ICYMI: Experts Discuss Economic and Legal Perspectives on Merger Control and Dynamic Markets
Coinciding with the American Bar Association’s 71st Antitrust Spring Meeting, on March 29 the Computer and Communications Industry Association (CCIA) hosted an event to discuss current trends in merger control in dynamic markets. The panel discussion focused on three main issues. First, in light of increased antitrust merger scrutiny, what are some of the key enforcement actions and trends in the United States and internationally? Second, what are the necessary tools to assess the competitive effects of mergers in dynamic markets? And third, do the current antitrust enforcement and policy tools enable enforcers to successfully challenge mergers in dynamic markets where necessary? Should there be any changes to the merger rules?
Trends In Merger Enforcement
Krisztian Katona, CCIA’s Vice President of Global Competition and Regulatory Policy who also served as the program’s moderator, started the discussion by asking the panelists about competition concerns regarding acquisitions in dynamic markets, specifically potential and nascent competition issues, so-called “killer acquisitions,” and any empirical evidence to support any of those concerns. David Teece, executive chairman of the Berkeley Group, summarized why getting merger regulation right is so crucial: “I think it’s probably true to say that mergers are actually more important in the industrial economy in terms of being able to achieve positive outcomes for society and eventually for consumers.” As part of his remarks focusing on the importance of recognizing different types of innovation, Teece argued that more research must be conducted as “we don’t have this understanding of how digital markets are different from the standard industrial market.” Specifically, he stated that “in order to understand nascent competitors and nascent competition, you really have to understand the world of venture capital and you have to understand the probabilities of success of companies and what it takes to be successful.”
Regarding merger practice and the agencies’ “litigation-readiness” as well as the Federal Trade Commission’s (FTC) recent adjustments to some of the merger control procedures, Taylor Owings, Partner at Baker Botts, explained that these new developments affect how to advise clients looking to undertake a merger especially as
“the typical decision whether to build, borrow, or buy is sort of being met with skepticism right now, I think by the agencies.”
Moving to international developments, one overarching trend that UK professor of law and economics at Queen Mary University, Ioannis Kokkoris, noted is that various international competition authorities seem to be trying to outdo each other in their efforts to scrutinize mergers. “There is, in my view, a slightly unhelpful competition between competition authorities: who is best, who is more active, who is more creative or interventionist,” Kokkoris said.
The UK’s competition authority, the Competition and Markets Authority (CMA), hit a new record last year in merger challenges, and much of this activity focused on dynamic markets. In 2022 for the first time, the CMA actually had more phase one cases that were referred for either an in-depth phase two investigation or were abandoned or cleared with remedies than those that actually had been cleared unconditionally. Asked by Katona about recent trends in international convergence and divergence, Kokkoris added that there seems to be a lot of convergence when it comes to theories of harm, but much less convergence when it comes to procedures and remedies, which can have a significant impact on merger activity.
Another important trend is an increased level of scrutiny of consummated mergers. For example, in light of the European Court of Justice’s recent Towercast decision member state authorities will likely start reviewing consummated mergers, as also evidenced by a recent investigation of the Belgian Competition Authority. Kokkoris highlighted that “we are seeing an expansion in the intervention in Europe.” In this regard, Douglas Melamed, scholar in residence at Stanford Law School, said that “there are real problems with the post-consummation cases. One, the merging parties don’t have the certainty that you would like economic actors to have… Secondly, you have remedy problems. Obviously, it’s very hard to get a remedy when the eggs have been scrambled.”
Assessing the Competitive Effects of Mergers in Dynamic Markets
Turning to relevant developments in terms of efficiencies and tools to assess the competitive effects of mergers in dynamic markets, Taylor Owings stated that it is widely expected that the new draft of the FTC and the Department of Justice (DOJ) merger guidelines is going to express a lot more skepticism toward efficiencies than has been the standard since at least 1984. She highlighted that part of the problem now is the lack of studies that quantify efficiencies merging parties have gained through mergers. She said the real measure of efficiency is the cost of inputs and the amount of output, but those are difficult to quantify. “This isn’t something that you can just get from a stock event study or other publicly available information,” Owings said.
Meanwhile, Teece questioned the value of measuring efficiencies as it comes from the industrial world where there is limited innovation. “The notion of dynamic efficiency is an oxymoron,” he said. Teece went on to explain that innovation and efficiency are usually enemies of each other. “So I would prefer the term dynamic effectiveness, not dynamic efficiency. It’s because if you pursue efficiency, you’re never going to get innovation,” Teece said. Current antitrust rules were put in place to encourage companies to innovate. Previous enforcement and legal scholars have focused on whether the nascent competitor was really a threat to the incumbent. But others have since argued that while that criteria is relevant it is not the only factor that should be reviewed. Panelists noted that regulators also need to investigate whether the nascent company had a viable business model and available cash flow or venture capital funding.
Final Notes On Merger Actions
The last part of the discussion focused on analyzing whether current antitrust enforcement and policy tools enable enforcers to successfully challenge mergers in dynamic markets where necessary and if there should be any changes to the merger rules.
Doug Melamed said that while agencies have the authority to challenge already consummated mergers, “it’s probably one that they ought to use in certain situations where there’s some really good reason, new information, new developments, and bring to light something they hadn’t been able to comprehend at the time.” Melamed further noted that such a tool should be used “sparingly because the prospect that, post-consummation, challenges will be anything other than very rare, I think will have perverse incentive effects.”
The panelists noted that this is an interesting time in merger enforcement as authorities are coming up with new ideas of how antitrust enforcement can fulfill its purpose. But Melamed said it would be “unfortunate to the extent that that conversation is muddied by a desire to use antitrust to achieve non-economic objectives.”