Randy Picker provides his round-one comments on the draft Merger Guidelines.
To read more from the ProMarket Merger Guidelines Symposium, please see here.
On July 19, 2023, the U.S. Department of Justice and the Federal Trade Commission released a draft of the new Merger Guidelines. The Guidelines announce the enforcement priorities of the antitrust agencies as they confront mergers and give guidance to private parties as they make choices about whether or not to consider merging. The agencies have broad, but presumably not unlimited, discretion in making enforcement choices. But the Guidelines are also a pitch by the agencies to the court system (and perhaps Congress) as the agencies hope to persuade the courts—where agency enforcement decisions are ultimately litigated—of their vision of how U.S. antitrust laws should function. And, as the Guidelines note, the most relevant antitrust law here is Section 7 of the Clayton Act.
The new document sets out thirteen guidelines. Some of the guidelines address possible mergers among firms that currently compete with each other—traditional horizontal mergers—while others step outside that class of situations. I want to focus here on Guideline 4: “Mergers Should Not Eliminate a Potential Entrant in a Concentrated Market.” The closing phrase there, concentrated market, is a term of art, but to simplify, think of it as a market midway between an unconcentrated market and one that is highly concentrated. The defense of Guideline 4 starts with what is set forth as a core principle of U.S. antitrust law:
The antitrust laws reflect a preference for internal growth over acquisition. In contrast to internal growth, merging a current and a potential market participant eliminates the possibility that the potential entrant would have entered on its own.
Each of those sentences has a corresponding footnote with a citation to different parts of Justice Thurgood Marshall’s concurring-in-the-result opinion in United States v. Falstaff Brewing Corp., 410 U.S. 526 (1973). Just for a shorthand, call this idea the “internal growth presumption.”
It is worth pausing to consider that idea. As a society, we should want assets to move from one owner to a new owner if the new owner will produce more overall social value from the assets. A sale often matches better ideas and better managers with preexisting assets to ensure that those assets are put to their best possible use. But that idea isn’t absolute, and, for example, U.S. antitrust law frequently blocks that process when a more capable firm wants to buy one of its current horizontal competitors if doing so would reduce competition.
But the issue raised by Guideline 4 is quite different. A firm is outside a market and is thinking about entering. What does antitrust law say about how a firm acquires a new skill set? As the draft Guidelines recognize, it takes time, money and expertise to enter a new market and buying an existing firm can speed up that process considerably. As I hope that suggests, there is a strong distinction between a firm buying an existing competitor and instead buying a second firm that will enable it to acquire a new skill set and enter a new market. Buying a competitor may eliminate existing competition and of course it was the emergence of the trusts—devices designed to eliminate competition among existing competitors—that gave rise to the Sherman Act in 1890. But buying a firm to enter a new market often doesn’t eliminate existing competition and indeed can facilitate competition.
As noted above, the draft Guidelines cite a footnote in Justice Marshall’s opinion in Falstaff Brewing for the internal growth presumption. Marshall’s footnote is worth parsing. Here is the first sentence: “To be sure, in terms of anticompetitive effects, the dominant firm’s acquisition of another firm within the market might be functionally indistinguishable from a de novo entry, which § 7 does not forbid.” Said differently, a dominant firm could just enter a new market and Section 7 doesn’t bar that and Marshall saw the “anticompetitive effects” of buying a firm as equivalent to whatever such effects would arise if the firm entered, as he put it, de novo. I confess to being uncertain what the “anticompetitive” effects are here, as it appears that entry should be presumptively seen as procompetitive, even if the entering firm has advantages over its new rivals. Indeed, we want firms with superior skills to enter markets.
In the next sentence in the footnote, Marshall quotes the internal growth presumption where he references the Court’s opinion in United States v. Philadelphia National Bank, 374 U.S. 321 (1963). There is no statutory basis for that claim in Marshall’s opinion nor is there in PNB itself. Marshall concludes the footnote with a third sentence: “Moreover, entry by acquisition has the added evil of eliminating one firm in the market and thus increasing the burden on the remaining firms which must compete with the dominant entering firm.” That is hard to understand. Entry by acquisition means that we have swapped out one firm for another, but we haven’t reduced the number of firms in the market.
What we have lost is, perhaps, the subject of Guideline 4, potential competition, meaning that prior to the acquisition, the buying firm sat outside the market and the threat of entry might have influenced behavior by the firms already in the market. And we have lost the chance to add a firm to the market, as would have occurred if the buying firm had entered de novo through internal growth. The new draft Guidelines have an extensive discussion of potential competition and the FTC of course pursued that theory of liability in a case it lost recently, Meta/Within. The potential competition idea really does go to the related questions of the acceptable path for a firm to obtain a new skill set and whether they have to do that through internal growth rather than buying an existing firm. A strong version of potential competition would operate as an almost flat block on entry via acquisition as it would force a firm to always enter through internal growth.
