TECNA Comments on the 2023 FTC/DOJ Draft Guidelines for Mergers and Acquisitions
TECNA Comments on the 2023 FTC/DOJ Draft Guidelines for Mergers and Acquisitions
September 12, 2023
The Federal Trade Commission
600 Pennsylvania Avenue NW
Washington, D.C. 20530
U.S. Department of Justice
950 Pennsylvania Avenue NW
Washington, D.C. 20530
Submitted electronically via www.regulations.gov
Re: Draft Merger Guidelines for Public Comment, FTC-2023-0043
To Whom It May Concern:
The Technology Councils of North America (TECNA) represents more than 60 technology business-serving councils and serves as the collective voice for regional technology organizations. Our members represent 22,000 small- to medium-sized technology companies across North America. Many of our members’ companies are startups and are heavily dependent on a thriving ecosystem of investment capital and acquisitions.
Mergers and acquisitions (“M&A”) play a critical role in shaping the success of our small- to medium-sized innovators and is an essential part of creating a competitive U.S. economy. It provides an incentive for startup creation and produces critical financing needed for entrepreneurs and startups to successfully realize their value. Ultimately, it leads to faster and better products and services for consumers at reduced costs.
Startups are the backbone for job creation and innovation in the United States. To the extent that government M&A guidelines were to unduly prevent or delay M&A activity, it would have a significant harmful impact on U.S. small- to medium-sized technology companies, their customers and their employees. Moreover, it would result in the increased acquisition of U.S. technology innovators by foreign technology companies, including foreign government controlled entities.
We thank the FTC and DOJ (“Agencies”) for affording us an opportunity to comment on the draft merger guidelines and respectfully offer for your consideration the following comments:
Need for Alignment with Long-Standing Regulation & Established Analytical Methodologies
Existing merger review is rooted in decades of antitrust precedent. Current guidelines reflect a widespread, bipartisan consensus and acknowledge that “vertical mergers often benefit consumers” and that the agencies should avoid “unnecessary interference with mergers that are either competitively beneficial or neutral.” However, the draft Guidelines dramatically and substantially change how the Agencies analyze merger review. It would find more mergers presumptively unlawful and more time would be needed for regulatory review before a transaction can close. Agencies should avoid overly prescriptive approaches that create broad, new enforcement schemes, lest we create unnecessary barriers to innovation. Rather than overhauling the guidelines, Agencies should update the guidelines in an incremental fashion to build on their long successful, bipartisan success.
The Agencies have stated that, in revising the merger guidelines, they are focused on three goals. The first is that “the guidelines should reflect the law as written by Congress and interpreted by the highest courts,” and the third is that “the guidelines should provide frameworks that reflect the realities of our modern economy and the best of the modern economics and other analytical tools.”
It is important to note that for the first time ever, the draft Guidelines include citations to actual court cases. However, most of the cases cited are based on court cases from the 1960s and early 1970s, which predate the 2010 Horizontal Merger Guidelines and have not been part of mainstream antitrust thinking. The Agencies are citing decades old case law – and discounting more recent case law – while purporting to align merger review with the modern economy. This is incongruous and difficult to reconcile. By including case law that does not reflect how courts have applied the law in merger cases for many decades, the Agencies are creating analytical confusion and potential loopholes through which procompetitive mergers can be deemed presumptively illegal.
The FTC has a core mission to protect consumers and competition, and that requires a balancing of facts when reviewing mergers. While transactions can cause some disruption to competition, they also benefit consumers by creating efficiencies and delivering better, faster products and services at reduced costs. Weighing both factors is paramount when determining whether a transaction violates the law. The draft Guidelines create structural presumptions that would capture a substantial amount of procompetitive merger activity and advocate for overenforcement. Simultaneously, it is generally skeptical of procompetitive and efficiencies rebuttal arguments that refute the structural presumptions used by the draft Guidelines.
Furthermore, it dramatically shifts the burden of proof from the Agencies to the transacting entities to demonstrate that their transaction is not anticompetitive. This sets up a presumption of anti-competitiveness and a presumption of illegality. In fact, in emerging areas where innovation is most important, it is going to be very difficult to “prove the negative”, i.e., that a transaction is not anticompetitive. U.S. companies will be disadvantaged specifically in the most important areas to remain internationally competitive and innovative. If enacted, it would enable the Agencies to block acquisitions without having to prove an anticompetitive effect. The prohibitive nature of the draft Guidelines would deter healthy, procompetitive activity and would limit the ability for businesses to advance their transactions upon showing a demonstration that the transaction is procompetitive and benefits consumers.
