DOJ/FTC Merger Guidelines and Review Process Practice Pointers and - - PowerPoint PPT Presentation

DOJ/FTC Merger Guidelines and Review Process

Practice Pointers and Lessons Learned From Antitrust Enforcement Trends

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THURSDAY, JULY 25, 2013

Presenting a live 90-minute webinar with interactive Q&A

Mark S. Ostrau, Partner, Fenwick & West, Mountain View, Calif. James W. Lowe, Partner, Wilmer Cutler Pickering Hale and Dorr, Washington, D.C.

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Stra raffor ford d Pu Publ blic icat ations ions Semin inar ar Jul uly y 25 25, , 20 2013 13

James mes W. Lowe Wil ilme merH rHale le Ma Mark rk S. Os Ostra rau Fenw nwic ick & & West st LLP

• The (New) Merger Guidelines Textbook
• Recent DOJ/FTC Actions
• Comparing Theory to Actual Practice
• Process Changes and Issues
• Key Takeaways and Lessons for Company

Counsel

6

• First DOJ Guidelines published in 1968 focused heavily
• n concentration
• No revision until 1982 & 1984 (DOJ only); separate FTC

Guidelines (1982)

 Increased focus on competitive effects

• First joint Guidelines in 1992

 Set formula for analysis centered around market definition

• By mid-2000s, consensus that 1992 Guidelines no

longer accurately reflected current analytical process

7

• “These Guidelines describe the principal analytical

techniques and the main types of evidence on which the Agencies usually rely to predict whether a horizontal merger may substantially lessen competition.” [Guidelines §1]

• “These Guidelines do not describe the way that the

Bureau of Competition and enforcement staff at the Commission proceed today. They also do not reflect the way that the courts proceed.” [FTC Commissioner Rosch]

8

• Market definition no longer first step
• Even when markets defined, higher concentration

thresholds

 Acceptance of much higher HHI levels (18002500)  Preference for narrow markets even if exclude some substitutes

• Fact-specific process using a range of analytical tools

 Observed effects and “natural experiments”  Closeness of competition  Pricing Models (Critical Loss/Diversion/GUPPI)  Simulation models  Role as Maverick

• But see Ovation (failure to prove product market

doomed post-deal case even though prices skyrocketed); Group Health (refusal to adopt UPP test)

9

• Unilateral Effects:

 Whether the combined firm will gain sufficient

market power that it will be able to exercise successfully to raise price

• Coordinated Effects

 Whether as a result of the transaction the industry

will be more susceptible to coordinated pricing or

• utput
• Does not require showing that collusion is more

likely

10

• No market share requirement
• Recognizing concern with non-price effects

 Quality, variety, service  Innovation (reducing incentives vs. enabling through

complementary capabilities)

• Key evidence in practice

 Company documents  Win-Loss records  Margin analysis  Cross-elasticity of demand

11

• History of coordination in market
• Transparency of price and non-price

competition

• Product homogeneity
• Size and frequency of sales
• Demand elasticity
• Buyer characteristics
• Presence of a maverick

12

• Entry: “Entry by a single firm that will replicate at

least the scale and strength of one of the merging firms is sufficient.” [Guidelines §9.3]

 Google/AdMob (Apple/Quattro)  Entry must be both “timely” and sufficient to avoid competitive

harm from the transaction

• Efficiencies: high level of proof, and won’t
• utweigh significant competitive risk

 Requires objective, preferably pre-signing, analysis of likely

efficiencies and synergies

 Fixed cost savings given little weight

• Power Buyers: limited impact

13

• Modes of Analysis
• Second Requests
• Enforcement Actions
• Key Evidence/Theories

14

• 2010 Guidelines given more explicit weight to

complex analytical models both as initial screens and as determinants of likely competitive effects

• Models will vary depending on the nature of

the competitive concern and available data

• Recent cases show increased reliance on

modeling

• Early preparation to address modeling is key

15

• Increased frequency of Second Requests

 Especially from DOJ (but lower challenge rate as a result)

• Frequency increases with size of transaction

 However, many smaller transactions are caught

• Key evidence: market shares/# of suppliers, entry

barriers, customer complaints, hot docs

• Primacy of price effects

 Non-price effects secondary (but still there)  Innovation effects mostly limited to pharma

• Volume of material demanded is enormous

 Between documents & data, often measured in terabytes

16

• New Guidelines alone have not meaningfully

changed enforcement patterns

 Focus on high shares or high industry concentration

• Investigations increasingly litigation focused

 Agencies seemingly more willing to litigate

• Enforcement decisions more multi-faceted

 Less reliance on single type of evidence

• Decisions often made only after full examination
• f documents and data

17

Age gency cy Parties ies Industry ry Si Sign gnif ifican icant t Competito itors rs Combin ined Market Sh Share DOJ H&R Block/TaxACT Tax Preparation Software 3 to 2 28% DOJ AT&T/T-Mobile Mobile Wireless 4 to 3 42% (national) FTC LCA/Orchid Cellmark DNA Testing Services 2 to 1 N/A FTC Western Digital/HGST Disk Drives 3 to 2 50% DOJ IDT/PLX Semiconductors 2 to 1 86% FTC Teva/Cephalon Generic Drugs 3 to 2 83% DOJ ABI/Modelo Beer 4 to 3 46% (national) DOJ Bazaarvoice/ PowerReviews Internet Ratings Platforms 2 to 1 N/A

18

• Guidelines related:

 Less rigidity in nature of analysis and investigation  Somewhat greater integration of fact and economic

analysis

• Not Guidelines related:

 Greater effort to use initial waiting period for substantial

analysis

 More interaction among economists  Increased demand for timing agreements

• Very one-sided process

 Automated document review

19

• Market shares and # competitors still

important

• Win-Loss experience (diversion analysis)

more important

• Hot documents matter a lot
• Customer opinions matter a lot too
• Process becoming more complex

 Increased modeling; timing agreements

20

• Heightened need for sensitizing all document

preparers early

 Write with expectation will be reviewed  Avoid “colorful” and/or market-limiting language  Don’t oversell transaction

• Provide drafts of sensitive documents to counsel

before providing to anyone else

• Limit dissemination and redistribution

21

HSR 4c/4d:

• Internal analyses relating to competition,

markets, synergies or efficiencies of proposed transaction

• Banker or consultant analyses of competition
• r markets created in last year (not specific to

deal or buyer)

• Offering memoranda created in last year (not

specific to deal or buyer)

22

• “There’s really only two players of any substance in the organic and all

natural [market], and that’s Whole Foods and Wild Oats. . . . [T]here’s really nobody else in that particular space.”

• [Buying PLX means difference between] “2 strong players vs. one

monopoly.”

• “[Acquisition will allow remaining players to] regain control of industry

pricing and avoid further price erosion.”

• [Acquisition] “an opportunity to ‘take out Bazaarvoices’s only

competitor, who . . . suppressed Bazaarvoice price points by as much as 15%.”

• “By buying [Wild Oats] we will greatly enhance our comps over the next

few years and avoid nasty price wars in … many other cities which will harm our gross margins and profitability.”

• The merger would “further increase . . . Switching costs” and “deepen

[Bazaarvoice’s] protective moat.”

23

• 2010 Guidelines evolutionary
• Process now more fact-specific and

economic-driven

• High concentration or market shares? History
• f collusion? Expect an investigation
• Process is long, resource draining and

complex

• Begin preparations early

24

Jim Lowe james.lowe@wilmerhale.com

25

Mark Ostrau mostrau@fenwick.com