Does Section 7 of the Clayton Act require that? To assess that, we should play through the history of Section 7. The core of that section, as enacted in 1914, read as follows:
That no corporation engaged in commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital of another corporation engaged also in commerce, where the effect of such acquisition may be to substantially lessen competition between the corporation, whose stock is so acquired and the corporation making the acquisition, or to restrain such commerce in any section or community, or tend to create a monopoly of any line of commerce.
Given what is coming—a 1950 amendment—note some particular features of the 1914 statute. The focus of the “may be to substantially lessen competition” language was on competition between the buying corporation and the corporation being purchased. If the two firms didn’t compete, then, without a more elaborate theory, it was hard to see how the purchase could diminish competition between them, a view of the statute confirmed by the Supreme Court in 1930 in International Shoe (280 U.S. 292, 298 (1930)). And that result also seems hard to square with the idea that a potential competition doctrine should limit this type of merger, as, at least from a distance, the shoe firms in International Shoe would have seemed like natural plausible competitors and thus potential competitors.
The 1914 statute also only applied to stock deals, so asset purchases couldn’t be challenged under Section 7, even as they would continue to be challenged under the Sherman Act. The focus on the two firms being in competition with each other also suggested that Section 7 was limited to horizontal mergers and that it didn’t apply to vertical mergers or conglomerate mergers. As suggested above, that might have been a perfectly sensible regime, where we want to limit horizontal mergers—they may reduce existing competition—while we might be open to vertical mergers, especially those that sped up entry by a firm into new markets.
Section 7 was amended in 1950, in a statute known as Celler-Kefauver. The asset-purchase hole was plugged and the new version dropped the focus on competition between the buyer and the seller. The legislative history suggests that that language was seen as perhaps too restrictive as it seemed to block all transactions among direct competitors. But Congress also wanted to make sure that Section 7 applied, if its statutory standard was met, to all mergers, horizontal, vertical, conglomerate or otherwise.
With the 1950 amendment done, Section 7 read, as it does today:
That no corporation engaged in commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital and no corporation subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of another corporation also engaged in commerce, where in any line of commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.
I don’t think that you find an internal growth presumption in that language. The focus after 1950, as it was in 1914, is on whether the acquisition “may be substantially to lessen competition, or to tend to create a monopoly.” The legislative history of the 1950 amendment makes clear that Congress wanted to amend the Clayton Act to track the understanding of International Shoe, and that focused on the extent of existing competition at the time of the proposed acquisition. (The draft Merger Guidelines cite lots of old cases but somehow not International Shoe.)
But there is another place worth looking at to understand what happened in 1950, and that takes us back to Justice Marshall’s opinion in Falstaff Brewing, again, the opinion that the draft Merger Guidelines cite for the internal growth presumption. After describing the 1950 amendments, Marshall took stock of the situation:
Thus, whereas before 1950, § 7 proscribed only those mergers which eliminated present, actual competition between the merging firms, the Celler-Kefauver Amendment reached cases where future or potential competition in the entire relevant market might be adversely affected by the merger.
The first part of that sentence seems right, the second part wrong. The description of the pre-1950 Section 7 matches the result in International Shoe, which, again, Congress was trying to track in 1950. But even as Celler-Kefauver made important changes to Section 7, it didn’t change the core test of the section—“may be substantially to lessen competition”—and that was the operative language that drove the result in International Shoe. The critical question focuses on what it means “to lessen competition” and Marshall understood that language to be limited to “present, actual competition” and not the future or potential competition that Marshall hoped to capture. I think that also makes it hard to think of a possible missed opportunity for deconcentration of a market, another goal of Guideline 4, as akin to the kind of present lessening of competition captured in the language of Section 7.
The FTC and DOJ are in the midst of an effort to revive the potential competition doctrine, and that doctrine matters for the way in which it can shape entry into new markets. As the draft Guidelines recognize, entry is actually hard, and, I assume, something that we should generally welcome. The draft Guidelines push us to return to the language of Section 7 and it is completely fair to demand that antitrust doctrine be situated in the language of the applicable statutes.
But I don’t see an internal growth presumption in Section 7 and we should be concerned about a robust potential competition doctrine premised on that idea as it will block or slow down movements of assets that we should welcome. What does that look like? Return to International Shoe itself, where the point of the merger was “to secure additional factories, which it could not itself build with sufficient speed to meet the pressing requirements of its business.”
Disclosure: Randy Picker is not currently working or consulting for any party with a financial interest in the Merger Guidelines.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
