Skip to main content

Mergers and Acquisitions

  • Doctrinal framework for horizontal mergers (shifting burden of production):

(1) P must make a prima facie case that the merger will lead to (PNB, use HHI):

  • (a) Undue concentration (post-merger HHI > 1800) AND
  • (b) A substantial increase in concentration in a particular product and geographic market (change in post-merger HHI > 100)
  • (c) Theory of harm: explain why the merger is likely to lessen competition
    • Look at 2023 Merger Guidelines 2-6
      • Big three are unilateral competitive effects (2), coordinated competitive effects (3), and mergers between complements (vertical mergers) (5)

(2) D can rebut the presumption that the merger is anticompetitive (hard to do) by showing that the prima facie case inaccurately predicts the transaction’s probable effect on future competition (between Baker Hughes, where the industry was special, and Heinz/HCA, where the industries weren’t special) – either

  • (a) P calculated the wrong shares (General Dynamics) OR
  • (b) even if the shares are correct, the merger is unlikely to harm competition (Baker Hughes) because the market is (i) easy to enter or (ii) there is some procompetitive justification for the merger (e.g., substantial efficiencies, failing firms)

(3) P must then provide additional evidence of likely anticompetitive effects (Baker Hughes)

  • (a) Collusion: coordinated competitive effects
    • 2023 guidelines look to “primary” and “secondary” factors (analogous to Type 2 factors under S1) to how likelihood of competitive harm – identify factors that help P/D, weigh and decide
  • (b) Exclusion: unilateral competitive effects
  • Note that as a matter of practice, P presents a theory of anticompetitive harm alongside their PF case (even though it isn’t required by the black letter law)

Calculating concentrations (HHI) for (1):​

(1) Define a relevant product and geographic market

  • (a) Look at reasonably interchangeable by consumers for the same purposes (Du Pont) and submarkets (Brown Shoe), where factors for submarkets include:
    • (a) recognition of the submarket as a separate economic entity, (b) product’s characteristics and uses, (c) unique production facilities, (d) distinct customers, (e) distinct prices, (f) sensitivity to price chances, and (g) specialized vendors
  • (b) Alternatively (and preferably for most courts), look at a hypothetical monopolist test: starting narrow and expanding larger, could a hypothetical monopolist profitably raise prices by 5-10% (SSNIP or SSNIPT)?

(2) Identify market participants: (i) currently earn revenue in a market, (ii) have committed to enter a market soon, (iii) “rapid entrants”

(3) Calculate market shares: typically based on sales, but other metrics (e.g., quantity sold, capacity) may be used

(4) Calculate HHIs: sum of squared market shares

  • Note that P’s prima facie case requires indirect evidence in the form of market concentrations, which is different from other areas of antitrust

Definition:

Merger (narrower): acquisition of a controlling stake in another firm

Acquisition (broader): purchase of the equity or assets of one firm by another

Types of mergers and acquisitions:​

Horizontal (bulk of merger practice): between competitors

Vertical: between buyers and sellers

Conglomerate: all others

  • Horizontal mergers:

Potential motives:

  • Reduce costs and/or improve products
  • Replace poor (acquire good) management: markets’ solution to allocation problems is to allow people to try to succeed until one eventually does
  • Tax purposes
  • Empire building

Anticompetitive concerns:

  • Unilateral competitive effects (collusion): loss of competition between two firms (merge two competitors)
  • Coordinated competitive effects (collusion): merger removes a firm that was aggressively competing with rivals
  • Exclusionary competitive effects: rivals not able to access materials (arises in the context of vertical mergers, e.g., merger between Time Warner and NBC)
  • Statutory framework:
  • Section 7 of the Clayton Act (1914, amended in 1950)

Enforcement: FTC, DOJ, other agencies (e.g., FCC for telecom mergers), private (uncommon)

  • Which agency enforces decided by bargaining and expertise: e.g., FTC is beer expert, DOJ is airlines expert
  • Private enforcement is rare: government has a more favorable standard for preliminary injunction

Remedies: equitable (injunction/divestiture) and damages

  • Damages: show increase in price as a result of exclusive effects of the merger

Prospective merger review: Hart-Scott-Rodino Act (1976) requires asset purchases past a certain size threshold must be reported to the government. The general flow is as follows:

  • (1) ~2,000 satisfy the transaction size requirement
  • (2) ~40 might go to second request, indicating the government is serious about investigating the transaction
  • (3) 15 might be formally challenged

Clayton Act § 7​

  • “No person engaged in commerce (jurisdictional, commerce clause) or in any activity affecting commerce shall acquire, directly or indirectly (broad application), the whole or any part of the stock or other share capital . . . where in any line of commerce (product market) or in any activity affecting commerce in any section of the country (geographic market), the effect of such acquisition may be substantially to lessen competition or to tend to create a monopoly” (incipiency standard, only have to show likelihood of harm)

Broad reading (Khan, merger guidelines): aggregate effect of approving this merger (which will require the approval of all similar mergers) is a concentrated market

Narrow (courts): merger has to harm competition

  • 1950 Amendments: following a rising tide of economic concentration, there was concern with industry dominance (concentration) and small businesses

Congress wanted to promote greater local control of commercial power by small businesses

Didn’t mean to interpret merger law to prevent small combinations of failing firms

Contents​