Merger guidelines
Encyclopedia
The Merger guidelines are a set of internal rules promulgated by the Antitrust Division
of the United States Department of Justice
(DOJ) in conjunction with the Federal Trade Commission
(FTC). These rules, which have been revised a number of times in the past four decades, govern the extent to which these two regulatory bodies will scrutinize and/or challenge a potential merger
on grounds of market concentration
or threat to competition
within a relevant market
.
The merger guidelines have sections governing both horizontal integration
and vertical integration
.
Dr. Donald Turner, an economist
and lawyer with expertise in the field of industrial organization
. These merger guidelines were criticized in some quarters as being overly concerned with issues of market structure such as barriers to entry
and concentration ratio
s at the expense of efficiency and economies of scale
. They were, however, a step forward in two ways: they gave more accurate advice to corporate management as to when and how mergers would be examined, and brought new economic ideas into antitrust enforcement, specifically the "structure-conduct-performance" model of industrial organization
.
In 1982, Associate Attorney General
Bill Baxter, under the authority of U.S. Attorney General
William French Smith
, released a new set of guidelines, which made heavier use of modern concepts of microeconomic theory
, including the using the Herfindahl index
to determine market concentration
. The newer guidelines took a more favorable view of economies of scale and efficiency of production as rationales for integration. Moreover, they raised the level of market concentration necessary for the government to scrutinize mergers, effectively treating competition as a means to greater efficiency rather than as a goal in and of itself. This was quite a controversial approach at the time: some antitrust lawyers saw it as a loosening of previous restraints on corporate consolidation, and some State Attorneys General
responded to Baxter's changes by tightening merger enforcement at the state level.
The guidelines were revised again in 1984. The only remaining portion of the 1984 guidelines which remains in effect is Section Four, which governs the examination of market effects of vertical integration
. These guidelines were later replaced by the 1992 Merger Guidelines, which represented a fine-tuning of previously established tools and policies, such as the SSNIP test and rules governing the acquisition of failing firms. The 1992 Guidelines were revised in 1997, almost concurrently with the FTC's challenge of the Staples-Office Depot merger in federal court.
The 1997 Horizontal Merger Guidelines were replaced with the most recent version in 2010. This version was released on August 19, 2010. The 2010 Guidelines introduced the concept of "upward pricing pressure" resulting from a merger between competing firms.
United States Department of Justice Antitrust Division
The United States Department of Justice Antitrust Division is responsible for enforcing the antitrust laws of the United States. It shares jurisdiction over civil antitrust cases with the Federal Trade Commission and often works jointly with the FTC to provide regulatory guidance to businesses...
of the United States Department of Justice
United States Department of Justice
The United States Department of Justice , is the United States federal executive department responsible for the enforcement of the law and administration of justice, equivalent to the justice or interior ministries of other countries.The Department is led by the Attorney General, who is nominated...
(DOJ) in conjunction with the Federal Trade Commission
Federal Trade Commission
The Federal Trade Commission is an independent agency of the United States government, established in 1914 by the Federal Trade Commission Act...
(FTC). These rules, which have been revised a number of times in the past four decades, govern the extent to which these two regulatory bodies will scrutinize and/or challenge a potential merger
Mergers and acquisitions
Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or...
on grounds of market concentration
Market concentration
In economics, market concentration is a function of the number of firms and their respective shares of the total production in a market...
or threat to competition
Competition
Competition is a contest between individuals, groups, animals, etc. for territory, a niche, or a location of resources. It arises whenever two and only two strive for a goal which cannot be shared. Competition occurs naturally between living organisms which co-exist in the same environment. For...
within a relevant market
Relevant market
In competition law the Relevant market defines the market in which one or more goods compete. Therefore, the Relevant market defines whether two or more products can be considered substitute goods and whether they constitute a particular and separate market for competition analysis.The relevant...
.
The merger guidelines have sections governing both horizontal integration
Horizontal integration
In microeconomics and strategic management, the term horizontal integration describes a type of ownership and control. It is a strategy used by a business or corporation that seeks to sell a type of product in numerous markets...
and vertical integration
Vertical integration
In microeconomics and management, the term vertical integration describes a style of management control. Vertically integrated companies in a supply chain are united through a common owner. Usually each member of the supply chain produces a different product or service, and the products combine to...
.
