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On March 27, 2006, the Department of Justice ("DOJ") and Federal Trade Commission ("FTC") took the significant step of issuing a joint 60-page commentary[1] on the application of the Agencies’ Horizontal Merger Guidelines (the "Guidelines").  The Commentary is important because it signifies a willingness of the enforcement agencies to sacrifice, to a limited extent, enforcement flexibility for greater transparency and predictability in the application of the Guidelines to mergers, acquisitions and joint ventures.  We view this as a positive step by the Agencies and a positive development for businesses involved in M&A transactions. 

Background.  In 1992, the FTC and DOJ jointly issued the 1992 Horizontal Merger Guidelines[2] to describe the analytic framework and standards the Agencies use to assess whether a proposed transaction threatens to violate the antitrust laws by "substantially lessening competition."  The Agencies’ Commentary to the Guidelines is organized as essentially an "annotation" to the principal sections of Guidelines, complete with reference to outcomes of previous FTC and DOJ merger investigations and additional discussion from the Agencies, and is intended principally for use by antitrust practitioners in connection with the antitrust review process.  Without question, the Agencies’ joint Commentary will soon become a de facto component of the Guidelines themselves, and the substantive elements of the Commentary will therefore become a part of the Agencies’ transaction review process.

Key Issues.  Although the Agencies’ purpose in issuing the Commentary is to clarify how the Guidelines have been applied in practice, not to set forth new interpretations or enforcement policy, the following themes are noteworthy because of the important role the Commentary will likely play in future horizontal merger investigations:

• Use of Evidence in Merger Investigations:  The Commentary identifies the types of evidence most likely to be useful in a merger investigation and discusses the specific uses of such evidence.  Some of this is old, and some is new.  For example, the Agencies use the Commentary to reaffirm the heavy reliance they place on information provided by customers – notwithstanding recent losses in merger challenges by the FTC and DOJ in which the courts questioned the probative value of customer testimony.  The Commentary also provides significant new insight into the myriad ways the Agencies use certain types of empirical data for economic analysis, including scanner data and so-called "natural experiments" involving previous market disruptions.

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• De-emphasis on Market Definition:  The Commentary may begin an effort by the Agencies to deemphasize incrementally the significance of "market definition" in the application of the antitrust laws to a proposed merger.  Under existing practice, the definition of the market is often decisive, as market definition may ultimately determine how many competitors exist within the affected market, the shares of the competitors, and the likelihood of new entry.  Market definition has often been the Agencies’ Achilles heel in cases the Agencies have litigated and lost.  In the Commentary, the Agencies appear to step away from the Guidelines’ emphasis on market definition analysis.  First, the Agencies say that market boundaries often are not precise or rigid, but assert that imprecise markets can be sufficient for determining whether a transaction may lessen competition.  Second, the Agencies explain that market definition may play a lesser role in transactions where the competitive effects are clear in the absence of a traditional market analysis, including transactions where empirical data can be used to show clear competitive effects.

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• Specific Application of Unilateral Effects Analysis:  The Guidelines identify two broad frameworks for assessing whether a horizontal merger may substantially lessen competition:  coordinated interaction and unilateral effects.  A merger is likely to lessen competition through unilateral effects if it creates a likelihood that the merged firm would be able to raise prices or otherwise exercise market power to a greater degree after the merger.  Although the Guidelines describe the general unilateral effects analytic model, the Commentary provides significant additional and sophisticated information about the Agencies’ approach to applying that analysis in specific industries and market conditions, including consumer products industries, markets characterized by homogenous goods, markets characterized by auction sales and bidding markets involving highly specialized or custom products.

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• Entry Analysis:  Like market definition, entry plays a key role in antitrust litigation, including merger litigation.  After a series of litigation losses in the 1980’s, the Agencies raised the bar in the 1992 Horizontal Merger Guidelines, requiring merging parties to make more detailed showings to support an argument that entry would deter or defeat a merger’s anticompetitive effects.  The Commentary suggests that the Agencies still harbor a high degree of skepticism with respect to entry arguments.  Specifically, it appears to suggest that entry often will not, in the Agencies’ view, defeat anticompetitive effects in mergers involving either consumer or industrial products. 

Greater Transparency.  As a general point, the Commentary is perhaps most notable for the Agencies’ willingness to provide specific examples from recent enforcement activities involving application of discrete principles from the Guidelines.  This approach is consistent with the Agencies’ objective of providing greater transparency and predictability in merger enforcement, but it is a helpful and positive departure from prior Agency practice. 

On balance, although the Commentary does not reflect any material departure in the Agencies’ approach to applying antitrust law in the M&A context, the Commentary should have a positive effect in assisting companies and their counsel in evaluating antitrust risk and navigating the antitrust approval process.