Vertical mergers and conglomerate mergers

Vertical mergers: merger of firms producing complementary units (not of competitors)

Guideline 5 (vertical mergers): mergers can violate the law when they create a firm that may limit access to products or services that its rivals use to compete (often through foreclosure) (AT&T)

(A) Merged firm can limit access to products or services

(B) Merged firm can gain or increase access to information that facilitates collusion

(C) Threat of exclusion can deter rivals or potential rivals from investing or otherwise competing

• Test under AT&T: burden shifting framework without required appeal to concentration statistics

(1) P’s prima facie case

• (a) P must establish a prima facie case that the merger is substantially likely to harm competition in the relevant market: show there is going to be some exclusion/foreclosure
• (b) P cannot rely on concentration statistics but must make a “fact-specific” showing that the proposed merger is “likely to be anticompetitive”

(2) Burden shifts to D to rebut P’s prima facie case

• Baker Hughes: Once the prima facie case is established, the burden shifts to D to:
  • (a) Present evidence that the prima facie case “inaccurately predicts the relevant transaction’s probable effect on future competition,” or to
  • (b) “Sufficiently discredit” the evidence underlying the prima facie case

(3) Burden shifts back to P to produce additional evidence

• Upon such rebuttal, “the burden of producing additional evidence of anticompetitive effects shifts to the government, and merges with the ultimate burden of persuasion, which remains with the government at all times”
• Guideline 4 (potential competition): mergers can violate the law when they eliminate a potential entrant in a concentrated market (Meta)
• Basic idea: if a firm would enter the market but-for the merger, the merger should be blocked – otherwise, there is no anticompetitive effect from the merger (a la effects on potential competition) – apply this idea when in a nonstandard situation like Meta

2.4.A. Actual potential competition: eliminating reasonably probable future entry

• Merging a current and potential market participant eliminates the possibility that the potential entrant would have entered on its own
• Test: 2 elements – if either fails, don’t prevent the merger
  • (1) Potential entrant must have the “available feasible means” of entering the market other than by acquisition
    • If not, there are no competitive effects of merger
  • (2) Independent entry would produce de-concentration or other procompetitive effects
    • If entrance is trivial, then there won’t be any procompetitive effects, nothing lost from merger

2.4.B. Perceived potential competition: lessening of current competitive pressure

• Acquisition of a firm that is perceived by market participants as a potential entrant
• Test: 2 elements – if either fails, don’t prevent the merger
  • (1) Firm possessed the characteristics of a perceived (de novo) potential entrant
  • (2) Firm’s presence prevented anticompetitive behavior by market participants

Theory still needs to be proven in court, unclear what set of facts the theory can be proved on (these are more ambitious forms of competition)

Unilateral competitive effect: elimination of potential competition

Coordinated competitive effects are getting farther away

• Standard case: incumbent is buying an entrant

Observed world: incumbent buys entrant where entrant was very likely to enter the market

• Merger eliminates reasonably probable future entry

Counterfactual: Entrant enters the market, introducing head-to-head competition with the incumbent (unilateral competitive effect) and decreasing the chances of coordination given the larger number of firms

Perceived potential competition case: basically analogous, just disciplining effects of the acquired firm were weaker because they were further from entering the market than the entrant

• Nonstandard case (Meta): entrant is buying an incumbent

History of vertical mergers: not much recent activity outside of the telecom industry

