The merger guidelines regulate mergers between companies to ensure compliance with antitrust laws and encourage healthy competition. First devised in 1968, the guidelines have undergone several revisions, including the use of the Herfindahl Index and the inclusion of sections for horizontal and vertical mergers. The DOJ and FTC use a five-level analysis to inspect potential mergers and can challenge them if adverse effects are found. The guidelines also expect mergers to result in greater efficiency.
The merger guidelines are a set of rules and regulations that govern any mergers between and between companies. Both the Federal Trade Commission (FTC) and the Antitrust Division of the United States Department of Justice (DOJ) rely on these guidelines to analyze and investigate companies planning future mergers. The guidelines ensure that companies in the United States comply with antitrust law and encourage healthy competition in the marketplace.
Dr. Donald Turner, former Assistant Attorney General of the United States, was the first to devise the merger guidelines in 1968. The main contribution of this first version was to introduce the concept of “Structure Conduct Performance” in the analysis of the market, stating that market performance depends on market behavior, which therefore hinges on the structure of the market. Since then, the merger guidelines have undergone several revisions, the first of which occurred in 1982.
Associate Attorney General Bill Baxter led the review and introduced the use of the Herfindahl Index, which measures the ratio of market size concentration to a company’s size. With the new revision, the guidelines also upheld “production efficiency” as a valid reason for a merger. In this way, many economists and entrepreneurs have changed their perspectives by seeing the competition in a positive way as it can create better products and services for the public. Other revisions were made in 1984, 1992, 1997 and 2010.
The 2010 merger guidelines included sections for both horizontal and vertical mergers. A horizontal merger occurs when two companies that create similar products and services merge. The DOJ and FTC use a five-level analysis included in the guidelines to inspect potential merger. The five-level analysis includes the collection of data on the current market, the study of the efficiency and stability of the companies involved and the assumption of the economic effects in case of realization of the merger. Any highly probable problems may be grounds for disputing the merger.
A vertical merger occurs when companies that create different products and services collaborate, for example with retailers and manufacturers. Using merger guidelines, the DOJ and FTC can challenge the merger if they find adverse effects similar to those that a horizontal merger can bring. These effects may include harm to “perceived potential competition”, barriers to entry or the elimination of a disruptive buyer. The Department also expects the merger to result in greater efficiency; if the assignment is not satisfied, the merger can be challenged.
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