The Department of Justice (DOJ) and the Federal Trade Commission (FTC) formally released the new Vertical Merger Guidelines on June 30, 2020, to provide insight to companies as to how the agencies will evaluate the competitive impact of vertical mergers. These guidelines replace the DOJ’s 1984 Non-Horizontal Merger Guidelines. The Guidelines provide companies with a tool for assessing the antitrust risks associated with a merger involving companies at different parts of the same supply chain or competing supply chains, or issues arising during a merger of complements.
Market definition remains an integral part of the merger analysis. The agencies reaffirm that the methodologies contained in the Horizontal Merger Guidelines to examine mergers at the same level of the supply chain, e.g. the hypothetical monopolist and SSNIP test, are utilized to define markets in a vertical merger. Although the agencies will not utilize the market concentration thresholds contained in their Horizontal Merger Guidelines—to act “as screens for or indicators of competitive effects from vertical theories of harm”—the agencies will still analyze the concentration of each relevant market to determine the probability of anticompetitive effects.
The guidelines focus on determining the unilateral effects that would result from a vertical merger, specifically those that would “diminish competition between one merging firm and rivals that trade” or could trade with “the other merging firm.” The agencies identify effects that foreclose supply to competitors or raise their costs, and effects concerning competitively sensitive information.
Regarding effects that may diminish competition due to “unilateral foreclosure” or raising the costs of competitors/rivals, the agencies will analyze whether the merged firm would have the ability and the incentive to foreclose the market to competitors or raise competitors’ costs. The agencies are unlikely to scrutinize a merger where those effects are absent.
The guidelines also focus on the merged firm’s expected ability to access competitively sensitive information at different levels of the supply chain. Because a vertical merger typically combines two firms from different levels of the supply chain, each of the previous members would have access to their newly acquired partner’s competitively sensitive information. This information could allow the newly formed firm to take advantage of knowing rival firms’ input costs or previous contracts, and competitively respond to those firms. The combination also may disincentivize those rival firms that once had used one of the pre-merged firms as a supplier to utilize other, economically inefficient suppliers due to the fear of the disclosure of competitively sensitive information.
With respect to coordinated effects, the Vertical Merger Guidelines invoke Section 7 of the Horizontal Merger Guidelines to describe how the agencies will analyze a vertical merger’s ability to harm customers through coordinated interaction among firms in the post-merger market. For example, the elimination of a maverick competitor, through a merger, would lead to greater chances for coordination in that particular market.
Lastly, the agencies recognize that vertical mergers provide a number of procompetitive effects for markets. The streamlined production, distribution, and other synergies gained through combining two firms on the supply chain could create more innovative products or quality products at lower prices. Specifically, the elimination of double marginalization—the idea that two separate firms each will charge a mark-up causing higher prices than a newly merged firm charging a single mark-up—could generate savings for customers of the newly merged firm. Because this is a direct result of the merger, namely “the alignment of economic incentives between the merging firms,” the agencies will take a particular look at this evidence.
Ballard Spahr attorneys have experience counseling merging firms regarding the antitrust laws, the implication of those laws on the merger at hand, and regulatory filings such as those required under the Hart-Scott-Rodino Act. If you would like to discuss any questions or concerns regarding a proposed, active, or past merger please contact our Antitrust and Competition Group.
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