16. How does the Clayton Act regulate “mergers and acquisitions”?
The Clayton Act § 7 makes certain mergers and acquisitions illegal. Basically, one company cannot acquire another company’s stock or assets (or otherwise combine with another entity) if the combination is reasonably likely to substantially lessen competition or tend to create a monopoly. Such activity may also be illegal under Sherman Act § 2 if such activity results in a company acquiring monopoly power following the transaction. Mergers are generally classified as horizontal, market extension, vertical, or conglomerate.
⁃ Note: Originally the Clayton Act only prohibited horizontal mergers. The Celler-Kefauver Amendment to the Clayton Act covers vertical mergers that lessen competition.
• Horizontal Merger – A horizontal merger combines competitors or two businesses in the same industry. To determine whether such a merger is anticompetitive, begin by defining the product and geographic market. These two factors define the market share of each entity. If the merger will result in less competition, it may be illegal. The court may examine any justifications for the anticompetitive activity, such as:
⁃ procompetitive results of the merger, or the offsetting pro-competitive market responses, such as new competitors entering the market; and
⁃ gains in the market efficiency.
• Vertical Merger – A vertical merger brings together companies that are in the same chain of commerce. That is, it brings together buyers and suppliers. Such a merger may be illegal where it will:
⁃ erect barriers to entry for competitors,
⁃ promotes collusion, or
⁃ allows the companies to evade regulations.
In reviewing a vertical merger, a court may consider the pro-competitive attributes of the merger.
• Conglomerate Merger – This type of merger is between non-related businesses. These businesses do not compete or operate in the same chain of commerce. This type of merger is illegal when it effectively makes it difficult for new competitors to enter the market.
⁃ Discussion: How do you feel about the regulation of mergers as potentially anticompetitive activity? Do you think the factors listed above are adequate to demonstrate an anticompetitive effect on the market? What pro-competitive justifications might justify some of these mergers?
⁃ Practice Question: ABC Corp is a manufacturer of televisions. 123 Corp is a primary supplier of glass used in HD televisions across the market. ABC Corp buys all of its glass from 123 Corp. 123 Corp also sells to XYZ Corp, the largest competitor to ABC Corp in the television manufacturing space. ABC Corp needs to spend any excess corporate cash and is considering a buyout of 123 Corp or XYZ Corp. If the FTC decides to challenge either of these mergers, what factors would the court apply in making a determination of legality?