Who’s Afraid of Conglomerate Mergers?

A. U.S. Merger Control

In 1968, the U.S. Department of Justice issued its first merger guidelines outlining the principles it applied when deciding whether to challenge mergers and acquisition under section 7 of the Clayton Act. ⁸ It published these guidelines as a response to the wave of conglomerate mergers that swept the U.S. economy in the 1950s and 1960s. At the time, the U.S. Supreme Court interpreted section 7 of the Clayton Act as seeking to prevent undue market concentration, ⁹ or the “rising tide towards concentration in too few hands,” leading to the “gradual demise of the small businessman.” ¹⁰ In the aim of ensuring certainty and practical judicial administration, and to avoid “subverting congressional intent by engaging in an overly economic investigation,” ¹¹ the U.S. Supreme Court readily relied on simple structural presumptions, and outlawed horizontal mergers if the merged entity would acquire a market share of 30 percent or more. ¹²

This strict approach soon resulted in a significant drop in horizontal mergers, leading commentators at the time to conclude that horizontal mergers were rapidly disappearing and no longer an enforcement issue. ¹³ In the words of then FTC Commissioner Reilly,

continuing to emphasize action against horizontal mergers would be like mounting a vast hunting expedition for stalking the dinosaur. He just isn’t there anymore. On the other hand, it seems difficult to deny that enforcement activity is lagging in the major problem area, conglomerate mergers. ¹⁴

Instead of horizontal acquisitions, firms had turned to vertical and conglomerate mergers. ¹⁵ However, while the U.S. Supreme Court had developed ample precedent on how to assess the legality of horizontal mergers, there was less guidance on vertical ¹⁶ and conglomerate mergers, other than the principle that section 7 of the Clayton Act also meant to catch nonhorizontal mergers that lead to a substantial lessening of competition. ¹⁷ The Federal Trade Commission (FTC) was grappling with pinpointing the exact harm that conglomerate mergers could cause. To quote another FTC Commissioner of the day, conglomerate merger control involved “public policy questions raised by the increasing concentration of power” and was “that no man’s land where economic, law and political science converge.” ¹⁸

The U.S. Department of Justice’s 1968 guidelines attempted to stop this gap. They contained a separate section on conglomerate mergers that outlined the Department’s key concerns. ¹⁹ The document opened with the statement that, as with other kinds of mergers, the purpose of the Department’s enforcement activity was to prevent changes in market structure that appeared likely over the course of time to cause a substantial lessening of competition, or to create a tendency toward monopoly. On this basis, the guidelines outlined in all brevity and in a highly abstract manner three constellations that the Department deemed anticompetitive: (1) conglomerate mergers that eliminated a likely entrant, ²⁰ (2) conglomerate mergers that created the danger of reciprocal buying, ²¹ and (3) conglomerate mergers that threatened to entrench the market power of the acquired firm. ²² The guidelines further established several presumptions of anticompetitive effects based on the merging firms’ market shares prior to the transaction. ²³

These categories were loosely based on the U.S. Supreme Court’s rulings from the 1960s. In FTC v. Consolidated Foods, the Court had outlawed a merger it categorized as conglomerate because the transaction could enable the merged entity to engage in reciprocal dealing, which the Court described as “one of the congeries of anticompetitive practices at which the antitrust laws are aimed.” ²⁴ In Procter & Gamble, the U.S. Supreme Court had relied both on the likely elimination of potential competition and the entrenchment theory to condemn the acquisition of Clorox Chemical Company, the largest producer of household liquid bleach, by Procter & Gamble, the largest domestic manufacturer of other household cleaning products. ²⁵

In Procter & Gamble, the U.S. Supreme Court had further held that possible efficiencies resulting from the merger could not be used as a defense to illegality. In its view, Congress had been aware that some mergers which lessened competition could also result in economies, but had struck the balance in favor of protecting competition. ²⁶ The 1968 guidelines embraced this position, and stated that, absent exceptional circumstances, the Department would not accept as a justification that anticompetitive conglomerate mergers would produce economies. They argued that equivalent economies could normally be achieved either through internal expansion, the acquisition of a small firm not caught by the guidelines’ market share presumptions, or through acquisitions that did not fall into the counterparts’ categories of mergers flagged as problematic in the merger guidelines. ²⁷ Incidentally, the guidelines were equally dismissive of efficiency defenses for horizontal and vertical mergers. ²⁸

B. EU Merger Control

EU antitrust law did not acquire its first purpose-made legal basis for carrying out ex ante merger control until 1990. ²⁹ This first EU Merger Regulation prohibited concentrations that were likely to result in the creation of a dominant position. ³⁰ Unlike the U.S. Department of Justice, the European Commission did not issue any guidelines on the original Merger Regulation that would have explained its legal interpretation of key theories of harm. However, an analysis of the decisional practice makes it possible to infer a number of key principles guiding the Commission’s early enforcement practice.

While the Commission’s enforcement focus, like its U.S., lay on reviewing mergers between competitors, it also examined nonhorizontal transactions. When assessing the conglomerate dimensions of a merger, it primarily examined the possibility of “portfolio effects,” that is, anticompetitive effects arising from the fact that parties owned a portfolio of different products. ³¹

In 1997, the Commission assessed portfolio effects in no fewer than four cases. The most famous of these, no doubt, is the acquisition of McDonnell Douglas by Boeing, two U.S. aerospace companies. ³² At the time of the transaction, Boeing had a market share of 64 percent in the market for new large commercial aircraft and McDonnell Douglas had a market share of six percent. The only other significant competitor, the European Airbus consortium, had a market share of around 30 percent. The case made international headlines ³³ when the European Commission seemed poised to prohibit the transaction after the U.S. antitrust authorities had found that it raised no serious competitive concerns. While the acquisition reduced the number of players in the market from three to two, the FTC had considered that McDonnell Douglas, whose market shares had steadily decreased over the previous ten years, no longer constituted a meaningful competitive force in the commercial aircraft market. ³⁴

The European Commission, however, signaled that it would block the acquisition unless Boeing made substantial commitments. ³⁵ Unlike the FTC, it had significant horizontal concerns. ³⁶ In addition, it also objected to the transaction’s nonhorizontal effects. In its view, Boeing would be the only manufacturer able to offer a full family of aircraft and commit itself to new aircraft models postmerger, which would strengthen its ability to induce airlines into long-term exclusivity agreements, thus foreclosing its remaining competitor (i.e., Airbus). ³⁷ It also balked at Boeing acquiring McDonnell Douglas’s space and defense business. McDonnell Douglas’s R&D in this area received significant financial contributions from the U.S. government, which the Commission suspected Boeing might use to cross-subsidize its activities in the commercial aircraft sector. ³⁸ Further, the Commission considered it likely that Boeing would be able to engage in “offset and bundling deals” with certain countries, thus combining the sale of commercial and military aircraft. ³⁹ In sum, its main concern arising from the conglomerate dimensions of the merger was the likely foreclosure of Airbus through exclusionary practices postmerger. Boeing offered last-minute structural commitments, averting the looming prohibition.

