PLI Briefing
                January 25, 2010


              Revising the
  DOJ/FTC Horizontal Merger Guidelines:
       ...
AGENDA


1.   Why merger guidelines are needed
2.   History of the guidelines
3.   The current guidelines
4.   The merger ...
Why Merger Guidelines?


No bright line answers in the law


Explain analytical framework used by DOJ/FTC to assess
whethe...
The Past as Prelude
     1968                   1982                    1982               1984
  DOJ Merger        DOJ Me...
The Past as Prelude (cont’d)
        1992                  1997                2006            2010/2011
DOJ/FTC Horizonta...
Market Share Thresholds
1968
   Highly Concentrated (4 firm CR >75%)
           10% + 2%                   4% + 4%    15% ...
The Likelihood of Challenge

1968 “will ordinarily challenge”


1982 “likely to challenge”
     “more likely than not”
   ...
The Likelihood of Challenge (cont’d)

1992 “The Guidelines are designed primarily to articulate the analytical
       fram...
A Response to Court Decisions
1968
   Philadelphia National Bank (1963)
   Von’s Grocery (1966)
   Pabst (1966)
   Proctor...
The Current 5-Step Analytical Framework


         CONCENTRATION
               depends on
  product / geographic market d...
Why Review the Guidelines Now?


To incorporate learning and experience gained
since 1992


To describe agency practice mo...
The Merger Guidelines Review Project


 Announced September 22, 2009

 20 Questions Posed

 Invitation for Public Comment ...
Scope of the Review

“The Agencies anticipate retaining …”
   the basic ‘hypothetical monopolist” test
   the Herfindahl-H...
Questions for Public Comment
Areas of Focus
 1. Five-step analytical approach

 2. Direct evidence of competitive effects
...
Questions for Public Comment (cont’d)

  Market Shares
   7.  Measurement of market shares
   8.  Market shares in dynamic...
Questions for Public Comment (cont’d)


   Other
 12.  Large buyers
 13.  Uncommitted vs. committed entry
 14.  Fixed vs. ...
Topics Discussed at the Workshops

December 3 – Washington, DC
   Overview, Historical Perspectives, Role of Guidelines
  ...
Topics Discussed at the Workshops (cont’d)

      December 10 – Chicago, IL
         Entry
         Direct Evidence of Com...
Predictions

When will new guidelines be issued?
  Will there be opportunity for comment on a draft?


Refinement rather t...
Mary L. Azcuenaga
Baker & McKenzie LLP
mary.l.azcuenaga@bakernet.com
202-835-6143


M. Howard Morse
Drinker Biddle & Reath...
Mary L. Azcuenaga
Mary L. Azcuenaga joined Baker & McKenzie in Washington, D.C., as a Partner in the   the
Antitrust and C...
M. Howard Morse
Howard Morse is a Washington-DC based partner and co-chair of Drinker Biddle’s
                      Washi...
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Revising the DOJ / FTC Horizontal Merger Guidelines

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Revising the DOJ / FTC Horizontal Merger Guidelines

