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DOJ/FTC Merger Guidelines and Review Process Practice Pointers and Lessons Learned From Antitrust Enforcement Trends
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THURSDAY, JULY 25, 2013
Presenting a live 90-minute webinar with interactive Q&A
Mark S. Ostrau, Partner, Fenwick & West, Mountain View, Calif.
James W. Lowe, Partner, Wilmer Cutler Pickering Hale and Dorr, Washington, D.C.
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Strafford Publications Seminar
July 25, 2013
James W. Lowe
WilmerHale
Mark S. Ostrau
Fenwick & West LLP
The (New) Merger Guidelines Textbook
Recent DOJ/FTC Actions
Comparing Theory to Actual Practice
Process Changes and Issues
Key Takeaways and Lessons for Company Counsel
6
First DOJ Guidelines published in 1968 focused heavily
on concentration
No revision until 1982 & 1984 (DOJ only); separate FTC
Guidelines (1982)
Increased focus on competitive effects
First joint Guidelines in 1992
Set formula for analysis centered around market definition
By mid-2000s, consensus that 1992 Guidelines no
longer accurately reflected current analytical process
7
“These Guidelines describe the principal analytical techniques and the main types of evidence on which the Agencies usually rely to predict whether a horizontal merger may substantially lessen competition.” [Guidelines §1]
“These Guidelines do not describe the way that the Bureau of Competition and enforcement staff at the Commission proceed today. They also do not reflect the way that the courts proceed.” [FTC Commissioner Rosch]
8
Market definition no longer first step
Even when markets defined, higher concentration thresholds
Acceptance of much higher HHI levels (18002500) Preference for narrow markets even if exclude some substitutes
Fact-specific process using a range of analytical tools Observed effects and “natural experiments” Closeness of competition Pricing Models (Critical Loss/Diversion/GUPPI) Simulation models Role as Maverick
But see Ovation (failure to prove product market doomed post-deal case even though prices skyrocketed); Group Health (refusal to adopt UPP test)
9
Unilateral Effects:
Whether the combined firm will gain sufficient market power that it will be able to exercise successfully to raise price
Coordinated Effects
Whether as a result of the transaction the industry will be more susceptible to coordinated pricing or output
• Does not require showing that collusion is more likely
10
No market share requirement
Recognizing concern with non-price effects
Quality, variety, service
Innovation (reducing incentives vs. enabling through complementary capabilities)
Key evidence in practice
Company documents
Win-Loss records
Margin analysis
Cross-elasticity of demand
11
• History of coordination in market
• Transparency of price and non-price competition
• Product homogeneity
• Size and frequency of sales
• Demand elasticity
• Buyer characteristics
• Presence of a maverick
12
Entry: “Entry by a single firm that will replicate at least the scale and strength of one of the merging firms is sufficient.” [Guidelines §9.3]
Google/AdMob (Apple/Quattro)
Entry must be both “timely” and sufficient to avoid competitive harm from the transaction
Efficiencies: high level of proof, and won’t outweigh significant competitive risk
Requires objective, preferably pre-signing, analysis of likely efficiencies and synergies
Fixed cost savings given little weight
Power Buyers: limited impact
13
Modes of Analysis
Second Requests
Enforcement Actions
Key Evidence/Theories
14
2010 Guidelines given more explicit weight to complex analytical models both as initial screens and as determinants of likely competitive effects
Models will vary depending on the nature of the competitive concern and available data
Recent cases show increased reliance on modeling
Early preparation to address modeling is key
15
Increased frequency of Second Requests
Especially from DOJ (but lower challenge rate as a result)
Frequency increases with size of transaction
However, many smaller transactions are caught
Key evidence: market shares/# of suppliers, entry barriers, customer complaints, hot docs
Primacy of price effects
Non-price effects secondary (but still there)
Innovation effects mostly limited to pharma
Volume of material demanded is enormous
Between documents & data, often measured in terabytes
16
New Guidelines alone have not meaningfully changed enforcement patterns
Focus on high shares or high industry concentration
Investigations increasingly litigation focused
Agencies seemingly more willing to litigate
Enforcement decisions more multi-faceted
Less reliance on single type of evidence
Decisions often made only after full examination of documents and data
17
Agency Parties Industry Significant Competitors
Combined Market Share
DOJ H&R Block/TaxACT Tax Preparation Software
3 to 2 28%
DOJ AT&T/T-Mobile Mobile Wireless 4 to 3 42% (national)
FTC LCA/Orchid Cellmark DNA Testing Services
2 to 1 N/A
FTC Western Digital/HGST Disk Drives 3 to 2 50%
DOJ IDT/PLX Semiconductors 2 to 1 86%
FTC Teva/Cephalon Generic Drugs 3 to 2 83%
DOJ ABI/Modelo Beer 4 to 3 46% (national)
DOJ Bazaarvoice/ PowerReviews
Internet Ratings Platforms
2 to 1 N/A
18
Guidelines related: Less rigidity in nature of analysis and investigation
Somewhat greater integration of fact and economic analysis
Not Guidelines related:
Greater effort to use initial waiting period for substantial analysis
More interaction among economists
Increased demand for timing agreements
• Very one-sided process
Automated document review
19
Market shares and # competitors still important
Win-Loss experience (diversion analysis) more important
Hot documents matter a lot
Customer opinions matter a lot too
Process becoming more complex
Increased modeling; timing agreements
20
Heightened need for sensitizing all document
preparers early
Write with expectation will be reviewed
Avoid “colorful” and/or market-limiting language
Don’t oversell transaction
Provide drafts of sensitive documents to counsel
before providing to anyone else
Limit dissemination and redistribution
21
HSR 4c/4d:
Internal analyses relating to competition, markets, synergies or efficiencies of proposed transaction
Banker or consultant analyses of competition or markets created in last year (not specific to deal or buyer)
Offering memoranda created in last year (not specific to deal or buyer)
22
“There’s really only two players of any substance in the organic and all natural [market], and that’s Whole Foods and Wild Oats. . . . [T]here’s really nobody else in that particular space.”
[Buying PLX means difference between] “2 strong players vs. one monopoly.”
“[Acquisition will allow remaining players to] regain control of industry pricing and avoid further price erosion.”
[Acquisition] “an opportunity to ‘take out Bazaarvoices’s only competitor, who . . . suppressed Bazaarvoice price points by as much as 15%.”
“By buying [Wild Oats] we will greatly enhance our comps over the next few years and avoid nasty price wars in … many other cities which will harm our gross margins and profitability.”
The merger would “further increase . . . Switching costs” and “deepen [Bazaarvoice’s] protective moat.”
23
2010 Guidelines evolutionary
Process now more fact-specific and economic-driven
High concentration or market shares? History of collusion? Expect an investigation
Process is long, resource draining and complex
Begin preparations early
24
