How the FTC Conducts Merger Investigations and Reviews

How the FTC Conducts Merger Investigations and Reviews

When two companies want to merge, they must first notify the Federal Trade Commission (FTC) and Department of Justice (DOJ) before completing the deal. The agencies then review the proposed merger to see if it will hurt competition and consumers. Here’s an overview of how the FTC conducts its merger investigations and reviews.

The Hart-Scott-Rodino Act

Most mergers must be reported to the FTC and DOJ under the Hart-Scott-Rodino (HSR) Act. This law requires companies to file notification forms and wait a period before completing mergers over a certain size. The waiting period allows the agencies to investigate deals that could be anticompetitive.

The HSR threshold changes yearly based on GNP numbers. For 2023, it’s $101 million. So if the merging companies have sales/assets above $101 million, they must file HSR forms and observe the waiting period before merging.

The Waiting Period

After filing HSR forms, the companies must wait 30 days before completing their merger. This pause lets the FTC and DOJ do an initial review. If needed, the agencies can issue a “Second Request” for more info to extend the waiting period.

With a Second Request, the waiting period extends until 30 days after the companies comply. So it creates more time for an in-depth investigation. Second Requests are rare though – only about 2-3% of reported deals get one.

Early Termination

If a merger clearly won’t harm competition, the FTC can grant “Early Termination” before the initial 30-day wait ends. This lets the companies complete the deal quickly. About 40% of reported mergers get Early Termination.

Preliminary Review

After a deal is reported, FTC lawyers and economists do a preliminary review. They analyze market shares, industry data, and other factors to see if the merger raises competition concerns. If it looks problematic, they’ll investigate further.

Second Request Investigations

If the FTC has concerns after the initial review, it will issue a Second Request. This requires the companies to provide more information like documents, data, and deposition testimony. It allows for an in-depth investigation.

The FTC will interview industry participants to understand competitive dynamics. It also does economic modeling to predict if the deal may increase prices or reduce innovation. Second Request investigations take 5-6 months on average.

Settlements

If the FTC believes a merger will substantially lessen competition, it may negotiate a settlement. The companies agree to divest assets or modify the transaction to resolve concerns. This avoids litigation.

For example, the FTC required divestitures from Kroger and Albertsons for their merger to proceed. The companies had to sell stores in overlapping markets to preserve competition.

Administrative Litigation

If the FTC can’t reach a settlement, it can block a merger through administrative litigation. An FTC judge will hold a trial to determine if the deal is illegal. This process avoids federal court.

In 2021, the FTC sued to block Illumina’s acquisition of Grail before an administrative judge. The companies abandoned the deal during litigation.

Federal Court Litigation

The FTC can also sue to stop mergers in federal court. It will ask the court for a preliminary injunction to block the deal pending litigation. If the FTC wins at trial, the court can order divestitures or permanently ban the merger.

In 1998, the FTC sued and blocked the merger of Staples and Office Depot. The court ruled the merger would reduce competition in office supply superstores.

Coordinating with DOJ

The FTC and DOJ have dual jurisdiction over merger enforcement. They divide up reviews based on experience and resources. The agencies have a clearance process to assign each merger to one or the other.

The FTC and DOJ coordinate investigations when both review a merger. They share information under waivers of confidentiality that merging parties must sign.

International Cooperation

The FTC cooperates with international enforcers reviewing the same mergers. They coordinate document requests, share information, and align remedies when possible.

The FTC has cooperation agreements with competition agencies in the EU, Canada, Mexico, Japan, Korea, Brazil, and other jurisdictions.

Merger Remedies

When anticompetitive concerns are identified, the FTC seeks remedies like:

• Structural relief – divesting assets like production facilities, IP rights, or brands
• Conduct relief – agreements limiting the combined firm’s post-merger conduct
• Access remedies – allowing rivals access to infrastructure or technology

Structural relief is preferred because it creates a permanent change in market structure. Conduct remedies are viewed as less effective and more difficult to enforce.

Key Principles

The FTC follows certain principles when reviewing mergers:

• Protect future competition – nascent rivals shouldn’t be eliminated
• Review non-price effects like reduced innovation
• Account for bargaining leverage and countervailing power
• Understand varied industry structures
• Require persuasive evidence for efficiency claims

Public Comments

The FTC allows public comments on mergers under review. Consumers, competitors, suppliers, and other stakeholders can submit their views on a deal.

Public comments help the FTC fully assess the merger’s impact. They provide valuable market intelligence for investigations.

Transparency

The FTC aims to be transparent about its merger review process. It holds public workshops, issues policy guides, and publishes closing statements explaining decisions.

Increased transparency helps companies understand the FTC’s approach and strengthens public confidence in outcomes.

That covers the key aspects of how the FTC conducts merger reviews! Let me know if you need any clarification or have additional questions.