Opening remarks before FTC Bureau of Economics Roundtable on Understanding Mergers: Strategy and Planning, Implementation, and Outcomes
Welcome to the Federal Trade Commission's Roundtable on "Understanding Mergers: Strategy and Planning, Implementation, and Outcomes," sponsored by the Bureau of Economics. Throughout my career, both as a Commission official and a law professor, I have focused on the important role that efficiencies play, and ought to play, in the antitrust analysis of mergers.(1) Today and tomorrow several panels will discuss what is known about what mergers accomplish. Today, three panels will discuss the rationales behind mergers, including important questions about assessing the value a merger will create, the likelihood it will successfully achieve that value, and how to achieve a merger's objectives. The first panel tomorrow will discuss the relationship between various costs and business decision making. The second panel will discuss private sector perceptions about what joint business planning may take place during the merger review period without becoming illegal "gun jumping" and the implications of concerns with "gun jumping."
Before we proceed, I will focus briefly on my view of how the Commission should treat efficiencies claims. The government once treated efficiencies as a reason to block a merger. Indeed, that position was taken at the Commission as recently as 1974.(2) We've come a long way, however. Modern merger analysis is much more sensible about efficiencies. The 1997 revision to the Merger Guidelines elaborated on the importance of efficiencies and offered some guidance on how efficiencies would be evaluated.
Efficiencies claims, however, have not flourished. I believe that, at least in part, this is because of a misunderstanding of the role of efficiencies. Many apparently believe that, practically speaking, efficiencies count only when the merger is otherwise determined not to be anticompetitive. Although I have written that the government has remained too hostile to efficiency claims, especially in court, it is not that hostile. Efficiencies can matter, even when there is basis for concern. Of course, the more likely and substantial are the likelihood of anticompetitive effects, the more likely and substantial must be efficiencies to overcome the presumption of anticompetitive effects.
A related misreading of the Guidelines is to overemphasize the structural presumptions. The Guidelines do not state and enforcement policy has never been since the 1982 Guidelines that a high HHI plus a significant delta is dispositive evidence of anticompetitive effects. Rather, a high HHI and significant change in HHI in a properly defined market, and the presence of barriers-to-entry, provides a prima facie case. This prima facie case can be rebutted by the absence of a viable factually supported theory of anticompetitive effects. Again, the strength of the affirmative case matters - i.e., 2-to-1 or 3-to-2 mergers in well-defined markets protected from entry are likely to pass the anticompetitive theory test simply because of the very low number of competitors. In other circumstances, however, efficiencies can be a significant component of the rebuttal of the prima facie case.(3) For example, in a 4-to-3 merger for which the viability of an anticompetitive theory is questionable, a demonstration of likely and significant efficiencies should lead to a decision not to challenge the merger. Last year, the Commission voted to close its investigation of the proposed merger of the third- and fourth-ranked drug wholesaling companies - AmeriSource Health Corporation and Bergen Brunswig Corporation. In a public statement, we concluded there was insufficient evidence to support a theory of competitive harm, including a lack of evidence that either of the merging firms had contributed significantly to the ongoing trend of decreases in drug wholesaling prices or that the resulting industry structure likely would lead to price increases or prevent further price reductions. We also noted that based on our review of the efficiencies, the proposed transaction likely would give the merged firm sufficient scale to allow it to become more cost-competitive with the two leading firms and to invest in the value-added services customers desired. Further, we believed that the combined firm could initiate these improvements more rapidly than either could do individually, and that this timing advantage would be significant enough to constitute a cognizable merger-specific efficiency.
One source of confusion about the role of efficiencies comes from the litigated cases. Generally, the courts have placed more weight on structural presumptions than do the Guidelines or actual enforcement policy. For example, in Cardinal Health(4) the court appeared to have relied principally on the presumption that increases in concentration would lead to higher prices. There were also significant customer complaints, although the court did not appear to weigh these heavily. Despite both acknowledging substantial efficiencies and recognizing the lack of strong proof of price effects, the court granted the injunction the Commission sought. When the government loses in court, the basis of the decision has generally been deficiencies in the evidence supporting the government's allegations of market definition or of entry barriers rather than the viability of a theory of anticompetitive effects.
An important decision that may not be properly understood is the so-called "Baby Food" case.(5) The critical issue in that case was whether the merger was a 3-to-2 merger of head-to-head competitors (or a 2-to-1 merger of competitors competing vigorously for shelf space) or instead, a transaction that would actually enhance competition by combining two weak brands into one that could at last challenge the dominance of Gerber. If the evidence supported the 3-to-2 head-to-head competitor characterization (or the 2-to-1 competitors for shelf space characterization, which would require some further elaboration), the structural presumptions, rightfully, would have likely trumped, at the preliminary injunction stage, what was a solid and substantial efficiency claim.(6) The parties lost, in part, because the district court judge ignored both antitrust economics and relevant precedent, and did not even allow the substantial customer testimony supporting the merger, let alone give that testimony proper weight. Lacking such evidence, the D.C. Circuit found that the record did not sufficiently rebut the 3-to-2 or 2-to-1 structural presumptions on appeal.