That same year, the European Commission examined portfolio effects in several mergers in the beverages industry. ⁴⁰ Its key concern in these cases was that a portfolio of related types of soft drink or alcoholic beverages, especially if the portfolio included must-have brands, conferred significant advantages upon the merged entity that could act as barriers to entry. Such a portfolio would allow the merged entity to entice distributors into buying the majority of their needs by means of tailored discounting, thereby creating substantial disincentives for customers to change supplier. ⁴¹ It was also likely to result in significant economies of scale in distribution, which would strengthen the conglomerate’s position. ⁴² Further, the Commission was concerned that the portfolio might allow the merged entity to engage in tying, ⁴³ potentially in combination with a threat of refusal to supply. ⁴⁴ In two of these cases, the Commission made clearance subject to structural remedies. ⁴⁵

In 2001, finally, the European Commission issued its first prohibitions based on conglomerate theories of harm. That year marked the height of the Commission’s intervention against conglomerate mergers. One of these cases concerned the anticipated acquisition of Honeywell by General Electric, ⁴⁶ another high-profile case involving two diversified U.S. aerospace companies. ⁴⁷ Like in the Boeing/McDonnell Douglas case, the U.S. Department of Justice had previously cleared the proposed transaction, although the parties had had to agree to divest Honeywell’s helicopter business to address horizontal concerns. ⁴⁸ The European Commission reached a different conclusion. In addition to horizontal concerns, ⁴⁹ it found that the merger would result in anticompetitive effects on vertically related and adjacent markets, which would have allowed the merged entity to exclude other businesses from these markets. It identified two mechanisms that would have permitted the parties to “leverage” their existing dominant positions to other markets. First, it found that General Electric’s considerable financial power would allow it to cross-subsidize Honeywell’s activities in vertically related markets, allowing it to exclude competitors. Second, the combined portfolio of the two companies’ diversified activities would have allowed them to offer bundles of products and services that would have been so attractive to customers that competitors, unable to match the merged entity’s offers, would have been forced out of the market. ⁵⁰

Only three months later, the Commission prohibited another merger because of serious horizontal, vertical, and conglomerate concerns. Tetra Laval, a French company, had intended to acquire Sidel, also incorporated under French law. Both companies were active in the liquid packaging industry. The acquisition would have allowed Tetra Laval, the world leader in liquid food carton packaging, to extend its activities into the market for polyethylene terephthalate (PET) plastic bottles. ⁵¹ In addition to horizontal and vertical concerns, the Commission predicted that the merged entity would use its presence in several packaging markets to leverage its dominant position in the carton sector, and turn its already leading position in PET packaging equipment into a dominant position. Tetra would have achieved this by tying carton packaging equipment with PET packaging equipment, and using its knowledge of clients’ needs from the carton side of the business to offer them timely and individually tailored PET solutions, thus enabling them to switch from carton to PET with a single supplier. ⁵²

In sum, while the European Commission did not issue any general guidance on its approach to assessing conglomerate effects, and the theories of harm underlying its decisions were not always models of clarity, an analysis of its decisional practice allows two key conclusions.

One, the Commission was concerned that the extension of a company’s product range would result in such “advantages” for the merged entity that it would create or strengthen a dominant position in the market. This was primarily a concern in the decisions of the early 1990s. The key advantages identified in this early enforcement practice were cost savings, increased financial strength, and the possibility of cross-subsidizing activities in different markets. This concern is not dissimilar to the U.S. Department of Justice’s early entrenchment theory, ⁵³ embraced by the U.S. Supreme Court in Procter & Gamble. ⁵⁴

Second, and this is the theory more commonly relied on in the decisional practice of the late 1990s, the Commission was concerned that the entity might bundle or tie different products, and use this strategy to exclude competitors from the market, thus leveraging its position of dominance from one market to the next. ⁵⁵ While tying is a different business practice than reciprocal buying, which had featured in the U.S. 1968 merger guidelines, both qualify as exclusionary strategies. ⁵⁶ In so far, there are clear parallels between the European Commission’s and U.S. enforcement agencies’ early approaches to conglomerate mergers. However, unlike early U.S. merger control, ⁵⁷ the European Commission’s early decisional practice reveals little concern about the elimination of potential competition.

A. U.S. Antitrust Law

The U.S. Antitrust Revolution of the 1970s and 1980s has been thoroughly analyzed and documented. ⁵⁸ It is not the aim of this contribution to add to this literature. Suffice it to say that the U.S. Supreme Court was convinced by scholars associated with the University of Chicago that Congress’ true aim, when enacting the Sherman Antitrust Act in 1890, had not been to fight the concentration of economic power, but to enact a “consumer welfare prescription.” ⁵⁹ This was a radically different legal objective than the aim of protecting competitive market structures, which had governed the early days of U.S. merger control.

Unsurprisingly, the new legal aim led to a new concept of harm. This, after all, was the ultimate purpose of the Chicago School’s push to redefine the law’s objective. ⁶⁰ Adherents of the Chicago school of thought did not consider “bigness,” ⁶¹ the concentration of power, or the exclusion of competitors problematic as such. In their view, only such restrictions of competition should be deemed anticompetitive that were likely to result in a lasting reduction of economic consumer welfare, in the form of higher prices, lower output, or reduced quality.

