Merger control

Last updated

Merger control refers to the procedure of reviewing mergers and acquisitions under antitrust / competition law. Over 130 nations worldwide have adopted a regime providing for merger control. National or supernational competition agencies such as the EU European Commission, the UK Competition and Markets Authority, or the US Department of Justice or Federal Trade Commission are normally entrusted with the role of reviewing mergers.

Contents

Merger control regimes are adopted to prevent anti-competitive consequences of concentrations (as mergers and acquisitions are also known). Accordingly, most merger control regimes normally provide for one of the following substantive tests:

In practice most merger control regimes are based on very similar underlying principles. In simple terms, the creation of a dominant position would usually result in a substantial lessening of or significant impediment to effective competition.

The large majority of modern merger control regimes are of an ex-ante nature, i.e. the reviewing authorities carry out their assessment before the transaction is implemented.

While it is indisputable that a concentration may lead to a reduction in output and result in higher prices and thus in a welfare loss to consumers, the antitrust authority faces the challenge of applying various economic theories and rules in a legally binding procedure.

Horizontal mergers

The vast majority of significant competition issues associated with mergers arises in horizontal mergers. [1] A horizontal merger is one between parties that are competitors at the same level of production and/or distribution of a good or service, i.e., in the same relevant market. [2]

There are two types of anticompetitive effects associated with horizontal mergers: unilateral effects and coordinated effects.

Unilateral effects, also known as non-coordinated effects, arise where, as a result of the merger, competition between the products of the merging firms is eliminated, allowing the merged entity to unilaterally exercise market power, for instance by profitably raising the price of one or both merging parties’ products, thus harming consumers. [3]

In homogeneous markets, unilateral effects can be pronounced when two significant competitors merge to create a large, dominant player with only a few or no other competitors. In these markets, an important role in the assessment is played by market shares and by the capacity available in the market. [4] In differentiated markets, unilateral effects tend to arise particularly when the two merging companies have highly substitutable goods. Such a price increase does not depend on the merged firm being the dominant player in the market. The likelihood and magnitude of such an increase will instead depend on the substitutability of the products supplied by the two firms – the closer the substitute, the greater the unilateral effects. [5]

Coordinated effects arise where, under certain market conditions (e.g., market transparency, product homogeneity etc.), the merger increases the probability that, post merger, merging parties and their competitors will successfully be able to coordinate their behaviour in an anti-competitive way, for example, by raising prices. [6] As in the case of unilateral effects, the most common form of coordinated effects is in the case of horizontal mergers, i.e. mergers between firms active on the same market.

The main question in analysing coordinated effects should be whether the merger materially increases the likelihood that firms in the market will successfully coordinate their behaviour or strengthen existing coordination. The task is to identify what factors are likely to lead to coordination taking place between firms post-merger. This was a controversial area with which competition authorities and courts have struggled to come to terms over the years, but experience has led to the emergence of some agreement on what conditions are most likely to give rise to coordinated effects. [7]

Under the European Union merger control regime, in order for coordinated effects to arise the so-called "Airtours criteria" have to be fulfilled. [8]

According to the "Airtours criteria", coordination is more likely to emerge in markets where it is relatively simple to reach a common understanding on the terms of coordination. In addition, three conditions are necessary for coordination to be sustainable. First, the coordinating firms must be able to monitor to a sufficient degree whether the terms of coordination are being adhered to. Second, discipline requires that there is some form of credible deterrent mechanism that can be activated if deviation is detected. Third, the reactions of outsiders, such as current and future competitors not participating in the coordination, as well as customers, should not be able to jeopardise the results expected from the coordination. [9]

Non-horizontal mergers

There are two basic forms of non-horizontal mergers: vertical mergers and conglomerate mergers. [10]

Vertical mergers are mergers between firms that operate at different but complementary levels in the chain of production (e.g., manufacturing and an upstream market for an input) and/or distribution (e.g., manufacturing and a downstream market for re-sale to retailers) of the same final product. In purely vertical mergers there is no direct loss in competition as in horizontal mergers because the parties' products did not compete in the same relevant market. As such, there is no change in the level of concentration in either relevant market. Vertical mergers have significant potential to create efficiencies largely because the upstream and downstream products or services complement each other. Even so, vertical integration may sometimes give rise to competition concerns. [10]

Vertical effects can produce competitive harm in the form of foreclosure. A merger is said to result in foreclosure where actual or potential rivals' access to supplies or markets is hampered or eliminated as a result of the merger, thereby reducing these companies' ability and/or incentive to compete. [11]

Two forms of foreclosure can be distinguished. The first is where the merger is likely to raise the costs of downstream rivals by restricting their access to an important input (input foreclosure). The second is where the merger is likely to foreclose upstream rivals by restricting their access to a sufficient customer base (customer foreclosure). [12]