• 1962: Brown Shoe v. U.S. (merger between a shoe manufacturer and a shoe retailer)
  • “Primary vice” of vertical mergers (or other arrangements tying a customer to a supplier): may “clog competition” by depriving rivals of a “fair opportunity” to compete.
    • This is still the theory of harm for vertical merger cases
  • Only vertical arrangements that may substantially lessen competition, or tend to create a monopoly, are prohibited by the Clayton Act (C7)
• 1972: Ford Motor Co. v. U.S. (last case on vertical mergers)
  • Holding: Court prohibited Ford’s acquisition of a leading spark plug manufacturer
    • Exclusion happening at two levels of the market:
      • Primary: independent automobile manufacturers are forced to deal with a single spark plug manufacturer, which harms competition in the car market
      • Secondary: a lack of buyers to operate at scale may lead the remaining independent sparkplug manufacturer to fail
  • Facts: There were only two independent sparkplug manufacturers. Ford purchased from independent manufacturers while GM owned its own manufacturer. Ford attempted to merge with one of the independent sparkplug manufacturers.
• 1978: Chicago School critique (Bork/Antitrust Paradox)
  • In structural era of merger enforcement, vertical mergers were condemned with fairly small foreclosure shares: Chicago School started asking “but what’s the harm?”
  • Foreclosure is never a threat to competition, only occasionally a threat to individual firms (suppliers and customers will find each other)
  • The structure of an industry will be whatever is the most efficient for that industry. The law should not interfere with the decision of whether to make oneself or buy from others, which must be based on the difference in cost and effectiveness of each option.
    • E.g., Sri Lankan delicacies offered at grocery stores despite the country being very small because people are willing to pay a lot for them
• 1996: Time Warner buys Turner Broadcasting (consent decree)
  • TW concerned that they wouldn’t be able to compete with online distributors
  • Three links to the industry’s chain: content creation, programming, and distribution
  • Horizontal merger dynamics (content/programming):
    • TW owns HBO, Cinemax, and Warner Brothers Studio
    • Turner owns CNN, Headline News, TNT, and WTBS
  • Vertical merger dynamics
    • TW operates cable systems
  • Consent decree: attempt to prevent exclusion at two levels of the market
    • (1) Turner cannot discriminate against other distributors (cable, satellite, etc.)
    • (2) TW cannot discriminate against other content creators/programmers
    • Prof. thinks this is reasonable: this is an older company’s attempt to compete with new, technologically savvy firms – not an attempt to acquire market power
    • Concern: court must oversee this process, which is costly and presents administrability issues
  • Merger ultimately unsuccessful: TW sold its cable, decided to exit the distribution business (but it’s ok, we need businesses to try new things for the market to work)
• 2011: Comcast buys NBC Universal (consent decree)
  • Horizontal merger dynamics: content and programs
    • Comcast owns E! and Golf Channel
    • NBC owns NBC, MSNBC, Syfy
  • Vertical merger dynamics:
    • Comcast owns cable systems
  • Consent decree:
    • NBC cannot discriminate against other distributors (cable, satellite, etc.)
    • Comcast cannot discriminate against other content creators/programmers
• 2018: AT&T buys Time-Warner (pure vertical merger challenged)
  • Raised First Amendment concerns: media companies merging
  • Vertical merger dynamics
    • AT&T owns distributors: Direct TV (satellite) and U-verse (cable)
    • Time-warner owns content/programming: Turner (including CNN, TBS, TNT, and WB) and HBO
  • Concern that merger would give too much leverage in bargaining: the merged company can extract better deal from distributors by credibly threatening to withhold content
  • Unclear why Trump challenged this merger and didn’t just pursue a consent decree (maybe because he hates CNN?)
    • Led to litigated case where we can see what the court thinks
  • U.S. v. AT&T (D.D.C. 2018)
    • Rejects 3 government assertions:
      • (1) TW (content/programming) will raise prices to other distributors (appealed)
      • (2) TW (content/programming) will limit content to online distributors
      • (3) TW (content/programming) will restrict use of HBO to other distributors
  • U.S. v. AT&T (D.C. Cir. 2019)
    • Adapts PNB and Baker Hughes to vertical mergers
• Antitrust doesn’t reach size:
• As long as a company doesn’t harm competition, antitrust doesn’t have much to say about it (doesn’t concern itself with the size of merging firms)
• Good example of where size is regulated: financial sector, banks can only hold a portion of deposits in each state

Caselaw

Early cases of vertical mergers

Brown Shoe v. U.S. (1962) (merger between a shoe manufacturer and a shoe retailer)

Ford Motor Co. v. U.S. (1972) (last SCOTUS case on vertical mergers)

• Holding: Court prohibited Ford’s acquisition of a leading spark plug manufacturer
  • Exclusion happening at two levels of the market:
    • Primary: independent automobile manufacturers are forced to deal with a single spark plug manufacturer, which harms competition in the car market
    • Secondary: a lack of buyers to operate at scale may lead the remaining independent sparkplug manufacturer to fail
• Facts: There were only two independent sparkplug manufacturers. Ford purchased from independent manufacturers while GM owned its own manufacturer. Ford attempted to merge with one of the independent sparkplug manufacturers.

