Antitrust Reframed: What It Means For These Mergers

Out with the old, in with the older. That modified expression is probably the best way to comprehend antitrust policy and enforcement in today’s America. It fits because regulators and several politicians are currently attempting to unravel over 40 years of antitrust precedent and replace it with an early twentieth-century approach. If successful, the new (old) paradigm would reframe antitrust policy and enforcement as a political and social tool, in addition to an economic one.

Several inroads have already been made towards this end. At the outset of his administration, President Biden appointed antitrust reformers to key positions and announced policy initiatives to expedite change among policymakers. In turn, these efforts have already resulted in several merger challenges that would have otherwise been a nonissue in the past. Lawmakers are also leading change in the field of antitrust. There is currently bipartisan support between both chambers of Congress to combat what many consider to be monopolies and oligopolies controlling digital platforms.

Against this backdrop, the Microsoft Corp. (MSFT)/Activision Blizzard, Inc. (ATVI), Amazon.com, Inc. (AMZN)/iRobot Corp. (IRBT), and Amazon/1Life Healthcare, Inc. (ONEM) mergers are unlikely to receive FTC approval (there is already a rumor circulating the FTC is contemplating a challenge against the former, and the latter two received a second request despite nonexistent product market overlap between the merging parties). Assuming the FTC challenges either, the parties will have to decide whether to litigate with the government in court.

Unfortunately, the litigation route, while it appears compelling considering past precedent, is risky given antitrust is historically amenable to evolving theories of harm, as well as the potential for deferential treatment for the executive branch’s interpretation of antitrust laws.

Therefore, it would be prudent to avoid a long arbitrage strategy in these merger opportunities.

U.S. Antitrust History and Interpretation

In order to understand the state of antitrust today and its implication for merger review and enforcement, one must possess a general understanding of its history.

The Sherman Act, the Clayton Act, and the Federal Trade Commission Act are the bedrock of U.S. antitrust law. Enacted in 1890, the Sherman Act was America’s first antitrust law. The Act set out “to protect trade and commerce against unlawful restraints and monopolies” at a time when America was experiencing rising concentrations of market power that allowed individuals and corporations to dominate entire sectors of the U.S. economy (think Standard Oil and John D. Rockefeller. This period is also known as the Gilded Age of American history).

Years later, in 1914, Congress passed both the Clayton Act and FTC Act. The former supplemented and strengthened the Sherman Act by addressing, among other antitrust issues, mergers and acquisitions. The latter created the agency tasked with enforcing federal antitrust laws. (Today, the FTC and the U.S. Department of Justice-Antitrust Division jointly enforce U.S. antitrust laws.)

Early policymakers and courts subscribed to economic structuralism, a market structure-based approach to antitrust. Structuralists hold the view that monopolistic and oligopolistic market structures promote anticompetitive behavior by:

• enabling harmful coordination with greater ease and subtlety;
• increasing barriers to entry; and
• making it easier to raise prices and reduce quality and service.

Because concentrated market structures cause societal harm, structuralists believe the goal of antitrust should be to preserve small businesses by limiting business size and concentration. Between the late nineteenth century and 1970s, regulators and courts applied the structuralist approach to both horizontal and vertical mergers alike.

Then, starting in the 1970s, antitrust experienced a dramatic shift away from economic structuralism. Instead of preserving small business, the goal of antitrust was suddenly interpreted as a consumer welfare prescription (i.e., an otherwise anticompetitive merger should be considered procompetitive if it has a beneficial or neutral impact on consumers and prices). This Chicago School philosophy differs from economic structuralism in that it is premised on the notions that industries have low barriers to entry, markets are perfectly competitive and actors behave rationally to maximize profits.

Accordingly, adherents to the Chicago School seldom find horizontal mergers as anticompetitive and believe vertical mergers are inherently competitive. This last point is made remarkably clear in the FTC and DOJ’s jointly published 1982 Merger Guidelines. The 1982 Merger Guidelines had very little concern for vertical mergers, stating that “non-horizontal mergers are less likely than horizontal mergers to create competitive problems.” This was a radical departure from the 1968 Merger Guidelines that considered vertical merger essentially equal to horizontal mergers when it came to competitive concerns.

Since finding its way into American jurisprudence and U.S. policy, the Chicago School has entirely altered the frame in which regulators and courts view antitrust problems. Under the consumer welfare approach, the U.S. did not challenge a single vertical merger in court from the mid-1970s through 2018, when the DOJ unsuccessfully challenged the merger between AT&T and Time Warner.

Paradigm Shift

Despite the Chicago School’s entrenched position in antitrust thought and policy for the last 40 years, the Biden Administration and several members of Congress want to reframe interpretation and application of antitrust in light of new market realities of the digital age. According to President Biden’s 2021 Executive Order on Promoting Competition in the American Economy:

a small number of dominant Internet platforms use their power to exclude market entrants, to extract monopoly profits, and to gather intimate personal information that they can exploit for their own advantage. Too many small businesses across the economy depend on those platforms and a few online marketplaces for their survival.”

