Monday, December 23, 2019

Merger Questions to Mull Over Your Cider

With the full FTC complaint against the Illumina-PacBio merger now out in the open but the holiday break bearing down like a reindeer on steroids, I want to leave you with a few questions to ponder over your wassail.  Because what holiday gathering is not enlightened by discussion on the Herfindahl-Hirschmann Index (HHI)?
It turns out that U.S. antitrust law actually contains an algorithmic way to determine if a merger is presumptively anticompetitive: the HHI.  This is computed by summing the squares of the market shares of the firms.  HHI over 2500 and merger bumps the index by 200 or more?  Market is too concentrated.

So not much skill required here.  Just identify all the players in a given market, such as the U.S. sequencing market, tally up their percent share, plug it into your favorite number cruncher (perhaps nutcracker shaped?) and presto!  Turns out that the U.S. sequencing market is at 8290, which doesn't surprise considering Illumina has a market share of at least 90 so alone contributes at least 8100 points.  FTC estimates the acquisition would increase the index by 443 points.

So here are the questions worth applying your (egg)noggin to:

If this calculation is so straightforward, why didn't anyone bring this up before, my self included?  I've talked to lots of financial types and never did anyone say "by-the-way, there's a totally deterministic way to figure out if the merger is anticompetitive".  Says something about the lack of expertise in antitrust law in those who have been commenting.

If this calculation is so simple, why did the FTC take over a year to trot out this analysis?  Nobody is served well by all this delay.  It's not like the FTC report has much in the way of striking detail not in the UK's CMA report -- indeed, it largely reads like the Cliff's Notes version.

Given that anyone can calculate this, did anyone at Illumina run through the calculation before signing the acquisition agreement?  If so, what internal justification did they use to talk themselves into pushing forward with a merger that would so clearly trigger regulatory headwinds?  And given that everything is in the open, how does Illumina convince themselves internally that these regulatory hurdles can be cleared?

Okay, one question not related to HHI.  When PacBio shopped itself around in 2018, only Illumina and BGI showed any interest.  Obviously the data PacBio showed really wowed Illumina.  Are any executives at the other companies re-thinking their decision?  Do any feel they let the latkes fall in the fire on this one?  If as the FTC claims Illumina saw acquiring PacBio as critical, why didn't anyone else see this as an opportunity to steal a lead on Illumina?

By the way, late presents are still great presents, and nothing makes a greater present than unredacted copies of regulatory complaints.  

Whichever set of holidays you observe this season, may they bring you joy and comfort.


Anonymous said...

Excellent questions.

ILMN knew it would hit barriers, that’s why they left such a long time for the initial merger agreement. Perhaps they only counted on resistance in the US which they thought, and may still think, they can overcome.

FTC may have let the CMA do all the heavy lifting one the CMA got rolling. Perhaps the CMA have flushed out the arguments and the FTC can judge the likelihood of a successful prosecution.

pacB couldn’t find another buyer other than the one in china. There are lots of reasons for that, but a couple are that ILMN is seen as too dominant to challenge, and pacb isn’t seen as heading towards profitability (or wasn’t). So pacb had little choice.

Adding 2% to 90% was raised by the parties that have objected to merger from the start. It’s a fundamental problem, all the other arguments are side shows.

ILMN probably has some upside from the merger, but can live without it, so it was worth a punt.

gasstationwithoutpumps said...

Maybe ILMN thought that they could define the market differently—say just the long-read sequencing market.