Chicago scholars also held the deep-seated belief that the entry of new competitors (or the mere threat thereof) would correct most restrictions of competition, so that there was no need for the State to intervene. In particular, they thought it implausible that exclusionary conduct could ever result in lasting consumer harm, ⁶² as new companies would enter the market to take away custom from any monopolist charging supracompetitive prices. Moreover, Chicago scholars argued that efficiency effects should be considered countervailing factors, capable of offsetting restriction of competition, as they would be passed on to consumers in a competitive market. In their view, vertical agreements, and exclusionary conduct more generally, were particularly likely to generate such effects. ⁶³

Predictably, therefore, the Chicago school roundly dismissed the idea that conglomerate mergers could significantly lessen competition. They deemed tying or bundling particularly unlikely to result in anticompetitive effects because there was only a single monopoly profit to be had. ⁶⁴ As anticompetitive effects were highly unlikely, but efficiency effects almost inevitable, nonhorizontal mergers and conglomerate mergers, in particular, should not be pursued under section 7 of the Clayton Act. ⁶⁵

The U.S. Department of Justice’s 1968 merger guidelines and the U.S. Supreme Court’s position in Procter & Gamble were not compatible with these new teachings. While the U.S. Supreme Court has never had the occasion to revisit the entrenchment theory established in Procter & Gamble, it subsequently reversed many of the principles underlying the ruling in Procter & Gamble. It embraced the consumer welfare aim. ⁶⁶ It ruled that the U.S. antitrust rules were not meant to protect businesses from the working of the market, but to protect the public from the failure of the market. ⁶⁷ It recognized the redeeming virtues of efficiencies ⁶⁸ and concluded that a merged entity’s ability to lower prices because of efficiency effects could never be a reason for prohibiting a merger even if it resulted in competitors leaving the market. ⁶⁹ It generally raised the bar for proving the anticompetitive effects of exclusionary conduct. ⁷⁰ It is therefore highly unlikely that the FTC’s arguments in the 1967 case of Procter & Gamble would convince the U.S. Supreme Court today.

This change in interpretation is clearly reflected in the U.S. Department of Justice’s 1984 nonhorizontal merger guidelines, ⁷¹ which replaced the original guidelines from 1968. The new nonhorizontal merger guidelines no longer defined the Department’s primary concern as preventing changes in market structure. In fact, they did not define the underlying objective at all. Eight years later, however, the 1992 horizontal merger guidelines clarified that the “unifying theme” underlying the agencies’ merger guidelines was that “mergers should not be permitted to create or enhance market power,” namely “the ability profitably to maintain prices above competitive levels for a significant period of time.” ⁷² In other words, the 1992 guidelines redefined the agencies’ aim as preventing mergers that could reduce consumer welfare.

Another significant change was that the nonhorizontal merger guidelines, unlike their predecessors, no longer mentioned any exclusionary theories of harm. Instead, the revised guidelines focused exclusively on the dangers arising from the elimination of potential entrants through vertical or conglomerate mergers, that is, the acquisition’s horizontal effects.

Finally, unlike the 1968 guidelines, the nonhorizontal guidelines from 1984 explicitly recognized that efficiency effects should be considered countervailing factors in any merger analysis, and stressed that the Department would give more weight to expected efficiencies in determining whether to challenge a vertical merger than in determining whether to challenge a horizontal merger. ⁷³ After the publication of the 1984 nonhorizontal merger guidelines, conglomerate effects analysis essentially disappeared from the U.S. antitrust authorities’ enforcement practice.

B. EU Antitrust Law

EU antitrust law underwent a similar paradigm shift, albeit almost three decades after the Chicago School revolution transformed U.S. antitrust law. The European Commission’s intervention against conglomerate effects reached its peak in the early 2000s, when it prohibited the mergers between GE/Honeywell ⁷⁴ and Tetra Laval/Sidel. ⁷⁵ At that point, conglomerate effects analysis had long disappeared from the U.S. enforcement practice.

Shortly thereafter, however, the European Commission’s Directorate General for Competition Policy embarked on a fundamental review process that aimed to introduce a more economic approach to EU competition law. ⁷⁶ This process also changed its approach to conglomerate merger control. Several factors are likely to have triggered this reform. In 1999, Mario Monti had become the first economist to head DG Competition—a role that had traditionally been held by lawyers and political scientists. From the outset, he made clear that the key purpose of his office would be to bring EU competition law into line with “modern economic thinking.” ⁷⁷ Not only did he see through a major revision of the Commission’s interpretation of Article 101 of the Treaty on the Functioning of the European Union (TFEU) and set in motion the review of EU merger control and Article 102 of the TFEU. ⁷⁸ He also created the position of Chief Economist within the Commission, ⁷⁹ and significantly increased the ratio of economists working on DG Competition’s case teams. ⁸⁰ In addition to bolstering the economic expertise within DG Competition, hiring industrial economists is likely to have impacted the core values guiding the enforcement practice within the DG Competition. ⁸¹

A second factor likely to have influenced and accelerated the reform was the highly publicized political clash that occurred after the European Commission prohibited the GE/Honeywell merger previously cleared by its U.S. counterparts. ⁸² Many U.S. antitrust experts and enforcers did not hide their contempt for the European Commission’s analysis of the prospective merger’s likely conglomerate effects, and the Commission took a public beating in the international press. ⁸³

Third, in 2002, the European Court of Justice struck down three Commission merger decisions in quick succession because of manifest errors of assessment, poor economic reasoning, and inadequate standards of proof. ⁸⁴ This was unprecedented. Among the decisions annulled by the Court was the TetraLaval/Sidel case. ⁸⁵ The Court found that the Commission had committed manifest errors of assessment in predicting that the merged entity would be able and likely to use its dominance in the carton packaging market as a lever to achieve dominance in the neighboring PET packaging equipment market by means of bundling or other exclusionary practices. While it did not question the theory of leveraging, it found that the Commission had failed to adduce sufficient evidence to prove that bundling would allow the merged entity to achieve a dominant position in any of the PET-related markets. It further criticized that the Commission had failed to consider that bundling was illegal pursuant to Article 102 TFEU, which would have disincentivized the parties to engage in such conduct. Also, Tetra had submitted behavioral commitments that left little room for such conduct. The Court annulled the decision in its entirety. ⁸⁶

