Mergers and acquisitions will continue to face strong headwinds at the Federal Trade Commission and the US Department of Justice under new proposed Merger Guidelines released on July 19, 2023. The Proposed Guidelines embody the antitrust agencies’ aggressive posture toward merger enforcement under the Biden administration. This On the Subject highlights the most significant changes in the Proposed Guidelines and what steps companies contemplating mergers and other transactions should take in the face of these changes.
In the last two years, the Federal Trade Commission (FTC) and the Antitrust Division of the US Department of Justice (DOJ) brought, and won, several litigated merger cases by establishing narrow markets comprised of a subset of customers for a product. This narrow market theory, known as price discrimination market definition, allowed the agencies to allege markets in which the merging parties faced few rivals and, therefore, estimate high post-merger market shares. By their nature, price discrimination markets can lead to a challenge of a high-value deal where only a small number of the merging parties’ customers are allegedly harmed. Given the increased usage by the agencies and now judicial acceptance of the theory, counsel for merging parties must consider the potential for price discrimination market definition in assessing the antitrust risks for transactions.
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On Tuesday the FTC published its comments to FERC’s Notice of Inquiry (NOI), in which FERC had asked for comments on whether, (and if so, how), it should revise its approach for examining market power concerns arising from horizontal mergers to reflect the revised 2010 Horizontal Merger Guidelines published by the FTC and DOJ. The NOI also asked for comments on what impact the revised Merger Guidelines should have on FERC’s analysis of horizontal market power in its electric market-based rate program.
The theme of the FTC’s comments focus on encouraging FERC to adopt the broader set of concepts from the 2010 Horizontal Merger Guidelines, not just the revised HHI thresholds, as FERC’s NOI suggests. HHI (Herfindahl-Hirschman Index) is a measure of market concentration, based on market share analysis. The FTC points out that a "critical thrust" of the 2010 Merger Guidelines is that "merger analysis should examine all dimensions of a transaction’s likely competitive effects," not just market concentration. The FTC cautions that focusing only on HHI calculations can be misleading – either too lenient or too restrictive– especially given characteristics of electricity markets, notably, relatively inelastic demand, capacity-constrained firms, transmission congestion and long-term supply contracts. While market shares are one indicator of competitive effects, other types of evidence include actual effects, direct comparison based on experience, substantial head-to-head competition and the potentially disruptive role of a merging party. The FTC’s comments also note that strict market definition is not the only appropriate starting point for merger analysis, and may not even be required in some circumstances when there is evidence of anticompetitive effects.
If FERC adopts the principles in the 2010 Horizontal Merger Guidelines, FERC’s competition analysis would become similar to the comprehensive competitive effects analysis in FTC and DOJ investigations.