  1. 1. PLI Briefing January 25, 2010 Revising the DOJ/FTC Horizontal Merger Guidelines: What is at Stake? Mary L. Azcuenaga M. Howard Morse 1
  2. 2. AGENDA 1. Why merger guidelines are needed 2. History of the guidelines 3. The current guidelines 4. The merger guidelines review project 5. The scope of the review 6. Substantive focus of the review 7. Predictions 2
  3. 3. Why Merger Guidelines? No bright line answers in the law Explain analytical framework used by DOJ/FTC to assess whether a merger or acquisition may lead to a substantial lessening of competition How to determine whether a transaction will likely increase market power and result in higher prices, less innovation, lower quality or less service 3
  4. 4. The Past as Prelude 1968 1982 1982 1984 DOJ Merger DOJ Merger Guidelines FTC Statement DOJ Merger Guidelines _________ Concerning Guidelines _________ 6/14/82 Horizontal __________ 5/30/68 Mergers 6/14/84 William Baxter Donald Turner _________ Paul McGrath ________ ________ 6/14/82 _________ James Miller Hypothetical Monopolist Issuance of __________ (SSNIP) Guidelines Treatment of Considerable Imports Herfindahl-Hirschman Weight to DOJ Concentration and Index (HHI) Market Share Guidelines Most Recent Thresholds Analysis of Non- Expanded Discussion of Greater Other Factors Horizontal Mergers Consideration of Evidence Beyond Market Share 4
  5. 5. The Past as Prelude (cont’d) 1992 1997 2006 2010/2011 DOJ/FTC Horizontal DOJ/FTC Horizontal DOJ/FTC Commentary Merger Guidelines Merger Guidelines on the Horizontal ? ________ ________ Merger Guidelines __________ 4/2/92 4/8/97 ___________ James Rill Joel Klein 3/27/06 Christine Varney Janet Steiger Robert Pitofsky Thomas Barnett Jon Leibowitz ________ ____________ Deborah Majoras __________ Joint DOJ + FTC Efficiencies __________ Guidelines Integrated Approach ? Timely, likely and Unilateral Effects sufficient entry Theories Coordinated Examples Interaction / Unilateral Effects 5
  6. 6. Market Share Thresholds 1968 Highly Concentrated (4 firm CR >75%) 10% + 2% 4% + 4% 15% + 1% Less Highly Concentrated (4 firm CR <75%) 5 % + 5% 15% + 3% 25% + 1% 10% + 4% 20% + 2% 1982 Highly Concentrated (post-merger HHI>1800) Change > 100 – likely to challenge Change 50 – 100 ? Change < 50 – unlikely to challenge HHI Between 1000 and 1800 Change > 100 more likely than not Change < 100 unlikely to challenge Un-concentrated (post-merger HHI <1000) Unlikely to challenge Leading firm Proviso 6 2010 ?
  7. 7. The Likelihood of Challenge 1968 “will ordinarily challenge” 1982 “likely to challenge” “more likely than not” “unlikely to challenge” 1984 “likely to challenge” “unless the Department concludes … that the merger is not likely substantially to lessen competition” “will not challenge … except in extraordinary circumstances” 1992 “presumed likely to create or enhance market power or facilitate its exercise” “potentially raise significant competitive concerns, depending on [other] factors” “unlikely to have adverse effects and ordinarily requires no further analysis” 7
  8. 8. The Likelihood of Challenge (cont’d) 1992 “The Guidelines are designed primarily to articulate the analytical framework… not to describe how the Agency will conduct the litigation of cases that it decides to bring… do not attempt to assign the burden of proof” “market share and concentration data provide only the starting point for analyzing the competitive impact of a merger” 8
  9. 9. A Response to Court Decisions 1968 Philadelphia National Bank (1963) Von’s Grocery (1966) Pabst (1966) Proctor & Gamble (1967) “the only consistency is that the government always wins” 1982 General Dynamics (1974) 1984 1992 Baker Hughes (1990) / Syufy (1990) 2010 Sungard (2001) / Arch Coal (2004) / Oracle (2004) / Western Refinery (2007) 9
  10. 10. The Current 5-Step Analytical Framework CONCENTRATION depends on product / geographic market definition, only a “starting point for analysis” ENTRY timely, likely and sufficient to deter or counteract effects UNILATERAL MARKET POWER or COORDINATED INTERACTION EFFICIENCIES lower costs, increased output or new products enhance competition BOTTOM LINE: will prices rise, quality fall, service decline or innovation slow to detriment of consumers ? 10
  11. 11. Why Review the Guidelines Now? To incorporate learning and experience gained since 1992 To describe agency practice more accurately To improve the usefulness of the guidelines as a practical tool 11
  12. 12. The Merger Guidelines Review Project Announced September 22, 2009 20 Questions Posed Invitation for Public Comment by Nov. 9, 2009 49 comments submitted to date Five Workshops December - January 12
  13. 13. Scope of the Review “The Agencies anticipate retaining …” the basic ‘hypothetical monopolist” test the Herfindahl-Hirschman Index (HHI) to measure concentration the basic structural presumptions the basic timeliness, likelihood, sufficiency approach to entry the fundamental approach to efficiencies and the failing firm defense See also C. Varney, “Merger Guidelines Workshops” (Sept. 22, 2009) “Although I am not prejudging the process … I would not anticipate departing form some of the basic elements in the current Guidelines” 13
  14. 14. Questions for Public Comment Areas of Focus 1. Five-step analytical approach 2. Direct evidence of competitive effects actual effects, natural experiments, post-merger plans, evidence from customers, head-to-head competition, historic actual and attempted coordination Market Definition 3. Use of “critical loss analysis,” price-cost margins to define markets 4. “Next best substitute” / smallest market” principle 5. 5% or 10% SSNIP 6. Geographic markets based on location of affected customers as well as location where product is produced 14
  15. 15. Questions for Public Comment (cont’d) Market Shares 7. Measurement of market shares 8. Market shares in dynamic markets technological change 9. HHI levels Unilateral effects 10. Recent learning localized effects, auctions, diversion ratios, simulation models, repositioning 11. Price discrimination 15