Modern cases of vertical mergers

U.S. v. AT&T (D.C. 2019) (adapts PNB and Baker Hughes to vertical mergers, Guideline 5)

• Holding: merger upheld, P failed to establish its prima facie case
  • Court outlines the test for vertical mergers (new test needed because vertical mergers don’t result in an increase in concentration, concerned about exclusion):
    • Adapts PNB and Baker Hughes to vertical mergers:
      • (1) P must establish a prima facie case that the merger is substantially likely to harm competition in the relevant market: show there is going to be some exclusion
      • (2) P cannot rely on concentration statistics but must make a “fact-specific” showing that the proposed merger is “likely to be anticompetitive”
    • Baker Hughes: Once the prima facie case is established, the burden shifts to D to:
      • (1) Present evidence that the prima facie case “inaccurately predicts the relevant transaction’s probable effect on future competition,” or to
      • (2) “Sufficiently discredit” the evidence underlying the prima facie case
    • Upon such rebuttal, “the burden of producing additional evidence of anticompetitive effects shifts to the government, and merges with the ultimate burden of persuasion, which remains with the government at all times”
  • Court applies test:
    • Market definition: multichannel video distribution (still have to define the market to show exclusion)
      • Excludes distributors of solely on-demand content (Netflix/Hulu)
        • Contentious: likely justified under hypothetical monopolist test, but Cellophane would justify including Netflix/Hulu, they seem reasonably interchangeable
      • 1,100 local markets
    • Anticompetitive effects: two levels of possible exclusion that could lead to higher prices (rejected by Court)
      • Content: merged company could credibly threaten to withhold distribution of other firms’ content if they didn’t agree to terms (can just show TW content during blackout)
      • Distribution: merged company could credibly threaten to withhold TW content from being distributed by other firms if they didn’t agree to terms (can just distribute using AT&T)
    • Prima facie case: not an easy case one way or the other
      • Statements by Ds in prior FCC filings (P): other agencies are worried that the content providers will discriminate
      • Internal documents of Ds (P): Ds documents suggest they believe they will be in a better bargaining position with distributors as far as offering their content
      • Statements by other competitors (P): other market participants were concerned that the parties would discriminate
      • Bargaining model (P): much discussion, prof. thinks it isn’t good to rely on a model in this instance
      • Past instances of vertical integration (no price effect) (D): key piece of evidence for D, there was no evidence of a price effect after merger
        • Prof. counterargument: of course, they were stopped from raising prices by the consent decree
      • Firms need to join forces to compete with new threat of online providers (like Netflix) (D)
  • Court affirms the district court: P failed to establish its prima facie case

Facts: AT&T (distribution) and TW (content and programming) merge.

• Prof. Note: because the case was litigated, enforcers lost everything, could have had at least a consent decree otherwise
  • Prof. thinks merger should have been blocked: government should have proceeded with structural presumption – there were substantial foreclosure shares, so anticompetitive effect should be presumed
    • Without a consent decree, block this, harmed parties would have no recourse for damages
    • With consent decree, let the merger through and see how the market responds
  • Takeaway: it’s typically hard to win vertical merger cases
  • Historical outcome of merger: known as a horrible merger, the merged firm faced a ton of competition from online providers and sold off the content piece of the business

2023 Merger Guidelines

FTC v. Meta Platforms (ND Cal. 2023) (example of agency litigating potential competition)

Holding:

• Nonstandard case of eliminating a potential or perceived competitor: rather than the incumbent purchasing an entrant, this is an entrant purchasing an incumbent
  • Here, the AT&T test is trivially satisfied: Meta is one of the best resourced tech companies in the world, they certainly have the means to make entry feasible
  • However, test doesn’t get to the core question: would Meta have entered the market but-for its acquisition of Supernatural? If yes, the merger should be blocked because having 2 competitors in the market is better than 1
• Court adopts the FTC’s market definition: “VR dedicated fitness apps in the United States”
  • Pre-merger HHI: 6,917 (revenue shares), 6,307 based on total hours spent, 3,377 based on monthly active users (indicates one firm has ~80% share).
  • Prof. Note: the merger won’t change concentrations since Meta would be an entrant (would fail to satisfy the PNB test)
• FTC’s first theory: merger deprives actual potential competition:
  • Acquisition deprives the market from the competition that would have arisen from Meta’s independent entry
  • Elements:
    • (1) Potential entrant must have the “available feasible means” of entering the market other than by acquisition
    • (2) Independent entry would produce de-concentration or other procompetitive effects
  • However, the court basically ignores this test (articulated more for the standard case)
  • Court concludes based on objective and subjective (what people are saying) evidence that it is not “reasonably probable” that Meta would enter the market for VR dedicated fitness apps if it could not consummate the acquisition
  • Basic idea: because Meta is unlikely to enter independently, you aren’t missing out on procompetitive benefits by allowing the merger, so it should be allowed
• FTC’s second theory: perceived potential competition (harder to show than actual potential competition):
  • FTC must show
    • (1) Meta possessed the characteristics of a perceived (de novo) potential entrant
    • (2) Meta’s presence prevented anticompetitive behavior by market participants (disciplining gravity)
  • FTC is unable to make either showing
    • (1) Court doesn’t think Meta is going to enter on its own
    • (2) Court doesn’t think parties will change their behavior because of the outside presence of Meta
  • Again, basic idea: 2 firms is better than 1, threat of entry disciplines the firm in the market

Facts: FTC challenges Meta’s purchase of Within, the maker of Supernatural, a virtual reality (VR) subscription fitness service. Acquisition would allow Meta to enter the market for VR subscription services. Meta manufactures VR devices and operates Quest Store, an app store for (Meta’s and third-parties) VR software applications.

Prof. Note:

• Court massages old doctrine: it seems like Meta would have reasonable means to enter the market, it has thousands of software engineers; if Meta entered, it would have decreased concentration in the market, so P would win if the court took the doctrine literally
• Instead, court construes the standard as “reasonably probable”
• How else might market participants react:
  • Meta’s presence as potential buyer could be good for consumers
  • Meta’s presence on the outside encourages market participants to compete to be acquired by Meta
    • If competitors don’t think they can be acquired, they won’t work hard to be acquired
• Entry is too easy here, it’s easy to make an app and enter the market
• Could argue that antitrust resources are not best spent here, Meta’s presence as potential buyer is incentivizing firms to compete

FTC v. Meta Platforms (D.D.C. 2025)

Holding:

• FTC alleged that Meta illegally maintained a monopoly by acquiring Instagram in 2012 and WhatsApp in 2014
• Monopoly power:
  • The FTC’s proposed market definition of personal social networking (Facebook, Instagram, Snapchat, and MeWe) was too narrow
  • Court: under an expanded market that includes TikTok and YouTube, Meta did not hold monopoly power
    • Importance of remedy: FTC was seeking an injunction, so the court looked at Meta’s market power at the time of the suit (not the time of acquisition)

Facts: Meta purchased Instagram and WhatsApp. FTC sues alleging monopolization.

Prof. Note:

• FTC could have brought the case as a merger case (Meta merged with Instagram and WhatsApp)
  • For challenging the merger:
    • Unilateral competitive effects: Meta competed with Instagram and WhatsApp, the merger eliminated the competition between the firms
      • But problem with P’s prima facie case: Instagram had very small revenue at the time of the transaction, concentration thresholds under PNB might not have been met – maybe Instagram only successful because of resources invested by Meta?
• General policy concern: killer acquisitions, we want to make sure that acquisitions are intended to make the product better, not to kill it
• FTC could have (but didn’t) also pursued an exclusion theory like the Meta and Supernatural merger: merger might enable Meta to exclude other apps from platform (like the Pepper case)