History of the Merger guidelines
The first merger guidelines set forth by the DOJ were the 1968 Merger Guidelines, which remained largely unchanged until 1982. The 1968 guidelines were developed by former U.S. Assistant Attorney GeneralUnited States Assistant Attorney General
Many of the divisions and offices of the United States Department of Justice are headed by an Assistant Attorney General.The President of the United States appoints individuals to the position of Assistant Attorney General with the advice and consent of the Senate...
Dr. Donald Turner, an economist
Economist
An economist is a professional in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy...
and lawyer with expertise in the field of industrial organization
Industrial organization
Industrial organization is the field of economics that builds on the theory of the firm in examining the structure of, and boundaries between, firms and markets....
. These merger guidelines were criticized in some quarters as being overly concerned with issues of market structure such as barriers to entry
Barriers to entry
In theories of competition in economics, barriers to entry are obstacles that make it difficult to enter a given market. The term can refer to hindrances a firm faces in trying to enter a market or industry - such as government regulation, or a large, established firm taking advantage of economies...
and concentration ratio
Concentration ratio
In economics, a concentration ratio is a measure of the total output produced in an industry by a given number of firms in the industry. The most common concentration ratios are the CR4 and the CR8, which means the four and the eight largest firms...
s at the expense of efficiency and economies of scale
Economies of scale
Economies of scale, in microeconomics, refers to the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. "Economies of scale" is a long run concept and refers to reductions in unit...
. They were, however, a step forward in two ways: they gave more accurate advice to corporate management as to when and how mergers would be examined, and brought new economic ideas into antitrust enforcement, specifically the "structure-conduct-performance" model of industrial organization
Industrial organization
Industrial organization is the field of economics that builds on the theory of the firm in examining the structure of, and boundaries between, firms and markets....
.
In 1982, Associate Attorney General
United States Associate Attorney General
The Associate Attorney General is the third-ranking official in the United States Department of Justice. The Associate Attorney General advises and assists the Attorney General and the Deputy Attorney General in policies relating to civil justice, federal and local law enforcement, and public...
Bill Baxter, under the authority of U.S. Attorney General
United States Attorney General
The United States Attorney General is the head of the United States Department of Justice concerned with legal affairs and is the chief law enforcement officer of the United States government. The attorney general is considered to be the chief lawyer of the U.S. government...
William French Smith
William French Smith
William French Smith was an American lawyer and the 74th Attorney General of the United States.-Biography:...
, released a new set of guidelines, which made heavier use of modern concepts of microeconomic theory
Microeconomics
Microeconomics is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources. Typically, it applies to markets where goods or services are being bought and sold...
, including the using the Herfindahl index
Herfindahl index
The Herfindahl index is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. Named after economists Orris C. Herfindahl and Albert O. Hirschman, it is an economic concept widely applied in competition law, antitrust and also...
to determine market concentration
Market concentration
In economics, market concentration is a function of the number of firms and their respective shares of the total production in a market...
. The newer guidelines took a more favorable view of economies of scale and efficiency of production as rationales for integration. Moreover, they raised the level of market concentration necessary for the government to scrutinize mergers, effectively treating competition as a means to greater efficiency rather than as a goal in and of itself. This was quite a controversial approach at the time: some antitrust lawyers saw it as a loosening of previous restraints on corporate consolidation, and some State Attorneys General
State Attorney General
The state attorney general in each of the 50 U.S. states and territories is the chief legal advisor to the state government and the state's chief law enforcement officer. In some states, the attorney general serves as the head of a state department of justice, with responsibilities similar to those...
responded to Baxter's changes by tightening merger enforcement at the state level.
The guidelines were revised again in 1984. The only remaining portion of the 1984 guidelines which remains in effect is Section Four, which governs the examination of market effects of vertical integration
Vertical integration
In microeconomics and management, the term vertical integration describes a style of management control. Vertically integrated companies in a supply chain are united through a common owner. Usually each member of the supply chain produces a different product or service, and the products combine to...
. These guidelines were later replaced by the 1992 Merger Guidelines, which represented a fine-tuning of previously established tools and policies, such as the SSNIP test and rules governing the acquisition of failing firms. The 1992 Guidelines were revised in 1997, almost concurrently with the FTC's challenge of the Staples-Office Depot merger in federal court.
The 1997 Horizontal Merger Guidelines were replaced with the most recent version in 2010. This version was released on August 19, 2010. The 2010 Guidelines introduced the concept of "upward pricing pressure" resulting from a merger between competing firms.