Following this concern, the president ordered the FTC and DOJ to:

enforce the antitrust laws to meet the challenges posed by new industries and technologies, including the rise of the dominant Internet platforms, especially as they stem from serial mergers, the acquisition of nascent competitors, the aggregation of data, unfair competition in attention markets, the surveillance of users, and the presence of network effects.

President Biden also appointed Lina Khan, Jonathan Kanter, and Tim Wu – three neo-structuralist reformers – to head the FTC, DOJ-antitrust, and as White House advisor on competition policy, respectively. Since accepting the appointments at the FTC and DOJ, Khan and Kanter have been very active in reshaping antitrust M&A policy and enforcement.

The most consequential action taken by the agencies to-date is the FTC withdrawal from the jointly published 2020 Vertical Merger Guidelines. The FTC cited flaws in the guideline’s approach – the Chicago School approach that had been used to assess vertical mergers for decades – as its reasoning behind the withdrawal. The FTC and DOJ are currently working together to publish new guidelines that will no doubt be more restrictive than previous guidance. Public comments are calling for the new guidelines to include presumptions that could stifle vertical M&A for certain digital ecosystem and platforms (e.g., Microsoft and Amazon, among others). A draft of the new guidelines is expected to be available by year-end, or early 2023, and will likely be detrimental to pending vertical M&A because courts will likely to defer to the guidelines when deciding cases.

Both the FTC and DOJ have also stepped up their challenges of vertical mergers over the last year. Since 2021, the agencies have brought 5 significant vertical merger challenges:

1. Nvidia/ARM Ltd. – parties abandoned after FTC challenged the merger.
2. Lockheed Martin/Aerojet Rocketdyne – parties abandoned after FTC challenged the merger.
3. Illumina, Inc./Grail, LLC – ALJ found in parties’ favor after FTC challenged the merger. FTC has appealed the decision.
4. UnitedHealth Group Inc./Change Healthcare Inc. – D.C. district court denied DOJ’s request to enjoin the merger after finding that the government did not meet its burden of proving that the merger was likely to substantially lessen competition.
5. Meta Platforms, Inc. (META)/Within Unlimited, Inc. – FTC has challenged the merger. The case is pending.

The Meta/Within challenge is particularly interesting considering the transaction is a mere $400m (small potatoes in the big-tech space).

It is not just the executive branch actively working to reframe U.S. antitrust. Members of Congress have also been actively working on legislation to make it difficult for digital platforms to abuse market power. Republican Chuck Grassley and democrat Amy Klobuchar, along with several bipartisan co-sponsors, introduced the American Innovation and Choice Online Act, which would enhance the ability of regulators and states to challenge, inter alia, mergers and restore competition in digital markets. This is just one of several pieces of antitrust legislation working its way through Congress.

From Policy To Legal Precedent

Reframing antitrust policy is one thing, but doing so in the court, with decades of legal precedent, is another. This is because the judiciary adheres to stare decisis, the legal doctrine that rests on the idea that “cases should be decided on the basis of legal principles articulated in earlier cases rather than on the basis of novel legal doctrine in each instance.” Stare decisis will present a challenge for the executive branch in its quest to redefine what is considered anticompetitive under antitrust laws. The government will have to persuade courts to toss out, or at least modify, the consumer welfare approach to antitrust, especially in vertical merger cases. As evidenced in the UnitedHealth/Change merger, this is a difficult task.

With that said, courts have made clear that antitrust promotes a common law approach whereby the law includes “the potential to grow and cover ever-changing realities.” So, who is to say courts will not feel compelled to overturn a past precedent in order to adapt the rules to “meet the dynamics of present economic conditions”?

Ultimately, concern of past precedent will fall away once the new merger guidelines go into effect. This is because of the legal doctrine known as Chevron deference. The Chevron rule compels courts to defer to administrative agencies when it comes to statutory interpretation, so long as the rule meets certain criteria. The upcoming merger guidelines set forth by the DOJ and FTC would likely receive such deference.

Conclusion

As an arbitrageur, at the moment it would be prudent to avoid long-only merger arbitrage strategies involving big-tech companies operating in monopolistic or oligopolistic markets. While the Microsoft/Activision and Amazon/iRobot and 1Life mergers appear competitive from a purely economic point of view, they do not from a political and social one. Therefore, they are likely to be challenged in due course. Assuming a challenge does occur, the parties will either abandon their respective deals, or litigate in court. And because of the shifting antitrust policy and interpretation underway, it is a huge gamble to think the parties will ultimately prevail in court. Therefore, it is recommended to sit on the sideline of aforementioned mergers.