Chapter 2. Horizontal Mergers

• Pages: 57-141

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CHAPTER II

HORIZONTAL MERGERS

A. Introduction

This chapter examines the issues raised by mergers and acquisitions

involving actual or potential horizontal competitors. In the late 1990s

and early 2000s, the telecommunications industry experienced a wave of

horizontal transactions among firms seeking to expand their size and

scope. As used in this chapter, a transaction is “horizontal” if it involves

actual or potential direct competitors — firms that currently provide, or

plan to provide, the same kind of telecommunications products or

services. The term also includes mergers among firms that compete in

the same product market but in different geographic markets — for

example, two local exchange carriers that operate in different cities at the

time of the merger. For the sake of convenience, the chapter will use the

term “merger” expansively to include acquisitions of stock or assets.

Horizontal mergers have occurred among large and small providers

of a wide range of telecommunications-related services: local exchange

carriers; domestic and international long-distance companies; providers

of Internet services, including Internet backbone services; wireless

companies; and direct broadcast satellite companies. Most of these

mergers did not raise any significant competitive issues, and the

necessary government clearances were obtained relatively quickly and

easily. But antitrust and regulatory questions raised by the remaining

horizontal transactions have taken much time and energy to address.

State and federal antitrust laws, and state and federal laws regulating

telecommunications companies, generally seek to preserve a competitive

market. As a result, courts and regulatory agencies will carefully

scrutinize horizontal mergers that potentially create or enhance market

power. That danger may arise either because the merger gives the

merged firm unilateral market power, or because the merger makes it

easier for all of the remaining firms in the market to collude or cooperate.

Courts and agencies will also take a close look at any possible

competitive benefits from the merger, i.e., will the combined entity be

able to offer goods or services the separate entities could not offer?

Horizontal mergers may have vertical aspects as well. For example,

two horizontal competitors may each produce an input into another

market, and joining their productive resources may have vertical effects

in an adjacent market. The vertical aspects of mergers are considered in

Chapter III.

58 Telecom Antitrust Handbook

This chapter first provides an overview of the relevant laws,

including federal and state antitrust laws and communications laws

enforced by federal and state regulators. The chapter then examines how

these principles are applied by antitrust enforcers, regulators, and courts,

illustrating the issues with examples from horizontal merger cases of the

last few years. Finally, the chapter considers remedies that courts and

agencies may consider to address mergers that threaten to reduce

competition.

B. Overview of Legal Standards

1. Federal Antitrust Laws Governing Horizontal Mergers

Today, the bulk of merger review — and merger litigation — in the

United States is conducted by either the Antitrust Division of the U.S.

Department of Justice (DOJ) or the Federal Trade Commission (FTC),

which share jurisdiction over federal antitrust enforcement. The

analytical framework developed and applied by these federal antitrust

agencies has become the primary focus for merger review in general,

whether conducted by one of the agencies, by a state attorney general, or

by a court. It is helpful to review the statutory scheme underlying the

agencies’ analysis.

a. The Clayton Act

The antitrust review of mergers and acquisitions is primarily

governed by Section 7 of the Clayton Act.1 As a general proposition,

Section 7, a purely civil statute, prohibits any merger, stock acquisition

or asset acquisition in which the effect of the transaction may be to

“substantially lessen competition” or “tend to create a monopoly” “in any

line of commerce or in any activity affecting commerce in any section of

the country.”2

Today, there is broad agreement among the courts and agencies on

the basic principles of merger review under Section 7.3 This, however,

has not always been the case. Early Supreme Court cases focused on

1. 15 U.S.C. § 18.

2. Id.

3. See, e.g., Thomas B. Leary, Commissioner, Federal Trade Commission,

The Essential Stability of Merger Policy in the United States, Prepared

Remarks at Guidelines for Merger Remedies: Prospects and Principles,

Joint U.S./E.U. Conference (January 17, 2002), available at www.ftc.

gov/speeches/leary/learyuseu.htm.

Horizontal Mergers 59

hindering trends toward industry concentration in their initial stages, and

were largely grounded in a generalized “big is bad” philosophy. This

approach was replaced by the rise of the Chicago School’s rigorous

economic approach to antitrust analysis, with its focus on the

implications of mergers for prices, output, and, ultimately, consumer

well-being, as opposed to abstract notions of industry structure.4

The initial step in any Section 7 case is to define the relevant product

market (or, in the parlance of Section 7, “line of commerce”) and

geographic market (or “section of the country”) implicated by the

merger.5 How the court defines the market is one of the most essential

elements of the analysis, because how “substantially” a horizontal

merger affects competition will depend on which firms are deemed to be

“competitors.”6 Markets are defined from a consumer-driven viewpoint;

the fundamental question posed by market definition tests are to what

extent products and firms are substitutes for each other, and constrain

each others’ prices.7 The “product” component of this analysis focuses

on whether consumers faced with an increase in the price of a given

product can and will switch to another product which serves much the

same function; for example, if the price of Coca-Cola rises by a

relatively small amount, will consumers switch to Pepsi? If so (within

certain ranges), Coke and Pepsi are probably part of the same product

market.8 The “geographic” component of the analysis examines the

4. Subsequently, the Chicago School’s approaches and conclusions have

been subject to a variety of critiques. However, the approach resulting

from the Chicago School’s critique of earlier merger policy — grounding

merger review in economic theory, with consumer welfare as the primary

goal — remains dominant.

5. See 15 U.S.C. § 18; see also FTC v. Swedish Match, 131 F. Supp. 2d 151,

156 (D.D.C. 2000); FTC v. Staples, Inc., 970 F. Supp. 1066, 1073

(D.D.C. 1997).

6. See Swedish Match, 131 F. Supp. 2d at 156.

7. See id. at 157.

8. The general rule when determining a relevant product

market is that “the outer boundaries of a product market

are determined by the reasonable interchangeability of use

[by consumers] or the cross-elasticity of demand between

the product itself and substitutes for it.” Interchangeability

of use and cross-elasticity of demand look to the

availability of substitute commodities, i.e., whether there

are other products offered to consumers which are similar

in character or use to the product or products in question,

as well as how far buyers will go to substitute one

commodity for another. In other words, the general