With the recent explosion of antitrust developments in the United States, members of our Corporate and Antitrust & Competition teams have come together to produce a three-part series that discusses the practical impact of these developments for our clients. In this episode, Reed Smith partners Anatoliy Rozental and Chris Brennan discuss new U.S. merger guidelines.
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Intro: Hello, welcome to...
With the recent explosion of antitrust developments in the United States, members of our Corporate and Antitrust & Competition teams have come together to produce a three-part series that discusses the practical impact of these developments for our clients. In this episode, Reed Smith partners Anatoliy Rozental and Chris Brennan discuss new U.S. merger guidelines.
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Transcript:
Intro: Hello, welcome to Dealmaker Insights, a podcast brought to you by Reed Smith's corporate and finance lawyers from around the globe. In this podcast series, we explore the various legal and financial issues impacting your deals. Should you have any questions on any of the content through this series, please contact our speakers.
Anatoliy: Hi, everyone and welcome back to Reed Smith's podcast series, Dealmaker Insights. I'm Anatoliy Rosental, private equity and M&A partner based in our New York office with the explosion of developments in the US antitrust space. I've teamed up with some of our antitrust and competition team to chair a three-part series where we'll be discussing the practical impact of recent developments and key priorities for some of our clients. For our second episode, I'm joined by Chris Brennan, who is a partner in Reed Smith's global antitrust and competition team and whose practice is at the forefront of these antitrust battles. Chris, thank you so much for joining me today.
Chris: Thanks, Anatoliy. Always good to work with you and especially for today's discussion which focuses on a major development on how our clients evaluate and plan for merger clearance issues in the US.
Anatoliy: So let's, let's jump right in. You know, this episode is focused on the US Department of Justice and the Federal Trade Commission's 2023 merger guidelines. So to start at the beginning for our listeners who may not be familiar with the history, you know, I understand that the first guidelines were issued way back in 1968 and there have been several iterations since then. The 2023 guidelines consolidate, revise, replace the various versions of the merger guidelines issued by the FTC and DOJ. And can you give us a brief background of what these guidelines represent?
Chris: So, the stated purpose of these guidelines is to help the public business leaders, practitioners that would be you and I and courts understand how the agencies consider certain issues when investigating mergers. The ideas is that they reflect the agency's current approach to merger enforcement and provide you and me and the larger community insights into how those mergers are going to be analyzed at least for the current agency leadership. And just so we're all on the same page. US law requires companies to file a notification that's known as an HSR filing to the FTC and DOJ for a proposed merger that at least for this year in 2024 is valued at or above 119.5 million. Once that filing is submitted, the agencies have 30 days to decide if they want to further investigate and potentially challenge the merger and critically the parties cannot close the deal while that process is playing out. So while these guidelines are non binding, you should think of them as the playbook for DOJ and FTC personnel that review those filings and that playbook is how agency leadership expects them to analyze a merger during the 30 day review period, and whether to let that deal close or to pump the brakes and investigate further.
Anatoliy: Got it. So are the 2023 guidelines, another incremental change or is this something more groundbreaking?
Chris: So it's definitely groundbreaking, but potentially not in the normal sense of that phrase. The agencies have touted these guidelines as necessary to address quote unquote the modern economy. Yet many of the legal authorities that the agencies rely on for significant changes in these guidelines are based on pre 1980’s case law and many of those authorities have been ignored or rejected by courts over the last 40 years as modern economic theory has shifted our view of how mergers affect markets and outcomes for market participants. Critics of these new guidelines have noted that there's an obvious tension between claiming to update the guidelines for a modern economy while seeming to adopt the pre economics era of antitrust enforcement. But if you take a step back, that approach makes perfect sense, if you think about the Biden administration's view of today's modern economy, and they've characterized that as one marked by excessive corporate consolidation and a need for enhanced merger enforcement. Consistent with that view, these 2023 merger guidelines clearly signal an appetite for stronger enforcement, more theories of potential harm to competition and likely longer investigation periods for our clients.
Anatoliy: Ok. So in light of this new approach, can you walk our listeners through the major changes and how the DOJ and FTC are analyzing mergers for potential competition concerns?
