By Robert L. Magielnicki
On April 8, 1997, the Antitrust Division of the Department of Justice and the Federal Trade
Commission (each individually, the "Agency," and collectively, the "Agencies")
issued revisions to the efficiencies section of their joint 1992 Horizontal Merger Guidelines. Under the
Guidelines, the consideration of efficiencies is part of a five step analysis which these enforcement
authorities use in determining whether to challenge a merger.
1
Prior to the recent Revisions, the section on efficiencies in the Merger Guidelines was only two
paragraphs in length and provided little guidance as to the role of efficiencies in evaluating a
proposed merger. The discussion stated that some mergers that the Agency otherwise might challenge may
be reasonably necessary to achieve significant net efficiencies. Among the efficiencies recognized by
the Guidelines were "achieving economies of scale, better integration of production facilities,
plant specialization, lower transportation costs, and similar efficiencies relating to specific
manufacturing, servicing, or distribution operations of the merging firms." Although the Agency
may also consider claimed efficiencies resulting from reductions in general selling, administrative and
overhead expenses, the Guidelines warned that these types of efficiencies may be difficult to
demonstrate. In addition, the Guidelines stated that the Agency will reject claims of efficiencies if
comparable savings can reasonably be achieved through other means. The Guidelines discussion of
efficiencies closed with the warning that the "expected net efficiencies must be greater the more
significant are the competitive risks." The recent Revisions greatly expand the Guidelines
discussion of efficiencies and make clear that the Guidelines are most interested in efficiencies which
are passed on to the customer, such as those which result in lower prices, improved quality, enhanced
service, or new or improved products. Under the Revisions, the Agency will only consider
"merger-specific efficiencies," which are those efficiencies likely to be accomplished with
the proposed merger and unlikely to be accomplished in the absence of the proposed merger.
Since efficiencies are difficult to verify and quantify, the Revisions provide that the merging
firms must substantiate their efficiency claims so that the reviewing Agency can verify: (1) the
likelihood and magnitude of each claimed efficiency; (2) how and when each would be achieved; (3) how
each would enhance the merged firm's ability and incentive to compete; and (4) why each claimed
efficiency would be merger-specific. The reviewing Agency will consider "cognizable
efficiencies," which are defined as "merger-specific efficiencies that have been verified and
do not arise from anticompetitive reductions in output or service."
With regard to the potential impact of cognizable efficiencies on the reviewing Agency's assessment
of a merger, the Revisions state: The Agency will not challenge a merger if cognizable
efficiencies are of a character and magnitude such that the merger is not likely to be anticompetitive
in any relevant market. To make the requisite determination, the Agency considers whether cognizable
efficiencies likely would be sufficient to reverse the merger's potential to harm consumers in the
relevant market, e.g., by preventing price increases in that market. . . .
2
The Revisions note that the greater the potential adverse competitive effects of a merger, the
greater the cognizable efficiencies must be in order to offset them. The Revisions also note that
certain types of efficiencies are more likely to be cognizable and substantial than are others. They
cite efficiencies resulting from shifting production among facilities that were formerly owned
separately as an example of efficiencies likely to be susceptible to verification, merger-specific and
substantial. Claimed efficiencies relating to such things as research and development are generally
less susceptible to verification and may be the result of anticompetitive output reductions. In
addition, claimed efficiencies relating to procurement, management or capital costs are less likely to
be merger-specific or substantial. The Revisions advise that, in the Agencies' experience, efficiencies
are most likely to make a difference in merger analysis when the likely adverse competitive effects,
absent the efficiencies, are not great.
In conclusion, the Revisions are useful because they provide additional guidance on how to approach
the Antitrust Division or FTC with an efficiencies argument regarding a proposed merger or acquisition,
particularly as to what kinds of efficiencies are likely to be considered by the reviewing Agency and
what evidence the parties should submit to demonstrate the claimed efficiencies. However, the Revisions
still leave a great deal to the judgment of the reviewing Agency and it appears unlikely that they will
have a major impact upon the outcome of an Agency's merger review. As Chairman Pitofsky of the FTC has
commented:
We do not believe that they will dramatically alter the outcome of our current merger enforcement
policy. At most, they will make a difference in a few close cases.
Nevertheless, in addition to providing beneficial guidance, the Revisions are significant in that
they do recognize that efficiencies may be sufficient to overcome anticompetitive concerns regarding a
merger, and they provide potentially useful guidance to courts as to how to deal with efficiency claims
in merger litigation.
Footnotes. 1In conducting its analysis, the
Agency assesses: (1) whether the merger would significantly increase concentration in a relevant market;
(2) whether the merger raises concerns about potential adverse competitive effects; (3) whether new
entry would be sufficient to deter or counteract the potential anticompetitive effects; (4) any
efficiency gains that cannot be reasonably achieved through other means; and (5) whether, but for the
merger, either party would be likely to fail, causing its assets to exit the market. © 1999, Kutak Rock LLP. All Rights Reserved. Please see our
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2The revision provides that in analyzing claimed efficiencies, the
Agencies will focus on short-term efficiencies and will give less weight to claimed long-term
efficiencies because they are "less approximate and more difficult to predict.
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