1. Master the Antitrust Basics Brown Bag Series
Lesson V – Clayton Act Section 7
Thomas D. Fina
Allen Bachman
Howrey LLP

2. Overview Substance – Clayton Section 7
1992 Merger Guidelines
Market Definition
Competitive Effects
Unilateral effects
Coordinated effects
Remedies
Litigation
Key issue – is the transaction likely to lead to higher prices, lower quality or reduced innovation?
Focus – practical tips on how to analyze a merger

3. Overview cont. Not going to cover in any detail: Appendices
Market definition (see December 13, 2006, presentation by Meg Guerin Calvert)
HSR and merger process (next month’s seminar)
Appendices
Bibliography
Sample merger analysis memo
Sample data request

4. Clayton Act Section 7 Overview of Legal Standards

5. Clayton Act Section 7
Prohibits acquisitions of stock or assets where “the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” 15 U.S.C. § 18 (2000).
Primary concern is the creation of market power
Power to restrain output and raise prices above competitive levels
Power to reduce quality while maintaining prices
Power to reduce the amount and/or pace of innovation while maintaining prices
“Horizontal” mergers, i.e., combinations of direct competitors, are far more likely to raise competitive concerns than are “Vertical” transactions.

6. Clayton Act Section 7 Enforcement
Department of Justice Antitrust Division
Federal Trade Commission
State Attorneys General
Private Lawsuits
(§ 4 and § 16)

7. Twin Pillars of Merger Analysis
FTC/DOJ Horizontal Merger Guidelines
Guide agency review of each and every transaction
Private Practice: satisfying the Merger Guidelines' criteria is critical to obtaining clearance without litigation.
Agency Staff: satisfying the Merger Guidelines is a necessary part of establishing a case with the “front office.”
Judicial Decisions
The Clayton Act itself is rather ambiguous.
The courts have developed a large body of case law interpreting the statute.
Courts rely on the Merger Guidelines, but are not bound by them.

8. Evaluating the Competitive Impact of a Transaction
DOJ/FTC Horizontal Merger Guidelines
Identify the relevant product and geographic markets and the firms participating in those markets
Assess market concentration
Determine the likely competitive effects
Analyze whether entry would maintain competition
Efficiencies
Merger Guidelines Commentary
The analysis need not be linear. It may be appropriate to begin by analyzing the competitive effects.

9. Relevant Geographic Market
The region in which the seller operates and to which the purchaser can practically turn for supplies
Classic examples of national markets
Prescription Drugs
Software
Classic examples of regional markets
Hospitals
Grocery Stores
Gas Stations

10. Relevant Product Market
Reasonable Interchangeability
Compare the use and function of the merging parties’ products with other products.
Assess the degree to which buyers are willing to substitute those similar products for the parties’ products.
Examples of Product Market Distinctions
Chewing Tobacco vs. Moist Snuff (Swedish Match)
Office Superstores vs. Smaller Retailers (Staples)

11. Market Definition – Final Thoughts
Lack of clearly defined markets inhibits reliance on market share presumptions and hinders the strength of any theories of competitive harm.
Cruise Lines
Oracle

12. Market Share Identify market participants
Identify each participant’s share of the relevant market
Analyze the extent to which the merger will increase concentration

13. Philadelphia National Bank Presumption
Mergers resulting in an “undue” increase in concentration are presumed harmful.
No clear guidance on how much is “undue”
Market shares provide a “static analysis.”
They offer only a “snapshot.”
The courts and agencies have increasingly backed away from exclusive reliance on market shares.

14. Philadelphia National Bank Presumption (cont.)
Presumption can be overcome with evidence clearly showing that the merger is not likely to have anticompetitive effects.
Market shares are merely the starting point.
Competitive effects analysis is “dynamic.”
The ultimate issue remains “what will happen in the future?”

15. Theories of Competitive Harm
Coordinated Effects
Would post-merger market conditions make coordination on price or output more likely after the merger?
Unilateral Effects
Would post-merger market conditions make it possible for individual firms to raise prices?
Will the merger eliminate a constraint?

