The principal deputy assistant attorney general at the US Department of Justice’s antitrust division has identified a lack of good presumptions on which to rely when analysing and measuring innovation in merger reviews.
Andrew Finch said the Antitrust Division continues to assess a variety of different factors when examining the effect that a merger might have on innovation. He gave the opening keynote remarks at GCR Live’s sixth annual New York conference this morning.
Some experts have said that rivalry between companies drives innovation, but others have said the opposite, Finch said, while noting that measuring rivalry can be difficult. Whereas in a typical merger review enforcers will examine the market shares in a relevant product market, it can be difficult to figure out what shares actually matter regarding rivalry.
The division measures innovation by examining research and development spending; the number of patented inventions; and the strength of patent portfolios based on the number of patents a company has received, Finch said. Each of these methods has its challenges though, he added.
There is still some uncertainty about how to group together different areas of innovation and determining which direction research might go, Finch said. Companies that set out to find a solution to one problem might very well end up with a solution to a different problem, he added.
R&D spend might make a company look like it is more innovative in one market while the number of patents might show it to be more active in another market, Finch explained. The division is careful to identify the market participants at different stages of innovation, he said.
“The mere absence of a competitor at one stage – or take the late stage in product development – doesn’t signify it wasn’t present as a rival in an earlier stage of the R&D development,” the deputy said.
Assuming one is able to accurately assess all the correct measurements, that might help paint a picture of how much innovation companies have undertaken in the past, and it will loosely predict whether a company will be innovative in the future, Finch said.
Still, there remains uncertainty about the likelihood of innovation increasing just because two innovative companies merge, Finch said, adding that the important question is whether any other innovator remains in the market after the merger.
“As a result of these open questions, merger reviews often focus naturally on industry participants’ understanding and expectations for how the forces of innovation will play out in an industry,” Finch said. “We take a highly fact-specific approach, because we don’t yet have good presumptions to rely on.”
That fact-specific inquiry extended to the analysis of innovation in the Dow/DuPont merger, which centred on the crop protection market, Finch said. The Antitrust Division’s investigation ultimately revealed features of the market in the US that led to a different conclusion to that of the European Commission’s Directorate-General for Competition. He noted that the US had more companies competing to develop crop protection products than Europe.
One of the controversial aspects of DG Comp’s decision in that case was the measurement of R&D spend. The enforcer ultimately forced the merged company to divest almost all of DuPont’s global R&D organisation, and the decision led observers to question how DG Comp assesses innovation in mergers.
GCR Live New York, which is being hosted at Cleary Gottlieb Steen & Hamilton, concludes today.