The misunderstanding of the role of efficiencies in the Guidelines, in prosecutorial decisions, and in court decisions has led some antitrust attorneys to advise their clients not to make the effort necessary to put forward their best efficiencies case. On the Commission side, the dearth of sound, factually-supported efficiencies presentations leads us usually to reject the efficiencies that are claimed. When the parties present back-of-the-envelope calculations, or advance claims of efficiencies with insufficient support, the staff will not accept them - and understandably so. Although this may give the staff a reputation for not welcoming efficiencies arguments, the only deserved reputation is one for rejecting poorly developed efficiencies arguments.
The dilemma is obvious - parties don't bother giving us good material, and without good material, we don't believe an efficiencies argument. It's the classic "chicken and egg" problem. The antitrust bar should know, however, that internally, we take substantial, well-documented efficiencies arguments seriously.(7) And we recognize that mergers can lead to a variety of efficiencies beyond reductions in variable costs.
Counsel should also bear in mind that efficiencies can be important in cases that result in consent decrees. Presentation of credible efficiencies claims can lead to a settlement that preserves competition while allowing the parties to achieve most, if not all, of the efficiencies they believe will flow from the merger.
I want to encourage the presentation of solid, credible efficiencies evidence. I also want to reassure antitrust counsel that such evidence will be taken seriously. That requires some leap of faith from counsel, but the Commission cannot move first in this area. We necessarily take the arguments as presented to us - although we evaluate them independently. We do not make them up for the parties. As Commissioner Leary recently detailed, when the arguments presented to us are strong, we will give them detailed attention.(8)
In sum, efficiencies should sometimes be an important and substantial component of the parties' presentations to the Commission. We will take efficiencies seriously. In turn, we expect that parties will present efficiencies claims with enough evidence to allow us to evaluate their validity. I do not expect that substantial efficiencies studies will be presented in very many cases. I do hope that they occur with more frequency than current practice. Indeed, in four years as a Commission official, I have seen serious efficiencies claims made only a few times. I encourage the bar to do better. Solid efficiency presentations will better enable the Commission to identify and forego challenging those mergers with bona fide efficiencies that benefit consumers.
1. See, e.g., Timothy J. Muris, The Government and Merger Efficiencies: Still Hostile After All These Years, 7 Geo. Mason L. Rev. 729 (1999).
2. See Ash Grove Cement Co., 85 F.T.C. 1123, 1148 (1974) (initial decision).
3. In 1980, I concluded that nontrivial efficiencies should overcome the structural presumptions prevalent at that time, i.e., that predicted anticompetitive effects would result from the typical mergers then challenged, which were at most eliminating one competitor from industries with many competitors. See Timothy J. Muris, The Efficiency Defense Under Section 7 of the Clayton Act, 30 Case W. Res. L. Rev. 381 (1980). Because we no longer challenge such mergers, current efficiency claims will need to be stronger.
4. Federal Trade Comm'n v. Cardinal Health, Inc., 12 F. Supp. 2d 34 (D.D.C. 1998).
5. Federal Trade Comm'n v. H.J. Heinz, Co., 116 F. Supp. 2d 190 (D.D.C. 2000), rev'd, 246 F.3d 708 (D.C. Cir. 2001). I consulted with Heinz during the litigation.
6. Chairman Robert Pitofsky stated in an April 2001 interview with BusinessWeek "[w]e paid attention to efficiencies in the baby-food case. We just didn't think they were adequate to [justify a merger in an industry with just three companies.]" Interview available at <http://www.businessweek.com/magazine/content/01_16/b3728088.htm>. I also have written that in a 3-to-2 merger, efficiencies are unlikely to be sufficient to prevail at the preliminary injunction stage. See Muris, supra note 1, at 743, 746 n.96, & 749 n.121.
7. Commissioner Leary has stated that a factor that led him to support a complaint in the "Baby Food" case, FTC v. Heinz, was his "initial reservations" about the parties' efficiency claims. Significantly, however, his reservations were fact-based (questions about merger specificity and the weight to be accorded particular claimed savings); they did not reflect a general antipathy toward efficiencies arguments. Indeed, Commissioner Leary emphasized that, had he found the efficiencies claims cognizable, he "would not have required a separate demonstration that the claimed efficiencies would be 'passed on' to ultimate consumers. . . . It is fair to assume generally that cognizable efficiencies will ultimately [benefit consumers]." Thomas B. Leary, An Inside Look at the Heinz Case, 16 ANTITRUST 32, 33 (Spring 2002) (adapted from remarks delivered before the Association of the Bar of the City of New York, Dec. 4, 2001), also available at </speeches/leary/babyfood.htm>.
8. In a speech last month before the 2002 ABA Antitrust Section Fall Forum, Commissioner Leary underscored the great weight the Commission will give to plausible efficiencies arguments. He stated that "the [federal antitrust] agencies today regularly clear mergers without requiring that plausible efficiencies be quantified, absent very high concentration levels or other factors that raise particular concerns. Also, likely efficiencies also can serve as a plus factor to help resolve close cases unrelated to concentration." Thomas B. Leary, "Efficiencies and Antitrust: A Story of Ongoing Evolution," Remarks Delivered to the ABA Section of Antitrust Law, 2002 Fall Forum, Washington, DC (Nov. 8, 2002), available at </speeches/leary/efficienciesandantitrust.htm>.