Hypotheticals-driven Approach

The History of Merger Guidelines

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U.S. Timeline

1890: Sherman Act 1914: Clayton Act 1950: Cellar-Kefauver Amendments to Clayton Act 1968: First Merger Guidelines 1976: Passage of HSR Act 1982: Baxter 1992 : Rill 1997: Efficiencies 2010: Third major revision since 1968 (1982, 1992)

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Lessons

Why did we need merger GLs to begin with? Why did their evolution occur in this fashion?

Overview of the New Horizontal Merger GLs

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The Basics

Multi-month cooperative effort between the FTC and DOJ Following release of a draft in April 2010, the

agencies reviewed public comments and, to some extent, incorporated them into the final version

Intended to reflect current agency practice and provide transparency into the principal analytical techniques and practices used by the agencies

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The Basics

Formulaic analytical approach of 1992 GLs is disavowed

Market definition no longer automatically the first step

Rather, each merger will be approached on an individual basis depending on specific facts and circumstances Tools used to analyze a merger may include: the actual effects in

consummated mergers; ‘natural experiments’; market shares and concentration; HHIs (albeit at different thresholds); the extent of head-to-head competition; and, evidence of a disruptive “maverick” firm

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The Basics

Embrace of certain economic concepts: Diversion ratios (i.e., evaluating closeness of

competition of the merging parties products by measuring the number of sales that are diverted from one party’s product to the other’s in the event of a price increase)

Upward pricing pressure test Elimination of 35% market share safe harbor

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The Basics

Focus on coordinated effects by examining Previous instances of collusion in the industry;

transparency of competition on both price and non-price terms; product homogeneity; size and frequency of sales or contracts; market elasticity of demand; and, characteristics of the buyers (including size)

Other “new” concepts mentioned in the GLs: power buyers; monopsony power; and partial-acquisitions

Applying the New Merger Guidelines

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Evidence of Adverse Competitive Effects Sources of Evidence

Merging Parties’ documents will always carry the most weight

Third Parties’ (customers / consultants) Types of Evidence

Actual effects observed in consummated mergers Direct comparisons based on experience Market shares in a Relevant Market Head-to-head competition Disruptive role of a merging party (the “maverick”)

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Importance of Price Discrimination on Merger Analysis Presence of price discrimination influences market

definition, the measurement of market shares, and/or the evaluation of competitive effects

Protecting against adverse competitive effects of a given transaction against one customer, whereas another customer may not experience the same negative effect

Typically, two requirements: Differential pricing; and Limited opportunities for arbitrage (indirect purchasing)

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Product Market Definition

How do you define a substitute? Hypothetical monopolist test SSNIP

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Geographic Market Definition What are the geographic bounds of the

relevant market? Impact of Suppliers Impact of Customers

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Market Shares

Counting noses Calculating market shares Analyzing market concentration

HHIs

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Unilateral Effects

Differentiated products Auctions markets Homogenous products and reductions in

output or capacity Diminished innovation or reduced product

variety

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Coordinated Effects

Will the transaction alter the way companies behave?

What kind of markets are most vulnerable to coordinated effects?

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Entry

Timeliness What is “rapid”

Likelihood Sufficiency

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Efficiencies

Merger specific Verifiable and cognizable

That is, they must reverse any potential harm caused by transaction

Examples Shifting production among facilities formerly owned

separately to reduce the incremental cost of production: can be quantified

R&D: perhaps but not subject to verification Procurement, management, or capital cost: unlikely

Thank you