The past year has seen some significant and interesting challenges brought by the federal antitrust agencies in the merger space. There has been evidence for years of the agencies’ aggressive willingness to litigate. And while 2016 certainly continued that trend, there has also been a notable evolution in the theories of competitive harm that the agencies have pursued. 

In a stark deviation from the traditional emphasis on consumer harm, as detailed in the Horizontal Merger Guidelines, both the FTC and the DOJ have pursued cases to block mergers based on potential competitive harm to large, national customers—the type of powerful, sophisticated customers that had previously been considered able to defend themselves against post-merger price increases by exerting their considerable buying power. Increasingly, however, the federal agencies and some courts are adopting the argument that within certain narrowly drawn national markets, there are so few actual and potential competitors able to serve those large customers that the apparent countervailing power to restrain price increases is insufficient to prevent price increases.

Recent Examples of Protection of Large Customers  

The trend began in 2015 with the FTC challenge of Sysco’s proposed acquisition of US Foods. The FTC adopted a national food service distribution market definition, and it focused on large customers with particular needs that could only be served by a very limited number of suppliers. These needs included a nationwide footprint, a high degree of consistency (in quality, ordering, pricing and breadth of product mix), the availability of private-label products and strong customer service. Sysco and US Foods were found to be the only two “broadline” food service distributors who could provide the “one-stop-shopping” required by customers such as nationwide chain restaurants, hotels, hospitals and schools. The focus on a narrow and specific sector of large corporate customers, as opposed to the ultimate purchasers, results in a very small percentage of the overall market becoming critical to the competitive analysis. Moreover, in a departure from the traditional antitrust perspective on strong, sophisticated buyers as embodied in the Horizontal Merger Guidelines, the FTC here predicated its case on the potential harm from price-discrimination against precisely these large, powerful buyers.

The same reliance on a narrow customer segment to define a very limited market emerged again in 2016 with the FTC’s challenge to the Staples-Office Depot merger. Unlike the basis for its challenge to a previous attempt to merge by the same parties in 1997, the FTC in 2016 alleged a market limited to the direct sales of office supplies to large, business-to-business customers. In 1997, the FTC successfully blocked the parties from merging by alleging competitive harm to consumers and small businesses in a relevant market for “office supply superstores.” But in 2016, similar to the customer segment identified in Sysco, the FTC in Staples focused on sophisticated customers with specific needs: the ability to deliver to nationwide locations, low pricing and high levels of customer service. Whereas the 1997 challenge focused on harm to local retail consumers, in 2016 the FTC focused on national price-discrimination effects for certain large customers. The implications of shifting the inquiry from local competition and effects on direct consumers to national competition and large, business-to-business consumers are significant.

Drawing a very narrow market may enable the federal agencies to reduce the number of viable competitors participating within that market, thereby increasing the competitive effects of the merger. With fewer available competitors, the opportunity for price discrimination increases, and, correspondingly, the ability of even large, sophisticated customers to leverage their countervailing buying power and resist a potential price increase is diminished. In both of the transactions discussed above, the FTC identified the merging parties as the only viable participants in the specific, nationwide market that the agency delineated.

Similarly, the Antitrust Division of the U.S. Department of Justice recently sued to block the merger of health insurers Anthem and Cigna based, in part, on the proposed transaction’s potential impact on the nationwide self-insured employer market. Large companies that self-insure for their employees’ medical care often still rely upon a major insurer for administrative functions, claims adjudication and provider network management, and one of the DOJ’s theories of competitive harm is based on this narrow national account employer market. The inability of other insurers to fill the post-merger void and compete for self-insured business would enable the combined Anthem-Cigna to potentially raise administrative-service fees to large employers. Thus, both agencies have now brought suit in federal court to block mergers based on an aggressive definition of a narrow market.

Implications for Merging Parties

For merging parties, this trend means that it will be important to consider the potential competitive impacts of the transaction in even narrow business segments that represent small revenues when assessing the likelihood of an antitrust challenge. Moreover, in the face of such challenges, the presence of large sophisticated customers with their presumptive countervailing buying power may be insufficient to persuade the agencies. So merging parties, along with their antitrust counsel and economists, should endeavor to fully understand the likely effects of the transaction across all segments of customers, and, in particular, be prepared to discuss the implications for nationwide customers for whom local competition may not provide an alternative. These recent cases brought by the FTC and DOJ show a willingness to pursue aggressive and innovative theories of competitive harm in merger enforcement. However, looking ahead to 2017, if the incoming Trump administration opts to dial back antitrust scrutiny of mergers, then this trend of aggressive enforcement postures may prove to be short-lived. The President-elect has offered some differing statements on significant mergers and acquisitions over the course of the campaign, so it is too soon to ascertain the direction of merger enforcement in the coming years.

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