The Proposed Merger Guidelines and Tech Acquisitions
The Draft Merger Guidelines (DMGs)[1] released by the US Department of Justice (DOJ) and the Federal Trade Commission (FTC) on July 19, 2023 feature many significant changes from earlier Merger Guidelines.[2] Of the 13 guidelines highlighted in the DMGs, two are particularly new and important for tech acquisitions. One is Guideline #4, which states that “mergers should not eliminate a potential entrant in a concentrated market” and the other is Guideline #9, stating that “when a merger is part of a series of multiple acquisitions, the agencies may examine the whole series” (emphases added).
While the DMGs provide hardly any details on #9, they do offer a list of evidence that the agencies would consider in support of #4. For example, the DMGs state that a firm’s “sufficient size and resources to enter,” expansion “into other markets in the past,” current participation “in adjacent or related markets,” being considered by industry participants as “a potential entrant,” as well as “subjective evidence that the company considered entering absent the merger” can all constitute evidence for the firm’s reasonable probability of entry. More importantly, a reasonable probability of entry is presumed to result in deconcentration or other significant benefits for competition, unless there is substantial direct evidence that the competitive effect would be de minimis. Simply put, a merger that is deemed to reduce a reasonable probability of entry is presumed to harm market competition.
Guideline #4 appears to hinge on the implicit assumption that, but for mergers and acquisitions (M&A), all entities with a reasonable probability of entry would likely enter the market, vigorously compete with each other, and significantly promote market competition in the absence of M&A. To avoid a linguistic debate on “reasonable,” “likely” and “significant,” it may be worthwhile to examine this assumption in a simple illustrative example.
[1] https://www.justice.gov/d9/2023-07/2023-draft-merger-guidelines_0.pdf.
[2] See a summary by Froeb et al., “Cost-Benefit Analysis Without the Benefits or the Analysis: How Not to Draft Merger Guidelines” available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_ id=4537425 and another summary by Werden, “Two Bridges Too Far: First Take on the Draft Merger Guide- lines”, CPI Column, September 5, 2023, available at https://www.pymnts.com/cpi_posts/two-bridges- too-far-first-take-on-the-draft-merger-guidelines.