Lower Thresholds to be Presumed Anticompetitive
The draft Guidelines create lower thresholds for determining whether a merger should be presumed anticompetitive by lowering the market concentration levels from 2,500 to 1,800, as measured by the Herfindahl-Hirschman Index (“HHI”). Simultaneously, it presumes that any merger increasing the HHI by more than 100 is anticompetitive. Notably, the draft Guidelines omit language from the current Guidelines that provide “safe harbors” and describe concentration levels below certain thresholds as “unlikely to have adverse competitive effect.” This suggests that no category of transaction is unlikely to raise competitive concerns – even in unconcentrated markets – and raises concerns that any transaction can be challenged as potentially having adverse competitive effects.
The draft Guidelines also introduce a new market share threshold and presume illegality for any merged firm with a combined share of merely 30%, regardless of industry concentration. This presumption based on share alone is a novel concept and cannot be found in any previous merger review. To illustrate what this means in practice, a startup with 2% of the market share that is trying to be acquired by a company with a 28% market share would be presumed unlawful even if no other competitors in the market had shares of more than 1%.
The proposed Guidelines also suggest that a merger could be illegal if it “furthers a trend” towards market concentration. Unfortunately, the proposed guidelines offer no solid guidance on what measures would constitute a “trend” or what level of increase in that trend would be challenged. Almost any activity could be attacked as “furthering a trend.” This standard is speculative and subjective.
Perceived Potential Competition (Guideline 4)
Current Merger Guidelines assess whether a merger could harm competition by eliminating the threat that one of the merging parties will enter the market in the future. However, the draft Guidelines do not require that a merging party actually be reasonably likely to enter for the Agencies to claim competitive harm from the merger. Instead, Agencies could block the merger if a market participant could “reasonably consider one of the merging companies to be a potential entrant,” even if that firm could not actually enter the market. This is particularly problematic as many procompetitive mergers involve a company acquiring a complementary product/service or acquiring a startup that complements current offerings to allow the acquiring firm to better compete to the benefit of the consumer. This effectively prevents larger companies from purchasing smaller companies and creates a framework where companies are forced to build rather than buy.
Vertical Merger Standard (Guideline 6)
Traditionally, merger review examines competition in the upstream and downstream markets to determine whether the parties have the ability and incentive to foreclose. However, the draft Guidelines create a structural presumption of harm if a company has the effect of foreclosing 50% of an input into downstream markets. Notably, however, the draft Guidelines provide no “safe harbor” for those transactions below 50%. Rather, it provides various “plus factors” to be considered in those cases. The language is written very broadly to capture the majority of vertical merger activity and focuses on the ability for other competitors to compete rather than on the pro-consumer benefits that result from vertical transactions.
Entrenchment (Guideline 7)
The draft Guidelines suggest the illegality of mergers that may allow a company to better compete in the markets it currently serves or adjacent markets. This is particularly concerning because it suggests illegality for any merger where a company with market presence seeks to acquire or merge with another company to better serve consumers. If an acquisition makes a company more competitive, then the merger can be deemed illegal under the draft Guidelines because it reduces the competitive strength of rivals, either by making the resulting company more efficient or otherwise more capable of serving customers with a reduced cost or high-quality product and service offering. That means that if a company, for example, bundles or otherwise links sales of two products, even if such conduct would not violate Section 2 of the Sherman Act, it could be illegal.
Serial Acquisitions (Guideline 9)
Under current merger review, acquisitions have generally been viewed one at a time and in isolation. However, the draft Guidelines suggest a merger, not otherwise illegal, could be found so for being part of a series. This theory of harm is not found in current Guidelines or relevant case law and serves as over-capture because companies often invest in or acquire firms with the hope that one of dozens will develop into a success.
Merger guidelines are intended to provide greater transparency, predictability and consistency to merging parties. It also serves to publicize the analytical framework that Agencies use for merger review. Unfortunately, the draft Guidelines do not offer specific guidance to firms seeking to understand the antitrust risk of a potential transaction. On the contrary, it will introduce greater uncertainty for merging parties, increase unpredictability for future transactions and create a longer review period as the Agencies increase the number of transactions that will be presumptively anticompetitive.
We thank the Agencies for affording us and other stakeholders the opportunity to comment. Should you have any questions about the comments or any of the information contained herein, please contact me at 412-545-3493 or at email@example.com.
Jennifer G. Young
Chief Executive Officer