The Department of Justice (DoJ) and the Federal Trade Commission (FTC) have finally published long-awaited guidelines on vertical mergers in the US. If adopted the guidelines will supersede the DoJ's 1984 Non-Horizontal Merger Guidelines.
Although widely well-received, sources say the guidelines leave some holes and could have gone further, for instance in clarifying what constitutes a contentious issue.
Some say that vertical merger enforcement has been way too lax over the past 15 to 20 years and that the new guidelines should take a strong stance, should have presumptions based on market share and the anticompetitive nature of deals , should rely less on quantitative models, and should be more focused on the issue of vertical integration.
"Basically, both groups will be disappointed by the new guidelines that are not trying to describe a big change in enforcement, but more accurately describe what the agencies actually do today," said Dan Culley, partner at Cleary Gottlieb.
"It doesn't mean every case like that is necessarily totally immune from enforcement"
"The guidelines discuss a quasi-safe harbour at roughly 20% market share in both markets and below, and although they are not dogmatic about it," he continued, "it doesn't mean every case like that is necessarily totally immune from enforcement under the right circumstances.”
A vertical merger is when two or more companies that provide different supply chain functions for a common good or service combine. They’re thought to allow for increased efficiency as the parent company is able to take on the entire supply chain reducing costs and boosting productivity.
The most recent guidance from the agencies on these deals is about 36 years old, and for many, no longer fit for purpose.
"In fact it was affirmatively misleading. Many thought that vertical mergers could only be either harmful or beneficial. Changes since that time were not captured by the 1984 guidelines at all," said Culley.
See also: US-China trade war part three: Cfius
The American Bar Association Antitrust Law Section has long been pushing for updated guidelines. "It was woefully out of date. They haven't reflected agency practice for some time," agreed Ian John, partner at Kirkland & Ellis. "These new guidelines are good for transparency because they tell the world how people look at vertical mergers."
The guidelines are lacking a concrete demonstration of foreclosure, what it means to raise rivals’ cost, and how to actually assess the target, he added. "The guidelines mention that the agencies would look at econometric models and consider consistency across models before they raise any concerns," he said. "But there is not a lot of detail there."
It’s of course useful to have the agencies on the record explaining how they approach vertical mergers, which will make the process clearer going forward.
These are however only guidelines, which must be approved before becoming legally binding.
"Hopefully we are actually able to get to a set of guidelines into force. It would be a good thing for the antitrust bar and the business world generally to have objective words on the page that explain how the FTC and the DoJ will look at vertical mergers," said John.
In terms of next steps, the DoJ can sign these off relatively easily, but the FTC has to hold a vote first. The two Democrat commissioners at the FTC abstained from the vote, and both released statements that were critical of the part of the guidelines that suggested that the thresholds should be lower. They both suggested that the agencies should be “more sceptical of efficiencies”. Commissioner Rohit Chopra went as far as to suggest that the agencies should rethink the entire consumer welfare structure.
"Everybody else is happy in the sense that these guidelines are a dramatic improvement over what is in place now, which is basically nothing," said Culley. "They fall a bit short on the level of detail we would expect though – only 8.5 pages – they’re a quarter of the length of the horizontal merger guidelines."
There are further areas that could have been considered too, said John.
· "It is notable that the new guidelines address only vertical mergers but would completely withdraw the 1984 non-horizontal guidelines, which include a section that addresses potential competition along with the section that addresses vertical mergers," he said.
© 2021 Euromoney Institutional Investor PLC. For help please see our FAQs.