M&A

The FTC’s New Antitrust Formula

Recent decision points to a more business-friendly view of mega-mergers.
Stephen BarrNovember 7, 2001

Worried about what the government might say about a merger with a rival? Concerned that the deal might be nixed because the combination gives you too much market share? A recent decision by the Federal Trade Commission, now chaired by Bush appointee (and Reagan Administration veteran) Timothy J. Muris, could allay your concerns.

The commission’s 5-0 approval in late August of the $3 billion merger of AmeriSource Health Corp. and Bergen Brunswick Corp. set two precedents for how the FTC might go about evaluating future combinations. First, the Herfindahl-Hirschman Index (HHI) may no longer be the final word on analyzing market concentration. Second, the so-called efficiency defense may represent a more effective argument for enabling deals to go through.

The HHI is a metric for determining changes in market power based on the parties’ combined market shares. A result of more than 1,800 and an increase of more than 100 points typically raise anticompetitive concerns. The AmeriSource-Bergen deal brought the index to 2,700, with an increase of 450 points, but that was not enough to scuttle the merger — perhaps, some surmise, because Bergen’s market share had fallen in the past year.

Likewise, regulators backed the companies’ claim that combining the nation’s third- and fourth-largest prescription drug wholesalers would result in efficiencies not possible without the merger. “The proposed transaction likely will give the merged firm sufficient scale, so that it can become cost-competitive with the two leading firms and invest in value-added services desired by customers,” the FTC stated in its ruling.

What does this mean for others contemplating mergers? The ruling, says David Balto, a partner at White & Case and a former FTC policy director, “demonstrates a greater willingness to appreciate potential efficiencies and greater sensitivity to the competitive positions of potential also-rans.”

In 1998, the FTC derailed the proposed acquisitions of AmeriSource by the industry’s number-one player and of Bergen by the number-two player. But by creating a stronger number three, says Balto, “the companies make a compelling case that, but for this merger, there would not be a competitive discipline on the marketplace.”