For the first time since the Department of Justice Antitrust Division (DOJ) published non-horizontal merger guidelines in 1984, the DOJ and Federal Trade Commission (FTC) issued updated Vertical Merger Guidelines to explain how the antitrust agencies analyze vertical mergers. The guidelines were published in draft on January 10, 2020, and are now open for a 30-day public comment period.
The DOJ and FTC released draft guidelines outlining the principal analytical techniques, practices and enforcement policies the antitrust agencies will use to analyze vertical mergers and acquisitions. Vertical mergers combine firms or assets that operate at different stages of the same supply chain. For example, vertical mergers or acquisitions could combine companies such as:
- a satellite maker and a payload provider;
- an automaker and an aluminum supplier;
- an automaker and an automotive retailer;
- a filmmaker and a cable television company; or
- a pharmaceutical company and a chemical company making active pharmaceutical ingredients.
The merging companies do not compete with each other, but rather work with each other through the supply of inputs, distribution or other business services. The draft guidelines are relatively limited in scope and do not significantly expand the theories and issues that US antitrust regulators have been applying to vertical mergers for several years. That said, having these theories on paper will provide helpful guideposts in assessing potential transactions. At the FTC, the two Democratic Commissioners abstained from voting to release the guidelines, issuing Dissenting Statements instead.
The draft guidelines rely on the well-established principles in the Horizontal Merger Guidelines on how to define product markets and measure concentration levels. The guidelines establish a safe harbor if the companies have a share of less than 20% in the relevant market(s), but set no presumption of anticompetitive harm if market shares are higher than that. The focus of these new draft vertical merger guidelines is on the competitive effects analysis and not on shares or any formulaic assessment. The basic concern is whether combining two companies at different levels in a supply chain will enable the combined company to lessen competition at one of the levels.
First, the guidelines discuss potential unilateral anticompetitive effects from vertical mergers under two theories: (1) foreclosure/raising rivals’ costs and (2) access to competitively sensitive information.
- Raising rivals costs / foreclosure. The first theory suggests that “[a] vertical merger may diminish competition by allowing the merged firm to profitably weaken . . . one or more of its actual or potential rivals in the relevant market by changing the terms of those rivals’ access to one or more related products.” Alternatively, the merged firm could refuse to supply rivals altogether, foreclosing their access to a necessary product or service. The guidelines lay out the following key conditions for a foreclosure theory:
- The foreclosure makes it more difficult for the company that is foreclosed to compete effectively.
- The newly merged firm is likely to win more business if it denies or disadvantages the [...]