Chapter 6. Efficiencies

• Pages: 175-201

175

CHAPTER 6

EFFICIENCIES

The debate over the appropriate role of efficiencies in merger

analysis has endured at least since Oliver Williamson first proposed that

the cost savings generated by a merger could justify otherwise

anticompetitive combinations.1 Despite general acceptance among

scholars, both the judiciary and enforcement agencies have traditionally

been less receptive, even hostile, to efficiency claims presented by

merging firms. Nonetheless, the 1997 amendment to the efficiencies

section of the Antitrust Division of the U.S. Department of Justice (DOJ

or the Division) and Federal Trade Commission (FTC or the

Commission) 1992Merger Guidelines, recent speeches by senior

officials, as well as subsequent lower court decisions, indicate that

efficiencies are beginning to achieve heightened recognition by both

courts and agencies analyzing the anticompetitive effects of mergers.

Yet there remains a fundamental debate regarding the extent to which

efficiencies should be considered in merger analysis, and, if so, how they

should be considered.2

A. Efficiencies Defined

Generally, “economic efficiency” describes an event that increases

the total value of all economically measurable assets in society.3 In the

context of a merger, efficiencies grow out of the ability of the combining

firms to “better utilize existing assets” through integration.4

1.See Oliver Williamson, Economies and an Antitrust Defense: The

Welfare Tradeoffs, 58AMER. ECON. REV. 18 (1968).

2.For an extensive discussion, see Ilene Knable Gotts and Calvin S.

Goldman, The Role of Efficiencies in M & A Global Antitrust Review:

Still in Flux?, in 2002FORDHAM CORPORATE LAW INSTITUTE:

INTERNATIONAL ANTITRUST LAW AND POLICY 201 (Barry Hawk, ed.

2003).

3.See, e.g., Joseph F. Brodley, The Economic Goals of Antitrust: Efficiency,

Consumer Welfare, and Technological Progress, 62 N.Y.U. L. REV.

1020, 1025 (1987).

4.U.S. DEP’T OF JUSTICE & FEDERAL TRADE COMM’N, HORIZONTAL

MERGER GUIDELINES (1992) [hereinafter 1992 MERGER GUIDELINES] § 4

(revised Apr. 8, 1997), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,104

176 MERGERS AND ACQUISITIONS

The two types of efficiencies most commonly recognized in merger

analysis are productive efficiencies and innovative efficiencies.5

Productive efficiencies are achieved when the merged firms are able to

reduce long-run average costs through a more cost-effective combination

of resources. Examples of productive efficiencies include achieving

economies of scale and economies of scope, superior integration of

production facilities, plant specialization, and lower transportation costs.6

The cost savings associated with productive efficiencies are generally

more susceptible to quantification than other types of efficiencies

because cost savings may be estimated reliably from available

information.

Innovative efficiencies arise when, for example, merging firms lower

costs by eliminating duplicative research and development operations or

by combining to expand the benefits of a superior technology.7 Although

the long-term benefits to consumers of innovative efficiencies may be

significant, the evidentiary problems of projecting such cost savings may

be substantial.8

Mergers also generate other savings, including managerial and

pecuniary efficiencies, such as tax and other fixed cost reductions, that

are generally treated less favorably because reductions in fixed costs are

less likely to result in lower prices to consumers and frequently may be

obtained without a merger. Managerial and pecuniary cost reductions

also are generally not considered by the agencies in evaluating the

procompetitive effects of a merger.9

and in Appendix I.

5.See, e.g., Joseph F. Brodley, Proof of Efficiencies in Mergers and Joint

Ventures, 64 ANTITRUST L.J. 575 (1996).

6.See 1992 MERGER GUIDELINES, supra note 4, § 4.

7.See Joseph Kattan, Efficiencies and Merger Analysis, 62 ANTITRUST L.J.

513, 522-23 (1994).

8.See Joseph F. Brodley, Proof of Efficiencies in Mergers and Joint

Ventures, 64 ANTITRUST L.J. 575, 581 (1996).

9.See Joseph Kattan, Efficiencies and Merger Analysis, 62 ANTITRUST L.J.

513 (1994). But see Thomas B. Leary, Commissioner, FTC, Efficiencies

and Antitrust: A Story of Ongoing Evolution, Remarks at ABA Section of

Antitrust Law 2002 Fall Forum, Washington, D.C. (Nov. 8, 2002)

[hereinafter Leary Remarks] (“whether they are called innovation or

managerial economies . . . we do not overtly take them into account when

deciding merger cases”), at www.ftc.gov/speeches/leary.htm.