16. Coordinated Effects
Will the merger increase the likelihood of explicit collusion or tacit coordination?
Examples of tacit coordination
Parallel pricing
Output restrictions
Arch Coal
Will the merger eliminate a maverick?
An unpredictable or uncooperative competitor

17. Unilateral Effects Markets with differentiated products
Products sold by different competitors are not perfect substitutes.
Example: branded products
Are the merging parties’ products next best substitutes?
Sales that would have been lost to the competitor from a unilateral price increase are now retained.
Compare McDonald’s buying Burger King vs. McDonald’s buying Pizza Hut.
Markets with undifferentiated products
Example: Commodities
Unilateral price increases are more likely when competitors cannot respond to a reduction in output.
Capacity

18. So Now What Do I Do?

19. Work “Backwards” into the Transaction
What are the likely competitive effects?
Don’t get bogged down on structural analysis
Market definition
Market shares
HHIs
Brown Shoe v. United States, 370 U.S. 294 (1962)
(upholding challenge to merger creating competitor with 5% share)
Whirlpool / Maytag (2006)
(DOJ permitted merger in washer/dryer industry with combined share of approximately 50-70%)

20. Screens Rationale for deal? Are customer complaints likely?
Any group of customers likely to be harmed?
Concentration level: 4 to 3 and 3 to 2 deals can be difficult.
Consumer goods or politically sensitive?
Enforcement history

21. Get Your Hands Dirty
Developing a sound understanding of the facts is essential.
“We learned long ago that facts are stubborn things in merger enforcement. No economic theory or story-based advocacy about a merger will give you a reliable answer unless the facts firmly support it.”
Former FTC Chairman Tim Muris, August 7, 2001

22. Step 1 -- Documents The parties’ documents are key. What do they say?
Offering Memorandum (if any)
Strategic plan (if any)
Board / management presentations
How does management rationalize the investment?
SEC filings / publicly available documents
Investor presentations

23. Documents cont. Use the documents to identify:
Potential overlaps
Rationale for transaction
Industry competitive dynamics
Competitors
Barriers to entry
Develop outline of questions for client
Identify “good” docs / “bad” docs

24. Step 2 – Identify the Overlaps
Identify overlaps
At product level
Amount of revenue (quantity) by overlap product

25. Step 3 -- Interview Management
What is the rationale for the transaction? Typical reasons include:
Efficiencies (Whirlpool; Arch Coal)
Product extension (Pepsi/Quaker)
Geographic expansion (retail)
Defensive (airlines)

26. Step 3 -- Interview Management cont.
Are customer complaints likely?
Do the complaints sound in antitrust?
“I like my sales representative.”
vs.
“The merger combines my two primary suppliers.”

27. Step 3 -- Interview Management cont.
Is there any identifiable class of customers who may be injured by the transaction?
Large customers vs. small customers
Buyer power
Vertical integration
Induce new entry
Locked in customers / group with higher switching costs?

28. Step 3 -- Interview Management cont.
Competitors and estimated market shares
Estimated efficiencies
Entry
Barriers?
Recent examples?
Ability of customers to sponsor?
Is either party a maverick?

29. Step 3 -- Interview Management cont.
Unilateral effects
Are overlapping products differentiated?
Are merging parties next-best substitutes and/or close in competitive space?
Ability of competitors to reposition?
Easier in industrial products
More difficult where brands/consumer goods are involved

30. Step 3 -- Interview Management cont.
Coordinated interaction
Industry structure / concentration
Transparency of pricing
Ability to detect cheating
Numerous small transactions?
Large lumpy sales?
Ability to punish cheating
History of collusion in industry?

31. Step 4 – History of Enforcement
Have the agencies challenged prior transactions?
Have industry conditions changed since prior enforcement actions?

32. Step 5 – Is There a Fix?
Agencies strongly prefer structural remedies to conduct remedies.
Is there a potential fix if an overlap raises competitive concerns?

33. Conclusion

34. Bibliography
ABA Section of Antitrust Law, Antitrust Law Developments (5th ed )
ABA Section of Antitrust Law, The Merger Review Process: A Step-by-Step Guide to Federal Merger Review, 3d ed. (2006)
ABA Section of Antitrust Law, Mergers & Acquisitions: Understanding the Antitrust Issues, 2d ed. (2004).
U.S. Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines, April 1992 (revised April 1997).
U.S. Department of Justice and Federal Trade Commission, Commentary on the Horizontal Merger Guidelines, March 2006.