Others—granted, people who are skeptical of mergers more generally—are skeptical of this one too. Brian Feldman, of the antitrust research group Open Markets Institute, argues that mergers in the past few decades have “created a funhouse mirror situation—the drug industry’s incentives have become incredibly warped.” The market for drugs is shaped by five different types of companies: drug manufacturers, wholesalers, pharmacies, insurers, and pharmacy benefit managers (which function as middlemen between manufacturers and insurers). If the CVS-Aetna deal goes through, Feldman argues, CVS would have a foothold in every category but manufacturing, meaning that it would encounter competition from other companies less often.
As government regulators weigh whether to greenlight the CVS-Aetna deal, it’s points like these that they will mull on. One clause I included at the top of this piece—“if government regulators and both companies’ shareholders give it their blessing”—may have read as a formality, but, more so than in the past, there’s a real question of whether the Department of Justice will approve of a merged CVS-Aetna.
Broadly speaking, there are two types of mergers: horizontal and vertical. A horizontal merger is between rivals, and is the type that tends to make regulators worried that companies benefit, via decreased competition, at the expense of consumers. A vertical merger is between companies that do different things in the same industry. The case that these mergers hurt consumers is not always as straightforward. Consider this example: If one company that makes T-shirts bought the rest (a horizontal merger), it could dictate the price of T-shirts. But if a department store bought one T-shirt maker (a vertical merger), it wouldn’t have so much sway over the market.
Antitrust regulators have tended to be more permissive of deals like the latter than deals like the former. Lately, though, the DOJ’s stance on vertical mergers—which is what the CVS-Aetna deal represents—appears to have changed, as my colleague Derek Thompson has written. In 2011, the Obama administration approved of a merger between NBCUniversal (a media company) and Comcast (a media-distribution company). But last month, the DOJ said it would sue to block a very similar deal, between Time Warner (a media company) and AT&T (a media-distribution company).
That seemed unusual under an administration that is outspokenly opposed to government regulation. What changed? Makan Delrahim, DOJ’s head of antitrust, explained his thinking in a speech last month. In the case of the Comcast-NBCUniversal merger, the government gave a thumbs-up, but only a conditional one: Regulators have been keeping close tabs on the company to make sure it hasn’t been engaging in any anticompetitive tactics. Delrahim said this isn’t how it should be: If a merged company is potentially anticompetitive, it just shouldn’t be approved in the first place, so the government doesn’t have to keep watch.
CVS, Aetna, and their shareholders—as well as those bankers who engineered the merger—will be eager to know if Delrahim feels the same about this deal. Another company will too: If CVS’s deal goes unchallenged, AT&T will probably want a good reason why its vertical merger did not.