Chris: Sure, I should be clear that there's a lot in these guidelines but for purposes of today's episode and for our listeners, I want to talk about three of the most widely applicable changes. First, the guidelines significantly lower the threshold that agencies use to assess whether a merger is presumptively anti competitive. Generally, a merger that creates a firm with a market share of greater than 30% is likely presumed to be an anti competitive under these new guidelines. And so these guidelines are going to make an entirely greater class of mergers presumptively anti competitive. The guidelines also substantially reduce the presumption thresholds for the Herfindahl–Hirschman Index which is known as the HHI index which analyzes the change in concentration of market shares across all the competitors in a relevant market. I don't want to get too deep into the numbers of that analysis, but one way to think about it is that these revisions place far greater scrutiny on what we call a 6 to 5 merger where you start with six competitors, there's a merger and now you're left with five. Before these guidelines, those mergers were less likely to raise anti competitive concerns. And certainly under this new approach, anything more concentrated such as a 5 to 4 merger is absolutely gonna trip the new guidelines. I should note that this is a rebuttable presumption. And the agency has made clear in the final version of these guidelines that it's a rebuttable presumption, but they're saying it's rebuttable while at the same time saying you're gonna need really good arguments to get over that presumption. And if you're in a significantly higher market share above 30% or substantially below the thresholds for the HHI index, that's really gonna be an uphill battle. You're gonna have to fight really hard and potentially go to the courts if you wanna push that deal through. So second, I wanna talk about vertical mergers and obviously by that, I mean, a merger that's not between direct competitors, but something like a merger between a supplier and a manufacturer. The guidelines now suggest, don't declare but suggest the presumption against mergers in which there's going to be a market share of 50% or greater in the related product. And that's the product by which you could use to foreclose other rivals access to the market. This is an area where the agencies are clearly departing from case law because there's never been a presumption that a 50% share would make a merger unlawful. And I think they're gonna have a really tough time pushing that through the courts. And it'll be interesting to see how much they try to push those cases and challenge those mergers uh to test this new approach. Third and finally, I wanna talk about deals that involve nascent or com or potential competitors. And this includes both actual potential competition where one of the merging parties has real plans to enter a market as well as perceived potential competition where current competitors are disciplined by a perception that one or more of the merging parties could enter the market. The guidelines claim that and I'm quoting here in general expansion into a concentrated market via internal growth rather than via acquisition benefits competition. In other words, they don't want you to see, they don't want to see a entity buy its way into a market. They wanna see it build its way into the market. And we've seen this theory in the fintech space, in virtual reality. It's particularly applicable to emerging technologies and I'm sure we'll see it in acquisitions related to artificial intelligence. My view is these challenges are gonna rise and fall on the specific facts and players and that's consistent with the agency's mixed record in challenging these deals to date.
Anatoliy: Generally sounds like scrutiny is increasing across the board. But are there any potential industries or types of entities that are specifically targeted in these new merger guidelines?
Chris: There are and we should begin with a shout out to your first episode with my colleague Michelle Mantine because private equity is definitely in the crosshairs of these new guidelines. And I know you and her talked about that issue in detail. So if you're listening and that's applicable to your world, then please go back and check out that episode. Let's also talk about two other subgroups and that's platforms and labor markets. A multi sided platform is defined as a product or service in which participants provide or use distinct products which contribute to the attractiveness and use of the platform overall. Just for some examples, think about companies offering digital services like app stores, buyer and seller platforms and social media companies. The agencies make clear that the guidelines will apply even if the competitive concerns do not arise on all sides of the proposed market. And they'll consider competition between platforms, competition on the platform, and competition to displace the platform. My view and it's sort of reading the tea leaves here is that platforms are gonna play an increasingly important role in a lot of industries as technology and software continue to infiltrate all aspects of our lives and the agencies are sort of ahead of that shift, ensuring they have a very flexible approach on when those acquisitions are up for review. Second, let's think about labor markets. Unlike the prior merger guidelines, the 2023 edition include extensive discussion of possible harm in labor markets resulting from combinations of employers, they compete for talent. We've seen this and I'm sure you're familiar with an increasing focus on labor markets in all contexts including outside the merger world. And the guidelines confirm that agencies will be reviewing deals for a number of possible effects to labor including lower wages, slower wage growth, the degradation of workplace quality and forcing workers to be pushed into the job market. In response, merging parties should consider how they would respond inquiries on labor issues. And in particular should think very hard about how efficiencies related to head count are addressed in their internal analysis and the calculations of potential synergies.