The Court of Justice was equally critical of the Commission’s analysis of conglomerate effects when reviewing the GE/Honeywell prohibition a few years later. ⁸⁷ Again, it did not question the Commission’s theories of harm, but found that the Commission had failed to support its prediction that the merged entity would be able and likely to engage in bundling and cross-subsidization with sufficient evidence. ⁸⁸

One last factor may have influenced the Commission’s change in legal interpretation. The GE/Honeywell clash triggered a period of increased international cooperation under the auspices of the Organization for Economic Cooperation and Development (OECD) ⁸⁹ and the International Competition Network (ICN), ⁹⁰ in which representatives of the U.S. and European competition agencies met, communicated, and exchanged best practices in a more conciliatory setting. It is not unlikely that this extended dialogue shaped the Commission’s reform process. ⁹¹

In 2008, the European Commission spelled out its revised approach to assessing conglomerate mergers in its first set of nonhorizontal merger guidelines. ⁹² Not unlike the 1992 horizontal U.S. merger guidelines, the Commission’s nonhorizontal merger guidelines define the key purpose of merger control as preventing mergers that would likely deprive customers of the benefits of competition by significantly increasing the market power of firms. Likewise, they define the benefits of competition as low prices, high-quality products, a wide selection of goods and services, and innovation. ⁹³ In other words, the European Commission’s merger guidelines officially embraced the consumer welfare aim that has been guiding U.S. antitrust law since the late 1970s. ⁹⁴ Further, the Commission’s nonhorizontal merger guidelines explicitly state that nonhorizontal mergers are generally less likely to result in a significant impediment to effective competition than horizontal mergers, and that nonhorizontal mergers provide substantial scope for efficiencies, which the guidelines now explicitly recognize as countervailing rather than aggravating factors. ⁹⁵ On this basis, the European Commission’s nonhorizontal merger guidelines establish the presumption that conglomerate mergers will not lead to competition problems “in the majority of circumstances.” ⁹⁶ On these points, the European Commission’s theoretical position is now aligned with the position of the U.S. nonhorizontal merger guidelines from 1984.

However, there is one significant difference. While the 1984 U.S. guidelines abandoned all exclusionary theories of harm and focused on the elimination of potential competition exclusively, the Commission’s nonhorizontal merger guidelines continue to consider that conglomerate mergers can result in anticompetitive foreclosure. ⁹⁷ According to the Commission, the combination of products in related markets may confer on the merged entity the ability and incentive to leverage a strong market position from one market to another by means of tying or bundling or other exclusionary practices. The guidelines acknowledge that tying and bundling are common practices, which often have no anticompetitive consequences, as companies often engage in tying and bundling to provide customers with better or cheaper products. The guidelines also state, however, that under certain circumstances, these practices may lead to a reduction in the merged entity’s rivals’ ability or incentive to compete, which could reduce the competitive pressure on the merged entity, allowing it to increase prices. The Commission thus proposes the following test for assessing the likelihood of such a scenario: a conglomerate merger will be deemed anticompetitive if, as a result, (1) the merged firm acquires the ability to exclude rivals from the market, (2) it would have the economic incentive to do so, and (3) the exclusionary effect was likely to result in lasting consumer harm, which could only be the case if the merged entity had market power. ⁹⁸ Rather as an afterthought, the nonhorizontal merger guidelines also mention a second theory of harm: under certain circumstances, conglomerate mergers may facilitate anticompetitive coordination between competitors. ⁹⁹

In sum, the European Commission no longer considers as problematic the exclusion of competitors and the ensuing impact on the structure of competition. It now only deems the exclusion of competitors anticompetitive if it is likely to result in long-term consumer harm because it creates market power that cannot be corrected through timely entry. This is an important change in interpretation that significantly reduced the scope of the EU Merger Regulation. However, significantly, the European Commission did not go as far as its U.S. counterparts: while it embraced the Chicago School’s legal objective, it did not reject the credibility of exclusionary strategies outright, but accepted Post-Chicago findings that, under certain narrow circumstances, tying complementary products could allow a firm with market power to extend this power to a neighboring market. ¹⁰⁰

However, while the European Commission’s nonhorizontal guidelines did not entirely discard conglomerate theories of harm, they subsequently disappeared from the Commission’s enforcement practice for several years. After 2001, the European Commission rarely considered conglomerate effects in merger analysis anymore. ¹⁰¹ Portfolio effects seemed to be a thing of the past.

A. EU Merger Control

Ten years later, conglomerate effect analysis has made a comeback in EU merger control. This is particularly noticeable in the domain of Big Tech acquisitions. To date, the European Commission has investigated sixteen acquisitions made by the Big Five ¹⁰² : eight by Microsoft, ¹⁰³ four by Google, ¹⁰⁴ two by Apple, ¹⁰⁵ two by Meta (formerly Facebook), ¹⁰⁶ but none by Amazon (yet). ¹⁰⁷ Thirteen out of these sixteen investigations have so far culminated in a reasoned decision. ¹⁰⁸ To date, the European Commission has not yet prohibited a single acquisition by the Big Five. However, in two of the investigated cases, the Commission only cleared the acquisitions subject to commitments, ¹⁰⁹ and it is currently examining commitments offered by Meta in Meta/Kustomer. ¹¹⁰

In view of the more permissive stance introduced in the 2008 merger guidelines, ¹¹¹ it is remarkable how many of these Big Tech acquisitions involved in-depth investigations of nonhorizontal effects. In fact, only in two out of the thirteen cases, for which a decision is available, were horizontal effects the Commission’s key concern. ¹¹² Even more striking, given the Commission guidelines’ position that conglomerate mergers are unlikely to raise competition concerns in the “majority of circumstances” ¹¹³ is the number of decisions assessing conglomerate theories of harm. The Commission analyzed potential conglomerate effects in eight out of the thirteen acquisitions for which a reasoned decision is available. ¹¹⁴

