20230601 Merger Efficiencies White Paper


May 31, 2023


Executive Summary

Under the U.S. antitrust laws, enforcement agencies may block an M&A transaction only if they meet their burden to prove that the transaction’s “effect may be substantially to lessen competition.” 15 U.S.C. § 18. As courts have explained, this is a “totality-of-the-circumstances” inquiry, and they “weigh a variety of factors to determine the effects of particular transactions on competition” and “future competitiveness.” United States v. Baker Hughes Inc., 908 F.2d 981, 984 (D.C. Cir. 1990).

In the modern era of antitrust law, one of these “variety of factors” has been the ability of a transaction to improve the performance of the combined entity, and thus to improve “future competitiveness” in the market. That is why the current Horizontal Merger Guidelines, as well as several prior iterations, explain: “a primary benefit of mergers to the economy is their potential to generate significant efficiencies and thus enhance the merged firm’s ability and incentive to compete, which may result in lower prices, improved quality, enhanced service, or new products.”

Enforcers in the Biden Administration, however, have threatened to move away from this effects-based analysis, particularly when it comes to measuring whether efficiencies will improve the performance of a combined entity. Indeed, the Chair of the Federal Trade Commission, Lina Khan, and the Assistant Attorney General for Antitrust, Jonathan Kanter, have promised that a revision of the merger guidelines is coming soon, and they have signaled their plan to take a skeptical view of whether mergers can make a market more competitive.

This Administration appears to prefer that companies, or at least established companies, avoid growth by M&A—and various Administration officials have cited for this position the belief that there is no good evidence for the ability of mergers to result in efficiencies.

In anticipation of what we expect will be a significant overhaul of the merger guidelines to enshrine this skepticism, we think it is valuable to begin a conversation about the state of empirical research on merger efficiencies. We perform a literature review to collect the existing studies that have observed real-world mergers resulting in improved performance for the combined entity. We believe this collection of academic studies is an important first step in pressure-testing the current climate of merger skepticism.

Key takeaways from the literature review:

  • There is zero basis to doubt the once-settled wisdom underpinning the basic framework for merger review: mergers can and do advance procompetitive business objectives. Merger review is therefore correctly focused on finding particularized evidence that the unilateral, coordinated, or vertical effects of an individual merger will cause quality-adjusted prices to increase or innovation to decrease.
  • There is no robust evidence that certain types of mergers are especially unlikely to result in efficiencies. Rather, there is evidence of mergers leading to efficiencies in a wide range of industries, including for both goods and services, and for both highly commoditized products and highly differentiated products.
  • Merger skeptics are correct that theoretical treatments of merger efficiencies are more plentiful than papers that record real-world evidence and control for appropriate variables to prove causation. Though we found plenty of examples of this sort of empirical treatment, more research is still needed. Currently, there are limitations on researchers seeking to test the hypothesis of merger efficiencies: a relatively small number of industries record public data measuring the inputs and outputs of production. Collecting additional data along these lines would allow for more robust testing of the efficiencies hypotheses in more industries, and could possibly allow researchers to predict factors that make merger efficiencies likely (or unlikely) in a particular transaction.