Anatoliy: So let's now talk about impact. Do these guidelines prevent our clients from considering certain acquisitions or exit strategies?
Chris: So I noted at the beginning that these guidelines aren't binding on the on the agencies and I should also clarify that the guidelines have no legally binding effect on courts. And it may be a really tough sell for many judges given that these guidelines depart from existing and widely accepted principles of merger analysis. So again, the law is not changing here. Moreover, these guidelines are generally seen by antitrust practitioners as essentially memorializing an enforcement strategy that has been in effect since this current administration took over in 2021. And in large part, that approach has failed to produce results in merger litigation. The agencies have lost most of their efforts to enforce the more novel theories in these guidelines. And there's really little reason to think that that's going to change simply because the agencies have published their playbook. That said, defeating the FTC or DOJ in a merger challenge is a massive undertaking. And the agency's track record has not deterred them from being exceedingly aggressive in enforcement efforts. I'll leave you with two perspectives on impact. One clients shouldn't slam the brakes on deal activity just because the temperature in the room has increased. At the end of the day, the vast majority of deals go unchallenged in large part because agencies only have so many staff members to do the work. So work with your antitrust counsel to get a deal specific assessment of where you fall across the potential enforcement spectrum. But second, there's no doubt that this administration has adopted a deep skepticism of large companies becoming larger. A draft version of these guidelines went so far as to claim that any merger by a company with at least a 30% share would be subject to heightened scrutiny. If you're in that universe, I think you need to factor into acquisition planning and should consider what deals are most likely to create real shareholder value over the next eight months of 2024.
Anatoliy: Is there anything our clients can do in response to these changes?
Chris: I think all the common and classic suggestions apply, right? And you and I have talked with clients about those all the time, right? Think about your documents, get planning early, prepare your arguments. But in light of these changes, I think the best thing you can do is actually integrate your antitrust counsel into the acquisition planning process. Not just after you have a potential target. I know I've had a number of clients reach out and say here are our goals and some potential ideas. What do you think? And the great thing about that approach is we're helping the key personnel at the company understand how to be proactive in developing short and long term acquisition strategies that are aligned with current enforcement attitudes. So we're avoiding a scenario where the board hears about this amazing opportunity. And then only later down the road hears about all the potential antitrust risks that can make it hard to push through if you can write size and right time your client's acquisition strategy, you're creating tremendous downstream efficiencies in how you'll subsequently defend that deal before the agencies. Similarly, I think client should be more willing to consider filing on a letter of intent versus fully signed Comprehensive Agreement. The HSR rules have always allowed both scenarios and I think there are certain deals where an lo I makes more sense because you can get the agency's reaction to the deal before you incur 100% of the due diligence burden to be sure you can't just send in a hypothetical deal and you have to certify that you have a good faith intention to consummate the transaction. But I think where you can get a seller on board, I think it's a really interesting approach for certain transactions.
Anatoliy: Definitely. And it's, it's certainly one that you've recommended for our clients on, on many transactions before and been successful approach that we've taken. All right, Chris, last question for you and I'm sure it's one that you're getting at a lot of cocktail parties these days, but with the close of the first quarter of 2024 and as we're barreling toward a presidential election in November, could the results of that election affect the lifespan of these guidelines?
Chris: So the short answer is yes and obviously neither you nor I have a crystal ball on how things are gonna play out. But uh let me give you a reason to think that's not just possible but potentially likely. The DOJ and FTC issued the vertical merger guidelines in 2020 under the Trump administration. Just about a year later. The FTC rescinded those 2020 guidelines after the Biden administration appointees took control. So we'll certainly be paying close attention to how there's discussion of monopolies as well as the economy at large on the campaign trail. And hopefully you can have me back for a follow up episode on how this election will impact the merger outlook for 2025.
Anatoliy: Perfect. That's all the time for today. Thank you to Chris for today's episode and thank you to everyone for tuning in. For part three, I'll be joined by my partner Ed Schwartz and we'll be discussing merger planning in the age of uncertainty, FTC Section 5 and beyond. We hope you can all join us then. Thank you so much.
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