What is more, the only two commitments decisions the Commission has issued in Big Tech acquisitions to date addressed conglomerate theories of harm. ¹¹⁵ In both cases, the Commission followed the approach outlined in its nonhorizontal merger guidelines, and first examined whether the merged entity would have the ability and incentive to foreclose competitors postmerger by means of tying, refusal to deal, or other exclusionary conduct. As a last step, it assessed whether such foreclosure would create market power, that is, put the merged entity in a position to raise prices or affect other parameters of consumer welfare for a nontransitory period of time. ¹¹⁶ In Microsoft/LinkedIn (2016), ¹¹⁷ the Commission was concerned that Microsoft might leverage its strong position in the market for PC operating systems to the market for professional social networks, either by preinstalling LinkedIn on Windows or by integrating LinkedIn features into Outlook or other Microsoft products. It found that Microsoft was likely to have the ability and incentive to do so, and that the market was likely to tip in Microsoft’s favor as a consequence of strong network effects, causing harm to consumers. ¹¹⁸ It concluded that there was a real danger that Microsoft would become the only provider of professional social network services in the European Economic Area. Microsoft offered behavioral commitments to address these concerns, which the Commission accepted.

In Google/Fitbit (2020), the second commitments decision based on conglomerate theories of harm, the European Commission examined Google’s acquisition of Fitbit, a U.S. technology company that develops wearable devices, software, and services in the health and fitness sector. It found that the transaction was likely to result in horizontal, ¹¹⁹ vertical, ¹²⁰ and conglomerate anticompetitive effects. In terms of conglomerate effects, its analysis showed that Google would have both the ability and economic incentive to leverage its dominant position in the supply of licensable operating systems for smart mobile devices to the market for the supply of wrist-worn wearable devices. In its view, there was a real danger that Google could exclude competing providers of wearable health devices by degrading their interoperability with Android smartphones, and thereby significantly impede competition in the market for wearable devices to the detriment of consumers. ¹²¹ Google offered behavioral remedies to address these foreclosure concerns, the final version of which the European Commission eventually accepted. ¹²²

In the ongoing investigation into Meta’s acquisition of Kustomer, opened in Aug. 2021, the European Commission is also exploring two theories of potential foreclosure, which have led it to open an in-depth phase II investigation. From the press release ¹²³ it is not clear whether the Commission considers these potential effects vertical or conglomerate in nature. ¹²⁴ Meta has reportedly offered commitments to address the Commission’s foreclosure concerns, which the Commission is currently assessing. ¹²⁵

In the other six cases it investigated for conglomerate effects, the European Commission concluded that it could not prove the likelihood of anticompetitive foreclosure effects to the required legal standard. In many cases, it was not convinced that the evidence supported the assumption that the merged entity would have the ability to engage in exclusionary conduct. ¹²⁶ In others, it found that the entity might well have the ability to exclude competitors, but was not confident that this would be a commercially sensible strategy. ¹²⁷ In a few cases, it found that the merged entity would in fact have both the ability and incentive to foreclose competitors. Nonetheless, it decided not to prohibit any of these transactions. In one case, it found that the dominant undertaking had already had the ability to foreclose competitors premerger, so that the danger of foreclosure was not merger specific. ¹²⁸ In the other cases, it was unable to prove that the merged entity would acquire durable market power postmerger, as it found that there was a sufficient number of actual competitors and that barriers to entry were low enough to allow new entry if the merged entity were to harm consumers. ¹²⁹

It remains that the Commission assessed conglomerate effects in over half of the Big Tech acquisitions investigated to date, and that the only two commitments decisions issued against these companies so far were based on conglomerate theories of harm. Given that just over ten years ago, conglomerate effects analysis had almost disappeared from the decisional practice, these are remarkable figures. ¹³⁰

B. U.S. Merger Control

The U.S. merger enforcement practice of the past ten years reveals a somewhat different picture. Like their European counterparts, the U.S. antitrust authorities have looked into a few acquisitions made by the Big Five. To date, they have only formally challenged one such transaction—Google’s acquisition of ITA in 2011. The case ended in a consent decree, in which Google accepted a number of conditions that addressed the Department of Justice’s concerns. ¹³¹ All other Big Tech acquisitions investigated by the U.S. agencies were cleared at the time of the transaction. ¹³² Like in Europe, the great majority of acquisitions were not formally investigated at the time of the takeover, either because the transaction was not made public or because the U.S. antitrust authorities decided not to open an inquiry. On these points, the U.S. and EU enforcement practice shows clear similarities.

However, if one looks at the substance of the assessments, there are marked differences. An analysis of the U.S. authorities’ substantive approach is complicated by the fact that, unlike the European Commission, the U.S. agencies are not legally required to close their investigations by means of reasoned decisions, and many cases are hence closed without explanation. Neither closing letters to the parties nor press releases normally reveal the agencies’ reasons for concluding that the transaction was unlikely to result in a substantial lessening of competition. There is, for example, no official account of the FTC’s reasons for closing its investigations into Facebook’s acquisition of Instagram ¹³³ —a transaction the agency is currently trying to challenge retroactively through the backdoor of section 2 of the Sherman Act. ¹³⁴ Only occasionally will the agencies issue a public statement explaining their key reasons for closing an investigation. While these statements regularly close with the disclaimer that the analysis and conclusions discussed therein are not binding in future matters, ¹³⁵ they are among the few official documents, in addition to the rare complaint, that give some insight into the U.S. authorities’ views. Given that no Big Tech merger challenge has ever been litigated to the end, there is no judicial precedent on how the effects of a merger involving a multisided and multiproduct digital platform should be assessed under section 7 of the Clayton Act.