  16. 16. Questions for Public Comment (cont’d) Other 12. Large buyers 13. Uncommitted vs. committed entry 14. Fixed vs. marginal cost efficiencies 15. Non-price effects / innovation 16. Minority interests 17. Failing firm / exiting assets 18. Remedies – preserving pre-merger competition, shortcomings of behavioral remedies 19. Examples 20. Retrospective studies 16
  17. 17. Topics Discussed at the Workshops December 3 – Washington, DC Overview, Historical Perspectives, Role of Guidelines Direct Evidence of Competitive Effects Market Definition Unilateral Effects December 8 – New York, NY International / State Authorities Market Concentration and the Structural Presumption Minority Interests / Failing Firms Merger Remedies 17
  18. 18. Topics Discussed at the Workshops (cont’d) December 10 – Chicago, IL Entry Direct Evidence of Competitive Effects Unilateral Effects Efficiencies January 14 – Stanford, CA Direct Evidence of Competitive Effects Price Discrimination / Large Buyers Unilateral Effects Market Dynamics and Innovation January 26 – Washington, DC Market Concentration and the Structural Presumption Price Discrimination / Large Buyers Entry Efficiencies / Merger Remedies 18
  19. 19. Predictions When will new guidelines be issued? Will there be opportunity for comment on a draft? Refinement rather than radical change Greater insight into agencies’ approach New economic tools Same outcomes but with better understanding More guidance aimed at influencing courts 19
  20. 20. Mary L. Azcuenaga Baker & McKenzie LLP mary.l.azcuenaga@bakernet.com 202-835-6143 M. Howard Morse Drinker Biddle & Reath LLP howard.morse@dbr.com 202-842-8883 20
  21. 21. Mary L. Azcuenaga Mary L. Azcuenaga joined Baker & McKenzie in Washington, D.C., as a Partner in the the Antitrust and Competition Practice Group in 2008. Prior to joining Baker & McKenzie, Ms. joining Azcuenaga was a partner at Heller Ehrman LLP, where she served for six years as co- for co- chair of the firmwide Antitrust and Trade Regulation Practice Group. Prior to joining Group. Heller Ehrman, she served as a Commissioner of the U.S. Federal Trade Commission for nearly 14 years. Ms. Azcuenaga focuses her practice in the area of antitrust, particularly mergers and particularly acquisitions and the intersection of antitrust and intellectual property law. She represents clients throughout the Hart-Scott-Rodino process and the antitrust review of Hart- Scott- mergers and acquisitions before both the department of Justice and the FTC. She has and litigated at the trial and appellate level, including the representation of clients in the defense and prosecution of representation antitrust counterclaims in patent litigation. Before her appointment as a Commissioner of the FTC, Ms. Azcuenaga spent more than eleven years at the FTC Azcuenaga in various litigating and supervisory positions. In that capacity and as a Commissioner, she reviewed and handled capacity matters in a full range of industries, including but not limited to the pharmaceutical, medical devices, biotechnology laboratory products, bio-engineered products, biometrics, software, internet infrastructure, wireless bio- infrastructure, infrastructure, data storage, data and e-mail security, high-quality radio frequency and microwave components, e- high- defense, information technology applications and consulting, construction materials, consumer and industrial construction tools, large industrial equipment, electric utility, natural gas, fishing, retail, cable television, and cruise line gas, industries. Ms. Azcuenaga has authored numerous Federal Trade Commission opinions and statements, articles, and opinions speeches, and has lectured widely in the field of antitrust. Ms. Azcuenaga is a graduate of the University of Chicago School of Law and Stanford University. Stanford 21
  22. 22. M. Howard Morse Howard Morse is a Washington-DC based partner and co-chair of Drinker Biddle’s Washington- co- Antitrust Practice Group. He regularly represents businesses before the Federal Trade before Commission, the Department of Justice, and State Attorneys General in investigations General involving mergers, acquisitions and joint ventures as well as alleged monopolization and alleged restraint of trade cases. He also counsels clients on antitrust issues and represents companies in private antitrust litigation. Before joining the firm, Howard served for ten years at the FTC as Deputy Assistant Director for Policy and Assistant Director of the Bureau of Competition. At the Competition. Commission, he was responsible for more than 50 enforcement actions including Hart- actions Hart- Scott-Rodino Act civil penalty and merger enforcement actions in the pharmaceutical, Scott- pharmaceutical, medical device, computer hardware and software, and other industries. industries. Howard has been active for many years in the American Bar Association Section of Antitrust Law. He is currently Association chair of the Section’s Federal Civil Enforcement Committee, which monitors and reports on developments at the which FTC and DOJ. He has previously served on the Section Council and as chair of its Computer Industry, Intellectual Property, and Exemptions and Immunities committees. Howard has testified before Congress, the Antitrust Modernization Commission and the DOJ/FTC hearings on Modernization Competition and Intellectual Property Law and Policy in the Knowledge-Based Economy. He has published articles Knowledge- on such antitrust topics as innovation markets, vertical mergers, “gun jumping,” and product market definition in mergers, the pharmaceutical industry. Howard is listed as a leading antitrust lawyer in the Legal Media Group’s Guide to the World’s Leading Lawyers Media and in the Chambers USA 2009 Guide which describes him as “a tireless advocate for his clients" who "impresses with his superb analytical and communications skills.” Howard is a summa cum laude graduate of Dartmouth College and cum laude graduate of Harvard Law School. cum 22

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