July 1, 2020
On June 30, 2020, the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice released new Vertical Merger Guidelines, which replace the Non-Horizontal Merger Guidelines published in 1984. The FTC’s vote to issue the Guidelines was 3-2, with Commissioners Rebecca Kelly Slaughter and Rohit Chopra dissenting. The new Vertical Merger Guidelines are effective immediately.
Vertical mergers are M&A transactions that combine firms or assets operating at different stages of the supply chain. Examples of vertical mergers include a car manufacturer acquiring the company that supplies it with auto parts, or a grocery store acquiring a milk processor. The Vertical Merger Guidelines aim to describe the agencies’ current approach to vertical mergers and provide greater transparency about how they evaluate such deals.
The finalized Guidelines include substantial revisions to previously released draft guidelines in response to more than 70 public comments. The Vertical Merger Guidelines acknowledge certain procompetitive benefits of vertical mergers, noting that vertical deals “often benefit consumers” by increasing incentives to lower prices and tend to raise fewer competitive concerns than horizontal mergers between competitors. But the final Vertical Merger Guidelines also remove from the initial draft what some observers viewed as a “safe harbor” and describe several additional ways in which vertical mergers could harm competition. And they leave several questions unresolved, including about remedies for vertical mergers.
Significant Changes from the Draft Guidelines
Analysis and Implications
Changes to the final Guidelines attempt to address comments from multiple directions and perspectives. Merging parties will welcome the Guidelines’ greater emphasis on and recognition of the procompetitive benefits of many vertical mergers—EDM foremost among them. The Guidelines now also helpfully describe situations in which vertical mergers will rarely raise concerns about foreclosure or raising rivals’ costs. At the same time, advocates for more active antitrust enforcement will be pleased that the final Guidelines lack a safe harbor and describe additional ways in which a vertical merger could potentially harm competition, including by discouraging potential entry and through “diagonal” and other relationships.
Still, several areas of uncertainty remain from the draft guidelines, and present potential ambiguities for merging parties.
For instance, the Guidelines resurrect the “two-level entry” theory of harm, asserting that vertical mergers can raise barriers to entry by effectively requiring new rivals to simultaneously enter both the upstream and downstream markets. Although the 1984 Guidelines also explored this theory, it is unclear whether “two-level entry” has ever provided a standalone basis for challenging a merger, and the agencies’ draft guidelines would have eliminated it.
The elimination of the safe harbor also creates uncertainty about how market shares and concentration will factor into the agencies’ approach to vertical mergers. The draft Guidelines contained language suggesting that enforcement action was unlikely for mergers below certain market share thresholds, while holding out the possibility that mergers with shares below the thresholds could still give rise to competitive concerns. But with the safe harbor gone, parties now have little insight into how the agencies will factor the merged firms’ market shares and concentration into their analysis, other than knowing that “high” concentration may sometimes cause concerns.
How the agencies will approach EDM in practice also remains unclear from the final Guidelines. The Guidelines at times appear to suggest that merging parties have the burden of showing that EDM is verifiable and merger specific, as with efficiencies under the Horizontal Merger Guidelines. But elsewhere, the Guidelines suggest that the agencies may “independently attempt to quantify” EDM based on available evidence, including the evidence agencies develop themselves to assess other price effects.
Lastly, the Guidelines remain silent about how the agencies will address remedies in vertical mergers. Recent policy statements and the retraction of DOJ’s 2011 Policy Guide for Merger Remedies have created considerable uncertainty about the agencies’ approach. For example, it is unclear whether either or both agencies will seek structural remedies in the form of divestitures, or will continue to accept conduct or “behavioral” remedies as they have in the past. It remains to be seen whether or how the new Guidelines will impact agency policy concerning remedies.
Companies considering vertical mergers should carefully consider whether their transactions will receive increased scrutiny under the new Vertical Merger Guidelines. Gibson Dunn successfully defended the only vertical merger challenge litigated to trial by the DOJ in the last forty years (involving AT&T’s acquisition of Time Warner), and attorneys in our Antitrust and Competition Law practice stand ready to assist clients in analyzing and securing approval of vertical transactions.
The following Gibson Dunn lawyers prepared this client alert: Kristen Limarzi, Adam Di Vincenzo, Richard Parker, Chris Wilson and Harry Phillips.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please feel free to contact the Gibson Dunn attorney with whom you usually work, the authors, or any member of the firm’s Antitrust and Competition Practice Group:
Antitrust and Competition Group:
D. Jarrett Arp (+1 202-955-8678, firstname.lastname@example.org)
Adam Di Vincenzo (+1 202-887-3704, email@example.com)
Scott D. Hammond (+1 202-887-3684, firstname.lastname@example.org)
Kristen C. Limarzi (+1 202-887-3518, email@example.com)
Joshua Lipton (+1 202-955-8226, firstname.lastname@example.org)
Richard G. Parker (+1 202-955-8503, email@example.com)
Cynthia Richman (+1 202-955-8234, firstname.lastname@example.org)
Jeremy Robison (+1 202-955-8518, email@example.com)
Andrew Cline (+1 202-887-3698, firstname.lastname@example.org)
Chris Wilson (+1 202-955-8520, email@example.com)
Harry R. S. Phillips (+1 202-887-3706, firstname.lastname@example.org)
Daniel G. Swanson (+1 213-229-7430, email@example.com)
Samuel G. Liversidge (+1 213-229-7420, firstname.lastname@example.org)
Jay P. Srinivasan (+1 213-229-7296, email@example.com)
Rod J. Stone (+1 213-229-7256, firstname.lastname@example.org)
Veronica S. Lewis (+1 214-698-3320, email@example.com)
Mike Raiff (+1 214-698-3350, firstname.lastname@example.org)
Brian Robison (+1 214-698-3370, email@example.com)
Robert C. Walters (+1 214-698-3114, firstname.lastname@example.org)
Peter Alexiadis (+32 2 554 7200, email@example.com)
Attila Borsos (+32 2 554 72 11, firstname.lastname@example.org)
Jens-Olrik Murach (+32 2 554 7240, email@example.com)
Christian Riis-Madsen (+32 2 554 72 05, firstname.lastname@example.org)
Lena Sandberg (+32 2 554 72 60, email@example.com)
David Wood (+32 2 554 7210, firstname.lastname@example.org)
Patrick Doris (+44 20 7071 4276, email@example.com)
Charles Falconer (+44 20 7071 4270, firstname.lastname@example.org)
Ali Nikpay (+44 20 7071 4273, email@example.com)
Philip Rocher (+44 20 7071 4202, firstname.lastname@example.org)
Deirdre Taylor (+44 20 7071 4274, email@example.com)
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.