On June 30, 2020, the Department of Justice's Antitrust Division (DOJ or Division), and the Federal Trade Commission (FTC) announced the release of new Vertical Merger Guidelines (VMG). These guidelines are instructive for the agencies' review of vertical mergers and acquisitions and will be persuasive but not binding on courts in litigation challenges to vertical mergers.
Vertical mergers combine firms or assets that operate at different stages of the distribution chain, although the analytical framework described in the Guidelines also applies to "diagonal" mergers (which combine firms or assets at different stages of competing supply chains) and vertical issues that arise in mergers of complements. By contrast, horizontal mergers are transactions that take place between direct competitors.
The new VMG rely heavily on the legal and economic theories and analytical framework set forth in the 2010 Horizontal Merger Guidelines (2010 HMG), and are explicitly intended to be read in conjunction with the 2010 HMG. The VMG state that horizontal considerations such as the analytic framework for evaluating entry considerations, the treatment of the acquisition of a failing firm or its assets, and the acquisition of a partial ownership interest are relevant to the evaluation of the competitive effects of vertical mergers as well.
Addressing the issues specific to vertical transactions, the VMG include modern approaches such as identifying relevant markets and related products; identifying market participants, market shares, and market concentration; analyzing evidence of adverse competitive effects, unilateral effects and coordinated effects; and efficiencies.
Some of the highlights of the VMG include:
- Crediting the potential for increased efficiencies due to the elimination of "double marginalization" (i.e., combining the upstream and downstream profit margins that can result in reduced prices to end users);
- Analyzing whether the post-merger firm would be likely to have access to its competitors' competitively-sensitive information and raise rivals' costs; and
- No longer relying on econometric analysis of markets via calculation of the Herfindahl-Hirschman Index (HHI) of a proposed transaction.
Notably, the language in the 2020 Draft Vertical Merger Guidelines (2020 Draft VMG) creating a 20-percent market share screen was removed. And while the 2020 Draft VMG only discussed vertical mergers, the final VMG include complementary and diagonal transactions.
FTC Commissioners Rohit Chopra and Rebecca Slaughter both dissented, arguing that the VMG support the flawed assumption that vertical mergers are presumptively benign or procompetitive. Commissioner Chopra expressed concern that the guidelines failed to "address the many ways that vertical transactions may suppress new entry," while Commissioner Slaughter challenged the VMG's "over-emphasis on the benefits of vertical mergers," its treatment of the elimination of double marginalization, and the omission of other important competition concerns.