From the available materials, one can conclude that conglomerate effects are likely to have played a negligible role in cases involving Big Tech acquisitions. The U.S. antitrust authorities have issued closing statements for three such acquisitions, all involving Google: Google/DoubleClick (2007), ¹³⁶ Google/AdMob (2010), ¹³⁷ and Google/Motorola Mobility (2012). ¹³⁸ There is also the U.S. Department of Justice’s complaint against Google in the case of Google/ITA (2011). ¹³⁹ In two out of these four cases, the FTC focused on horizontal effects, ¹⁴⁰ and in the other two, the agencies primarily investigated vertical effects in the form of input foreclosure. ¹⁴¹

Only in one case, the Google/DoubleClick acquisition from 2007, did the FTC additionally touch on the possibility of the merged entity leveraging a leading position into a new market by means of bundling. The FTC was concerned about the prospect of Google, the provider of the most popular Internet search engine and leader in the ad intermediation market, purchasing the leading third-party provider of ad serving technology, even in the absence of exact overlaps in their diverse activities. It therefore examined whether Google might “leverage” DoubleClick’s leading position in third-party ad serving to its advantage in the ad intermediation market. These markets were not vertically related, nor did the FTC consider that they formed part of the same market. The FTC explored a number of potential leveraging theories, but concluded that such arguments would only raise antitrust concern if DoubleClick enjoyed significant market power in third-party ad serving market. The majority was not convinced that DoubleClick, despite its high market share, had market power, as it deemed the market for third-party ad serving competitive and likely to become even more so in the future. ¹⁴² This has all the elements of a classic conglomerate theory of harm, even though the FTC avoided using this term. In the end, the agency decided not to oppose the acquisition. ¹⁴³

The statement in the Google/DoubleClick from 2007 is the last publicly documented case in which a U.S. antitrust authority appears to have examined conglomerate theories of harm in substance, although without using this terminology. This finding stands in stark contrast to the European Commission’s track record of assessing conglomerate effects in over half of the Big Tech acquisitions over the past ten years.

The absence of conglomerate effects analysis in the agencies’ recent enforcement practice is entirely in line with the theory outlined in the U.S. enforcement agencies’ nonhorizontal merger guidelines from 1984, ¹⁴⁴ which exclusively focused on horizontal effects. However, these guidelines were replaced in June 2020. ¹⁴⁵ At first sight, one could get the impression that the new guidelines formalize the demise of conglomerate effects analysis in U.S. merger control. Unlike the 1984 “non-horizontal” guidelines, the new guidelines are entitled “vertical merger guidelines,” suggesting that conglomerate mergers are no longer a concern. The term “conglomerate” does not appear in their substantive guidance either.

During the public consultation process preceding the publication of the new guidelines, conglomerate mergers had been a divisive topic. ¹⁴⁶ For certain respondents, the agencies’ draft guidelines did not reject the concept of conglomerate effects clearly enough. The American Bar Association, for example, recommended that the guidelines explicitly state that conglomerate effects were not a credible theory of harm. ¹⁴⁷ The reply of twenty-eight State Attorneys General and other respondents, on the other hand, appeared to take the opposite view. They recommended that “related” products within the meaning of the draft guidelines should be read as being wider than just upstream and downstream markets, and should also include “complementary products in vertically adjacent” markets. ¹⁴⁸

The enforcement agencies eventually sided with the latter group. The vertical merger guidelines of June 30, 2020, far from publicly disavowing the notion of conglomerate effects, specify that “vertical” should not be read too narrowly, but should include “strictly vertical” mergers, ¹⁴⁹ “diagonal” mergers, ¹⁵⁰ and “vertical issues that can arise in mergers of complements.” ¹⁵¹ Both diagonal mergers and mergers of complements refer to situations, ¹⁵² which would in the past have been called conglomerate. Moreover, unlike the 1984 nonhorizontal merger guidelines, the 2020 vertical guidelines are not limited to horizontal theories of harm but recognize that foreclosure effects can, under certain circumstances, lead to a significant lessening of competition within the meaning of section 7 of the Clayton Act. In substance, the final vertical merger guidelines allow the agencies to investigate mergers of companies that are neither direct competitors nor active in the same supply and distribution chain. Somewhat remarkably, for a policy tool issued in 2020, they do not provide any special guidance on how to assess acquisitions in digital markets. In fact, they do not even contain the word “digital.”

Possibly, there is a reluctance to using the term conglomerate, caused by the caustic criticism the Chicago School directed at the enforcement agencies’ and the U.S. Supreme Court’s approach to assessing conglomerate mergers in the 1960s, that has resulted in the U.S. agencies preferring to refer to the merger of companies in closely related but separate markets as vertical. The U.S. written contribution to the OECD Competition Committee meeting on conglomerate effects of mergers support the conclusion that much of what the European Union, the OECD, and other jurisdictions refer to as conglomerate effects is captured in U.S. antitrust law by horizontal and vertical theories of harm. ¹⁵³ Therefore, the theoretical differences between the current U.S. and EU approaches may not be as extreme as the available evidence suggests at first sight. In theory at least, the U.S. authorities are currently once more open to the idea that nonhorizontal acquisitions can result in anticompetitive foreclosure effects.

That being said, the FTC’s approach to assessing nonhorizontal mergers currently hangs in the balance. On Sept. 16, 2021, the FTC voted 3-2, along partisan lines, to withdraw its support for the Vertical Merger Guidelines, which it had jointly adopted with the U.S. Department of Justice the previous year. ¹⁵⁴ Under the leadership of its newly appointed Chair, Lina Khan, the majority issued a statement ¹⁵⁵ explaining that the guidelines should be withdrawn because they contained flawed economics and legal rules. The majority statement opens by explaining that the United States has experienced increasing levels of consolidation across the economy—much of it via merger—and a reduction in new firm formation over the past few decades, leading to a lessening of competition reflected in growing markups and shrinking wages. While stating that the 2020 vertical guidelines represent a substantial improvement on the 1984 guidelines, the majority take issue with several economic theories and legal presumptions featured in the 2020 guidelines, in particular relating to efficiencies. Among others, they find the efficiency defense, first incorporated in the 1984 guidelines and perpetuated in the 2020 vertical guidelines, to be incompatible with section 7 of the Clayton Act. Relying on many of the Supreme Court cases from the 1960s, including Brown Shoe, Procter & Gamble, and Philadelphia National Bank, ¹⁵⁶ the majority statement concludes that efficiencies are not capable of justifying mergers that lessen competition. ¹⁵⁷ The statement commits the FTC to working with the U.S. Department of Justice to update the merger guidance, incorporating emerging economic evidence about the impact of market structure on the likely competitive effects of a merger. The majority also intend to seize the opportunity to analyze prevalent harms in critical areas of the economy, such as digital gatekeeper platforms and labor markets.

