principles of merger analysis
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Principles of Merger Analysis. The Antitrust Masters Course V September 30, 2010 Andrea Agathoklis, Department of Justice Norman A. Armstrong, Jr., Federal Trade Commission Phillip A. Proger, Jones Day. Agenda. A Look Back to Look Forward: The History of Merger GLs in the US and Elsewhere - PowerPoint PPT PresentationTRANSCRIPT
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Principles of Merger Analysis
The Antitrust Masters Course V
September 30, 2010
Andrea Agathoklis, Department of Justice
Norman A. Armstrong, Jr., Federal Trade Commission
Phillip A. Proger, Jones Day
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Agenda
A Look Back to Look Forward: The History of Merger GLs in the US and Elsewhere
Overview of the New Horizontal Merger GLs
Applying the New Merger GLs: a Hypotheticals-driven Approach
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The History of Merger Guidelines
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U.S. Timeline
1890: Sherman Act 1914: Clayton Act 1950: Cellar-Kefauver Amendments to Clayton Act 1968: First Merger Guidelines 1976: Passage of HSR Act 1982: Baxter 1992 : Rill 1997: Efficiencies 2010: Third major revision since 1968 (1982, 1992)
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Lessons
Why did we need merger GLs to begin with? Why did their evolution occur in this fashion?
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Overview of the New Horizontal Merger GLs
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The Basics
Multi-month cooperative effort between the FTC and DOJ Following release of a draft in April 2010, the
agencies reviewed public comments and, to some extent, incorporated them into the final version
Intended to reflect current agency practice and provide transparency into the principal analytical techniques and practices used by the agencies
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The Basics
Formulaic analytical approach of 1992 GLs is disavowed
Market definition no longer automatically the first step
Rather, each merger will be approached on an individual basis depending on specific facts and circumstances Tools used to analyze a merger may include: the actual effects in
consummated mergers; ‘natural experiments’; market shares and concentration; HHIs (albeit at different thresholds); the extent of head-to-head competition; and, evidence of a disruptive “maverick” firm
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The Basics
Embrace of certain economic concepts: Diversion ratios (i.e., evaluating closeness of
competition of the merging parties products by measuring the number of sales that are diverted from one party’s product to the other’s in the event of a price increase)
Upward pricing pressure test Elimination of 35% market share safe harbor
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The Basics
Focus on coordinated effects by examining Previous instances of collusion in the industry;
transparency of competition on both price and non-price terms; product homogeneity; size and frequency of sales or contracts; market elasticity of demand; and, characteristics of the buyers (including size)
Other “new” concepts mentioned in the GLs: power buyers; monopsony power; and partial-acquisitions
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Applying the New Merger Guidelines
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Evidence of Adverse Competitive Effects Sources of Evidence
Merging Parties’ documents will always carry the most weight
Third Parties’ (customers / consultants) Types of Evidence
Actual effects observed in consummated mergers Direct comparisons based on experience Market shares in a Relevant Market Head-to-head competition Disruptive role of a merging party (the “maverick”)
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Importance of Price Discrimination on Merger Analysis Presence of price discrimination influences market
definition, the measurement of market shares, and/or the evaluation of competitive effects
Protecting against adverse competitive effects of a given transaction against one customer, whereas another customer may not experience the same negative effect
Typically, two requirements: Differential pricing; and Limited opportunities for arbitrage (indirect purchasing)
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Product Market Definition
How do you define a substitute? Hypothetical monopolist test SSNIP
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Geographic Market Definition What are the geographic bounds of the
relevant market? Impact of Suppliers Impact of Customers
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Market Shares
Counting noses Calculating market shares Analyzing market concentration
HHIs
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Unilateral Effects
Differentiated products Auctions markets Homogenous products and reductions in
output or capacity Diminished innovation or reduced product
variety
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Coordinated Effects
Will the transaction alter the way companies behave?
What kind of markets are most vulnerable to coordinated effects?
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Entry
Timeliness What is “rapid”
Likelihood Sufficiency
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Efficiencies
Merger specific Verifiable and cognizable
That is, they must reverse any potential harm caused by transaction
Examples Shifting production among facilities formerly owned
separately to reduce the incremental cost of production: can be quantified
R&D: perhaps but not subject to verification Procurement, management, or capital cost: unlikely
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Thank you