On December 18, 2023, the Federal Trade Commission and the Antitrust Division of the Department of Justice (together, the “Agencies”) released their finalized Merger Guidelines (the “Final Guidelines”). The Final Guidelines contain updates to the draft merger guidelines (the “Proposed Guidelines”) that the Agencies released in July 2023.
The Final Guidelines are a significant shift from the Agencies’ previous Horizontal Merger Guidelines and Vertical Merger Guidelines and reflect the Agencies’ belief that the way companies do business within the economy is evolving at a rapid pace, and that it often isn’t easy to distinguish a merger as solely horizontal or vertical. The Final Guidelines also mirror the increasingly aggressive efforts by the Biden Administration, the Agencies and Congress to increase oversight of potential mergers and acquisitions.
Key Takeaways
The Final Guidelines contain 11 specific points that the Agencies will use to determine the illegality of a merger. All 11 points in the Final Guidelines will have a significant impact on health care transactions, but the following summary highlights a few of the most noteworthy changes.
Lower Thresholds for Concentrated Markets. The Final Guidelines lower the Herfindahl-Hirschman Index (“HHI”) thresholds for post-merger concentration levels that will trigger a structural presumption of unlawfulness. The Agencies use an HHI analysis to measure market concentration. Generally, the higher an HHI score, the more concentrated a market is deemed to be. To that end, the Final Guidelines lower the HHI threshold for a “highly concentrated” market from 2,500 to 1,800. Similarly, the greater the change in HHI resulting from a merger, the more likely the transaction will be deemed to be presumptively unlawful. The Final Guidelines lower the post-merger change in HHI that creates a presumptive unlawful merger from 200 to 100. Additionally, the Final Guidelines consider any transaction that results in a combined market share greater than 30%, and a change in the HHI greater than 100, to be presumptively unlawful.
Focus on Mergers that “Entrench” or “Extend” an already Dominant Position. The Final Guidelines suggest mergers that “entrench” or “extend” a firm’s “dominant position” may be considered unlawful.
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- “Entrenching” this dominant position may occur by increasing barriers to entry, increasing the costs to transition, interfering with the use of competitive alternatives, depriving rivals of scale economies or eliminating a growing competitive threat.
- “Extending” this dominant position may occur by tying, bundling, conditioning or otherwise linking the sales of two products, allowing the merged firm to leverage its dominant position and exclude competitive rivals.
Though the Final Guidelines eliminate a clear definition of what would be a “dominant position,” the concentration in many health care markets may give the Agencies the opportunity to utilize this theory of harm in investigating health care transactions.
Comprehensive Merger/Market Review. The Final Guidelines state that the Agencies may view a transaction in light of other transactions that have occurred, or which may be in progress within an industry or market. If previous transactions in an industry have resulted in post-transaction changes in price, profit margins or other indications of anticompetitive harms, then the Agencies may be more likely to flag a transaction for review.
Additionally, the Final Guidelines confirm in writing, the Agencies’ increased scrutiny around roll-up transactions, highlighting that Agencies will study the changes in a company’s market share and market concentration over time and use that to evaluate the current transaction. Roll-up transactions typically involve acquiring several smaller players in relevant markets through a series of transactions at relatively low valuations to build a company over time with increased scale. These changes emphasize that Agencies are evaluating much more than just the anticompetitive considerations that stem from a single transaction in their analysis of a merger. This position is particularly relevant in light of the continued investment in health care by private equity-backed platform entities that utilize long-term roll-up strategies.
Labor Market Impacts. The Final Guidelines focus heavily on the impact that transactions will have on labor markets, focusing on the merged firms as the buyers of labor. The Final Guidelines state that the Agencies will focus on whether a merger will substantially lessen competition for workers, and whether that change in competition might lead to impacts on wages. This reflects the Agencies’ view that reducing input costs is no longer always viewed as an efficiency of a merger and may instead be seen as a detriment of the merger. Given the fact that many health systems are the largest employers in their area, any increased focus by the Agencies on labor markets is likely to have an impact on health care transactions.
Vertical Concerns. Though the Final Guidelines do not include the presumption that a vertical merger in which one party has a 50% share of a vertically related input product is anticompetitive (as was stated in the Proposed Guidelines), this should not be viewed as a lack of concern from the Agencies as to the impact of vertical mergers. The Final Guidelines still contain language about their increased scrutiny of any trends towards vertical integration and the ability of, or incentives to a merged firm, to limit access to a product.
Though the Final Guidelines are a marked change in enforcement framework when compared to the previous guidelines released by the Agencies, it is yet to be seen how the courts will treat the more aggressive approaches towards competition. To avoid enforcement action from the Agencies, parties to any merger should be prepared to fully analyze the potential risks of a transaction early in the planning process.
If you have questions about how the Agencies’ new post-merger guidance could impact a potential transaction or would like additional information about this topic, please contact a member of Hall Render’s Antitrust Practice Group or M&A Practice Group:
- William Berlin at (202) 370-9582 or wberlin@hallrender.com;
- Michael Greer at (317) 977-1493 or mgreer@hallrender.com;
- Chad Sukurs at (317) 977-1452 or csukurs@hallrender.com;
- Colleen Powers at (317) 977-1471 or cpowers@hallrender.com;
- John Bowen at (317) 429-3629 or jbowen@hallrender.com;
- Nathan Chubb at (202) 780-2991 or nchubb@hallrender.com;
- Hannah Clarke at (317) 429-3615 or hclarke@hallrender.com; or
- Your primary Hall Render contact.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot—outside of an attorney-client relationship—answer specific questions that would be legal advice.