Two Commissioners dissented, and issued a strongly worded statement that criticizes the decision to withdraw the vertical merger guidelines and supports both a lenient approach to nonhorizontal mergers and the efficiency defense. ¹⁵⁸

C. U.K. Merger Control

The U.K. Competition and Markets Authority (CMA) is currently developing its own approach to reviewing Big Tech acquisitions, as the United Kingdom left the European Union on Jan. 31, 2020, and no longer enforces EU competition law. On Nov. 30, 2021, it became the first European competition agency to prohibit a completed acquisition by Facebook (now Meta). ¹⁵⁹ Its predecessor, the Office of Fair Trading (OFT), had already scrutinized a few high-profile acquisitions by the Big Five, without challenging any of them. All in all, the U.K. authorities have investigated a total of eight such acquisitions: three by Meta/Facebook, ¹⁶⁰ three by Google, ¹⁶¹ and two by Amazon. ¹⁶²

The CMA and OFT considered vertical theories of harm in five of these eight acquisitions, ¹⁶³ including the Facebook/Giphy prohibition. However, unlike the European Commission, the U.K. competition agencies have only considered conglomerate effects in one acquisition to date, the Amazon/Deliveroo merger from 2020. In this case, the CMA concluded that while the parties were likely to have the ability to bundle their respective subscription services to foreclose either other food delivery companies or other suppliers of subscription services postmerger, they were unlikely to have the incentive to act such a way. ¹⁶⁴

The CMA’s merger assessment guidelines from Mar. 2021 explicitly recognize conglomerate theories of harm. ¹⁶⁵ Their key conglomerate concern is that the merged entity could restrict rivals in one focal market from accessing customers in an adjacent market, for example, by linking the sales of the two products. Such linking could be achieved through bundling, integration within a digital ecosystem, or discounting if the customer of the adjacent product also purchased the focal product. The CMA’s guidelines acknowledge that the loss of sales by competitors is not problematic in and of itself, and that linked sales of related products can result in efficiencies. However, they take the view that competition concerns arise if such a strategy would cause rivals in the focal market to become less effective competitors, for example, by denying them growth opportunities, which could result in higher prices or lower quality in the longer term.

The guidelines conclude by stating that conglomerate effect concerns may be greatest in nascent and digital markets because new customers can be more easily diverted between firms, scaling is particularly critical, competitors are more easily marginalized, and the future benefits of controlling these markets are especially large. They also recognize that such effects might not emerge in full until after the market has reached maturity, so that the CMA might have to focus on their impact on the market structure and competition over the longer term. While such an assessment would likely be “subject to a degree of uncertainty,” this would not stop the CMA from concluding that the substantial-lessening-of-competition test was met. ¹⁶⁶

The CMA’s 2020 study into digital advertising also explicitly recognizes the credibility of leveraging theories. In this document, the CMA expressed clear concern about Facebook’s ability to leverage its market power from social media, and Google’s ability to leverage its market power from general search into related markets. ¹⁶⁷ In theory, therefore, the U.K. approach is aligned with that of the European Commission. In practice, however, the CMA has not yet issued a single decision establishing serious conglomerate concerns.

A. Key Findings

This analysis of the EU, U.S., and U.K. merger enforcement practice reveals a complex picture of evolving beliefs and enforcement trends. There are a number of clear parallels, as well as divergences. Both the EU and U.S. merger regimes, in their early days, used to condemn conglomerate mergers if combining the merging entities’ portfolios and financial resources was likely to give them such an advantage over competitors that the new entity would be able to drive its rivals out of the market and thus significantly affect the competitive structure of the market. Also, both jurisdictions essentially abandoned conglomerate effects for several years, when, albeit with a thirty-year delay, U.S. and EU antitrust enforcers adopted the consumer welfare aim and other core premises of the Chicago School.

In the European Union, conglomerate effects analysis is now suddenly, and somewhat mystifyingly, back on the enforcement agenda. In over half of the investigated Big Tech acquisitions, the European Commission carried out in-depth analyses of potential conglomerate effects in the form of anticompetitive leveraging through tying or other exclusionary practices. Granted, it has not yet prohibited any acquisition based on leveraging. However, this needs to be put in perspective. To date, the European Commission has not prohibited any acquisition by the Big Five, be it on the basis of horizontal or nonhorizontal effects. However, the only two commitments decisions issued to date addressed likely conglomerate leveraging effects. ¹⁶⁸ Remarkably, the European Commission accepted behavioral remedies in both cases. This is another significant break with its previous practice and general policy of preferring structural remedies. ¹⁶⁹

The position of the U.K. competition agency, spelled out in its recent updated merger guidelines from Mar. 2021, ¹⁷⁰ is, in essence, aligned with that of the European Commission. However, in practice, the CMA has yet to intervene against a merger on the basis of a conglomerate theory of harm.

By contrast, the position of the U.S. antitrust authorities is less clear. At first glance, one might conclude that conglomerate effects remain entirely off the table: over the past fifteen years, the FTC has only once engaged with the possibility that a product extension acquisition by a major diversified digital platform could result in leveraging effects—and rejected it. This was in 2007. ¹⁷¹ Moreover, the U.S. vertical merger guidelines from June 2020, ¹⁷² superficially at least, appear to imply that potential foreclosure strategies made possible through product extension are no longer an official theory of harm. A closer reading of the guidelines, however, suggests that there is scope for assessing such effects under vertical theories of harm. This was not the case under the previous nonhorizontal merger guidelines from 1984, which were issued at the height of the Chicago School’s influence, and focused on horizontal effects only. To some degree, the difference between the EU and U.S. enforcement agency’s positions may therefore currently be one of semantics. While the new U.S. vertical merger guidelines steadfastly avoid using the term conglomerate, their concept of a vertical merger appears much broader than that of the EU nonhorizontal merger guidelines, and many situations that would be considered conglomerate under EU merger law would be deemed vertical under the current U.S. merger guidelines. Given that the FTC officially withdrew its support for these guidelines in Sept. 2021, however, its position on foreclosure theories through leveraging in digital platform markets is currently unclear. Ultimately, it is, of course, the U.S. judiciaries’ legal interpretation of section 7 of the Clayton Act that counts. However, there is no legal precedent on conglomerate effects analysis in digital platform markets because the U.S. antitrust authorities have never brought such a case. In sum, there is a fair amount of uncertainty on the current U.S. position, primarily due to a lack of enforcement and precedent.

