The Federal Trade Commission (FTC) and the Department of Justice's (DOJ) Antitrust Division recently published draft 2020 Vertical Merger Guidelines for public comment. According to the agencies, the new guidelines outline their analytical techniques, practices, and enforcement policy for vertical mergers that raise antitrust concerns.
"While many vertical mergers are competitively beneficial or neutral, both the Department and the Federal Trade Commission have recognized for over 25 years that some vertical transactions can raise serious concern," said Assistant Attorney General Makan Delrahim of DOJ's Antitrust Division. He added that "[T]he revised draft guidelines are based on new economic understandings and the agencies’ experience over the past several decades and better reflect the agencies' actual practice in evaluating proposed vertical mergers”.
The Basics of Vertical Mergers
Mergers can help companies attain a number of strategic goals, including diversification, growth acceleration, improved performance, development of new skills/technology, and elimination of competition. Mergers can also take a number of different forms. In a horizontal merger, one company merges or takes over another company that may offer similar products and/or services to the public. In certain cases, the two businesses may be direct competitors, i.e. one ice cream manufacturer taking over another one.
By comparison, a vertical merger combines two companies that are in the same industry but operate at different levels or stages of the supply chain. For example, an ice cream shop may merge with an ice cream manufacturer. In describing a vertical relationship, the level or stage closer to final consumers (such as a distributor, retailer, or finished goods manufacturer) is referred to as “downstream,” while the stage farther from final consumers (such as a supplier, wholesaler, or input manufacturer) is referred to as “upstream.”
Because vertical mergers and acquisitions (M&A) can directly impact competition, the DOJ and the FTC regularly review proposed or consummated transactions. The agencies can prohibit anticompetitive transactions under a number of antitrust laws, including the Clayton Act, the Sherman Act, and the Federal Trade Commission Act. For example, Section 7 of the Clayton Act prohibits mergers if “in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.”
Proposed Vertical Merger Guidelines
According to the DOJ and FTC, the Draft Vertical Merger Guidelines (Guidelines) were drafted in response to requests for enforcement guidance. “Many comments received from the FTC’s Hearings on Competition and Consumer Protection in the 21st Century called for additional and updated guidance on analysis of vertical mergers, as have reports from the American Bar Association’s Antitrust Section and the Antitrust Modernization Commission,” they said in a joint press statement.
Thus, the Guidelines are intended to assist the business community by explaining the rationale underlying the agencies’ enforcement decisions. According to the Guidelines, they “may also assist the courts in developing an appropriate framework for interpreting and applying the antitrust laws in the vertical merger context.”
The agencies advise that the Guidelines should be read in conjunction with the Horizontal Merger Guidelines because “[t}he principles and analytical frameworks used to assess horizontal mergers apply to vertical mergers.” By way of example, “Section 1 of the Horizontal Merger Guidelines—describing in general terms the purpose and limitations of the Horizontal Merger Guidelines and the goals of merger enforcement—is also relevant to the consideration of vertical mergers.”
The Guidelines also address issues that are unique to vertical mergers. As described by the FTC and DOJ, the Guidelines:
- Describe potential anticompetitive effects resulting from vertical mergers, which may include both unilateral and coordinated effects;
- Identify foreclosure and raising rivals’ costs and access to competitively sensitive information as potential elements of antitrust harm under unilateral effects;
- Describe an analytic framework for analyzing potential anticompetitive effects of foreclosure and raising rivals’ costs;
- Discuss how the elimination of double marginalization may mitigate or completely neutralize the potential anticompetitive effects of vertical mergers;
- Discuss cognizable merger efficiencies that are specific to vertical mergers; and
- Provide a number of examples to give more clarity to the analytical methods used by the agencies in evaluating vertical mergers.
Mergers and acquisitions are among the most complex business transactions. They are also often subject to regulatory scrutiny. To help navigate these sophisticated transactions, New Jersey companies should seek the assistance of business lawyers experienced in mergers and acquisitions. They can often structure a deal to minimize regulatory scrutiny while still meeting the needs of the parties.
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If you have any questions or if you would like to discuss the matter further, we encourage you to contact us at 201-806-3364 or visit Scarinci Hollenbeck's Mergers & Acquisitions page to learn more about our attorneys and their experience.