Antitrust review is a significant consideration in any M&A transaction where the buyer and seller (or their respective businesses) compete in overlapping markets, where the combined entity will have significant market share in any defined product or geographic market, or where a large buyer is acquiring a smaller company with potential or actual competitive significance. The federal antitrust agencies — the Department of Justice Antitrust Division and the Federal Trade Commission — have broad authority to challenge transactions they believe will substantially lessen competition or tend to create a monopoly. Understanding the analytical framework the agencies apply and the remedies they impose when they find competitive concerns is important for any business owner navigating a significant M&A transaction.

The Analytical Framework: Market Definition and Competitive Effects

Antitrust merger analysis begins with market definition — the process of identifying the relevant product market and the relevant geographic market within which competitive effects will be assessed. The product market is defined by the concept of demand substitutability: which products do customers consider to be reasonable alternatives? If a small but significant price increase by the merged entity would cause a significant number of customers to switch to another product, that other product is probably in the same market. Geographic markets are defined by the location of customers and the feasibility of supply from different regions.

Once the relevant market is defined, the agencies assess the competitive effects of the merger within that market. The primary tool for this assessment is the Herfindahl-Hirschman Index, or HHI, which measures market concentration. The HHI is calculated by squaring each firm’s market share percentage and summing the results. A market in which one firm has 100 percent market share would have an HHI of 10,000 (100 squared); a perfectly competitive market with many small firms would have an HHI approaching zero. The agencies use HHI thresholds to identify potentially problematic levels of concentration: a post-merger HHI below 1,500 indicates an unconcentrated market with limited competitive concern, between 1,500 and 2,500 indicates moderate concentration, and above 2,500 indicates high concentration. A merger that increases the HHI by more than 200 points in a highly concentrated market is presumptively anticompetitive under the agencies’ current Merger Guidelines.

Horizontal Theories of Harm

A horizontal merger is a merger between competitors — companies that sell the same or similar products in the same market. Horizontal mergers are subject to the most rigorous antitrust scrutiny because they directly reduce the number of competitors in the market. The two primary theories of competitive harm in horizontal mergers are unilateral effects and coordinated effects.

Unilateral effects occur when the merged firm can profitably raise prices (or reduce quality, service, or innovation) without coordinating with other competitors, simply because the merger eliminates the competitive constraint that the acquired firm previously imposed on the acquirer. If the buyer and target have been competing directly and the buyer has been restrained from raising prices because customers would switch to the target, the merger removes that constraint. The agencies use merger simulation models and customer surveys to assess the likelihood and magnitude of unilateral price effects.

Coordinated effects occur when the merger makes it easier for the remaining competitors in a market to coordinate on price, output, or other competitive dimensions. When a merger reduces the number of significant competitors to only two or three, the remaining firms may find it easier to achieve tacit coordination than they could when more competitors were present. The agencies assess whether market conditions — product homogeneity, pricing transparency, stable market shares — favor coordination.

Vertical Theories of Harm

A vertical merger is a merger between companies at different levels of the supply chain — for example, a manufacturer acquiring a key input supplier or a distributor acquiring a retail chain. Vertical mergers do not directly reduce horizontal competition, but they can harm competition through foreclosure effects: the combined entity might refuse to sell critical inputs to competitors (input foreclosure) or refuse to purchase from competing suppliers (customer foreclosure), disadvantaging rival companies in the market.

The DOJ and FTC’s attention to vertical mergers increased significantly in the late 2010s and early 2020s. High-profile vertical merger challenges, including the Department of Justice’s attempt to block AT&T’s acquisition of Time Warner and the FTC’s challenge to Illumina’s acquisition of GRAIL, reflected the agencies’ view that vertical combinations in certain industries can threaten competition in ways that traditional horizontal analysis does not capture. The current Merger Guidelines issued in 2023 explicitly address both horizontal and vertical competitive concerns and signal an expansive agency approach to merger review.

Remedies: Structural vs. Behavioral

When the reviewing agency concludes that a proposed merger raises competitive concerns but is potentially clearable with appropriate remedies, it will negotiate remedies with the parties as a condition to granting clearance. Remedies fall into two broad categories: structural and behavioral.

Structural remedies involve the divestiture of one or more businesses, product lines, or assets to address the specific competitive overlap identified by the agency. A structural remedy removes the competitive problem by eliminating the market overlap that creates the concern, rather than imposing behavioral constraints on the post-merger entity. The antitrust agencies strongly prefer structural remedies because they are self-executing — once the divestiture is completed, there is no need for ongoing government oversight of compliance.

Behavioral remedies impose ongoing obligations on the merged entity to conduct its business in ways that preserve competition — for example, by requiring the entity to continue supplying critical inputs to competitors on specified terms, to maintain certain pricing or quality standards, or to refrain from combining certain data assets or technical systems. Behavioral remedies require ongoing regulatory monitoring and are considered less effective than structural remedies by most practitioners, which is why the agencies resist them in many contexts.

Technology Sector Enforcement

The technology sector has been the focus of intense antitrust scrutiny in recent years. The agencies have challenged or investigated numerous technology sector acquisitions, including acquisitions by major platform companies of smaller competitors, potential entrants, or companies with access to data or technology that could enhance the acquirer’s market position. The agencies have developed theories of harm specific to digital markets: the acquisition of nascent competitors who have not yet achieved significant market share but whose future growth poses a competitive threat to the acquirer, the acquisition of data assets that enhance the acquirer’s competitive advantage in ways that are difficult for rivals to replicate, and the acquisition of complements that allow the acquirer to extend its dominance across adjacent markets.

For technology companies contemplating a sale, the identity of the buyer matters significantly from an antitrust perspective. A sale to a large platform company in the same or adjacent market will receive far more rigorous scrutiny than a sale to a private equity firm or a strategic buyer in a different industry. Sellers and their advisors should conduct an antitrust risk assessment early in the sale process to understand which potential buyers may present antitrust obstacles and what remedies might be required. This analysis can affect the selection of buyers in an auction process and can be used to negotiate appropriate regulatory risk allocation provisions (including hell-or-high-water covenants and reverse termination fees for regulatory failure) in the purchase agreement.