Merger Mysteries

Eakinomics: Merger Mysteries Jennifer Huddleston has a very nice new piece entitled “Mergers and Acquisitions Amid Calls for Increasing Antitrust Enforcement.” As the title suggests, there has been increased scrutiny of mergers, both in the United States and abroad. In the United States, competition has been guided by the consumer welfare standard – mergers are only blocked when there is a clear detriment to competition such that it harms consumers. The rise in scrutiny is troubling because competition policy outside the United States has not been tethered to the welfare standard and scrutiny in the United States has increasingly appeared to be motived by the simple notion that bigger must mean bad. Indeed, some U.S. policymakers (notably Senators Amy Klobuchar and Josh Hawley) have explicitly called for abandoning the standard in favor of more scrutiny and changing standards that would effectively prevent certain types of mergers such as those involving companies of a certain size. All of this scrutiny is certain to stop mergers harmful to consumers, and that is good. But it raises the real risk of also stopping those that are likely to provide a net benefit. Huddleston’s piece is a nice exposition of this risk. But what really caught my eye was the increasing scrutiny of vertical mergers. “Vertical mergers occur when two companies that participate in different but complementary parts of an industry merge into one company. For example, an online marketplace merging with a payment processor, as eBay and PayPal did in 2002 before later splitting again, is a vertical merger.” Since the two companies don’t compete, scrutinizing and blocking a vertical merger should be extremely rare. Consider a recent example cited by Huddleston – the acquisition of GRAIL by Illumina. As Buffalo Springfield put it in my youth: “There's something happening here. But what it is ain't exactly clear.” To begin, GRAIL was originally part of Illumina, but got spun off. Now, the two companies simply want to restore the original status quo. If the merger was harmful to consumers, why did the Federal Trade Commission (FTC) not take action to begin with, but is now suing to stop the merger? Second, it is a vertical merger – Illumina does genetic sequencing and GRAIL makes tests for cancer – with no first-order obvious competitive implications. Why the scrutiny? Third, the FTC is about to drop its suit because the merger is being investigated by the European Commission (EC). That’s bad, because the EC is not guided by the consumer welfare principle and the FTC appears to be outsourcing its competition policy to the EC. It’s worse because the FTC wants to reserve the right to re-file a suit to stop the merger after the EC has completed action. This also makes no sense. If the merger is harmful, that should be decided now on the basis of evidence and any damage stopped in its tracks. If it is not, why delay the benefits that would accrue to consumers? The whole affair puts a real emphasis on Huddleston’s conclusion: “Antitrust enforcers have the difficult task of applying the appropriate level of scrutiny to mergers and acquisitions in order to ensure a competitive market that benefits consumers. Increased scrutiny should be used in a principled way to stop mergers that are likely to be harmful to consumers and not simply to result in larger companies or more concentration. Recently, policy proposals and agency actions indicate a shift in the attitude toward mergers and acquisitions that may neglect to recognize the benefits that mergers can have for consumers.”