Incidentally, conglomerate effects and digital ecosystems are currently also back on the agenda of international competition networks and fora. Both the OECD and the ICN have recently organized roundtables and discussions on conglomerate merger analysis. ¹⁷³

B. What Explains These Findings?

This raises the question why conglomerate effects analysis, presumed dead only a decade ago, has suddenly made such a forceful reappearance, at the very least in the European Commission’s enforcement practice, and why it is suddenly warranting reexamination at the international level. A number of factors have likely contributed to this development.

C. Where Is the Harm?

The Big Five’s high and steady market share, their pattern of acquiring innovative start-ups, and their continuous extension into complementary markets may explain the European Commission’s growing attention to conglomerate effects and leveraging theories. This does not necessarily mean that the concern is justified. While the above factors taken together will not fail to trigger a vague sense of unease in most onlookers, unease is not a solid basis for intervention. It is a useful starting point for a more in-depth exploration of the situation, however.

Digital platforms and digital ecosystems are relatively new phenomena, and competition in and among digital ecosystems is not yet fully understood. Nonetheless, research on these new business models is slowly emerging. While disciples of the Chicago School mostly see no reason for concern, ¹⁸⁸ other scholars contest the validity of the Chicago School’s economic premises and legal presumptions for digital markets.

The push-back against the Chicago School’s compellingly simple presumptions is nothing new, of course. ¹⁸⁹ However, the advent of the Big Five, with their steadfast high market share, vast financial resources, truly global reach, and almost unchallenged string of acquisitions, appears to have reinvigorated the insurgency. ¹⁹⁰ It is not the place of a lawyer to judge the validity of this economic research. A little knowledge is a dangerous thing. The following therefore limits itself to outlining, in all brevity, a few recurring themes that can be observed in the more recent economic literature.

D. Outlook

While conglomerate effects analysis has recently experienced a renaissance in EU merger control and, albeit on a more theoretical level, also in U.K. merger law, the question arises whether this will be a lasting phenomenon. There is reason to believe that it might not.

In Dec. 2020, the European Commission submitted a legislative proposal for a Digital Markets Act (DMA). ²⁰⁶ This draft regulation is currently being discussed in the European Parliament and the Council of Ministers. While these two key legislative bodies of the European Union are likely to amend certain details, a version of the DMA is expected to be adopted in 2022. The DMA’s legal objective is to ensure the contestability and fairness of core digital platform markets in the European Union. ²⁰⁷ More specifically, it aims to address the dangers emanating from the fact that a few large digital platforms act as gatekeepers between business and end users, and enjoy an entrenched and durable position, often as a result of the creation of conglomerate ecosystems around their core platform services which reinforce existing barriers to entry. To this end, the DMA establishes a number of per se conduct rules that will be binding on designated “gatekeeper” platforms. ²⁰⁸ It is reasonable to expect that the European Commission will confer gatekeeper status upon the Big Five.

The seventeen conduct rules ²⁰⁹ proposed by the draft DMA include bans on a number of exclusionary strategies that could be used for leveraging purposes, such as self-preferencing ²¹⁰ and different forms of tying. ²¹¹ These rules are to be legally enforceable and noncompliance subject to potentially heavy financial penalties. ²¹² Given that these conduct rules do not require an investigation of the actual effects, the DMA’s enforcement is expected to be quicker and more effective than an investigation under the EU antitrust rules. ²¹³

It stands to reason that the European Commission will have to take these prohibitions into account when predicting whether two merging parties would have the incentive to engage in exclusionary conduct postmerger. The European Court of Justice already requires that the Commission consider whether the exclusionary practice underlying a leveraging theory would amount to a violation of Article 102 of the TFEU. ²¹⁴ There is no reason why the same rationale should not apply to the more easily enforceable conduct rules of the DMA. Once the DMA enters into force, one could therefore expect key leveraging scenarios to be preempted, and there to be less scope for conglomerate effects analysis in the review of future digital acquisitions. Incidentally, the United Kingdom is planning to enact similar, though custom-tailored, conduct rules for digital platforms with strategic market status. ²¹⁵

In the United States, the outlook is less clear. In an interesting twist of fate, President Biden recently appointed a key critic of the Chicago School as chair of the Federal Trade Commission. ²¹⁶ Lina Khan is an outspoken proponent of abandoning the consumer welfare aim and returning to the original legal objective of protecting the competitive process and competitive market structures. There is little doubt that this appointment played a role in the FTC revoking its support for the 2020 vertical merger guidelines just over a year after they were adopted. The FTC’s majority statement suggests that the agency will review key economic and legal presumptions that have guided U.S. merger review for the past decades. It is also interesting that the majority statement should use the term “gatekeeper platforms” ²¹⁷ —a core concept of the EU draft DMA. It may be a pure coincidence, of course. On the other hand, the FTC, the Department of Justice, and the European Commission recently launched an EU–U.S. Joint Technology Competition Policy Dialogue in the aim of cooperating on competition policy and enforcement overall and digital sectors in particular. ²¹⁸ While U.S. ideas significantly shaped EU antitrust law twenty years ago following the Boeing/McDonnell Douglas and GE/Honeywell debacles, ²¹⁹ the current U.S. administration may be open to engaging with a few European ideas. However, it remains to be seen whether the outcome of this process will translate into a lasting legacy, or whether the agency will return to business as usual under a future administration. Furthermore, the FTC is not the only U.S. agency responsible for enforcing section 7 of the Clayton Act. This is a task it shares with the Department of Justice, the latter having not publicly renounced the 2020 vertical merger guidelines. While these guidelines are more open to leveraging theories than the 1984 guidelines, the question remains whether Department of Justice will be open to enforcement on leveraging bases. Ultimately, in any case, it is the opinion of the judiciary that matters, and it is far from clear whether U.S. courts can be convinced to embrace post-Chicago research. ²²⁰