In general, vertical merger concerns are likely to arise only if market power already exists in one or more markets along the supply chain. [13]

Conglomerate mergers involve firms that operate in different product markets, without a vertical relationship. They may be product extension mergers, i.e., mergers between firms that produce different but related products or pure conglomerate mergers, i.e., mergers between firms operating in entirely different markets. In practice, the focus is on mergers between companies that are active in related or neighbouring markets, e.g., mergers involving suppliers of complementary products or of products belonging to a range of products that is generally sold to the same set of customers in a manner that lessens competition. [14]

Merger review in this area is controversial, as commentators and enforcement agencies disagree on the extent to which one can predict competitive harm resulting from such mergers. [15] Such a disagreement is for instance illustrated by the different outcomes of the merger control reviews by the authorities of the United States and the European Union of the GE/Honeywell merger attempt.

Proponents of conglomerate theories of harm argue that in a small number of cases, where the parties to the merger have strong market positions in their respective markets, potential harm may arise when the merging group is likely to foreclose other rivals from the market in a way similar to vertical mergers, particularly by means of tying and bundling their products. When as a result of foreclosure rival companies become less effective competitors, consumer harm may result.

However, it should be stressed that in these cases there is a real risk of foregoing efficiency gains that benefits consumer welfare and thus the theory of competitive harm needs to be supported by substantial evidence. [16]

Mandatory and voluntary regimes

A merger control regime is described as "mandatory" when filing of a transaction is compulsory. Mandatory regimes normally also contain a so-called "suspensory clause", which implies that the parties to a transaction are indefinitely prevented from closing the deal until they have received merger clearance. The majority of merger jurisdictions worldwide have mandatory merger control systems. An examples of a mandatory system with suspensory clause is provided by the European Union merger control. [17]

A distinction can also be made between "local" and "global" bars on closing/implementation; some mandatory regimes provide that the transaction cannot be implemented within the particular jurisdiction (local bar on closing) and some provide that the transaction cannot be closed/implemented anywhere in the world prior to merger clearance (global bar on closing). A number of jurisdictions worldwide have a merger control regime which imposes a global bar on closing. This creates obstacles for the parties to a concentration to close a transaction until a number of the regulatory clearances required are obtained.

A merger control regime is described as "voluntary" when the parties are not prevented from closing the deal and implementing the transaction in advance of having applied for and received merger clearance. In these circumstances the merging parties are effectively taking the risk that the competition authority will not require them to undo the deal if in due course it is found that the transaction is likely to have an anti-competitive effect. Voluntary regimes are fairly exceptional. The United Kingdom, for instance, has a voluntary merger control regime. However, the Competition and Markets Authority can request the parties to a merger that has already completed to hold the two businesses separate pending an investigation (so called "initial enforcement orders").

Mandatory regimes can be considered effective in preventing anticompetitive concentrations since it is almost impossible to unravel a merger once it has been implemented (for example because key staff have been made redundant, assets have been sold and information has been exchanged). On the other hand, voluntary regimes are seen as constituting less of a burden for merging firms.

See also

Related Research Articles

<span class="mw-page-title-main">Mergers and acquisitions</span> Type of corporate transaction

Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect of strategic management, M&A can allow enterprises to grow or downsize, and change the nature of their business or competitive position.

The Herfindahl index is a measure of the size of firms in relation to the industry they are in and is an indicator of the amount of competition among them. Named after economists Orris C. Herfindahl and Albert O. Hirschman, it is an economic concept widely applied in competition law, antitrust regulation, and technology management. HHI has continued to be used by antitrust authorities, primarily to evaluate and understand how mergers will affect their associated markets. HHI is calculated by squaring the market share of each competing firm in the industry and then summing the resulting numbers. The result is proportional to the average market share, weighted by market share. As such, it can range from 0 to 1.0, moving from a huge number of very small firms to a single monopolistic producer. Increases in the HHI generally indicate a decrease in competition and an increase of market power, whereas decreases indicate the opposite. Alternatively, the index can be expressed per 10,000 "points". For example, an index of .25 is the same as 2,500 points.

<span class="mw-page-title-main">Horizontal integration</span> Business process

Horizontal integration is the process of a company increasing production of goods or services at the same level of the value chain, in the same industry. A company may do this via internal expansion, acquisition or merger.

<span class="mw-page-title-main">Vertical integration</span> When a company owns its supply chain

In microeconomics, management and international political economy, vertical integration is an arrangement in which the supply chain of a company is integrated and owned by that company. Usually each member of the supply chain produces a different product or (market-specific) service, and the products combine to satisfy a common need. It contrasts with horizontal integration, wherein a company produces several items that are related to one another. Vertical integration has also described management styles that bring large portions of the supply chain not only under a common ownership but also into one corporation.

Anti-competitive practices are business or government practices that prevent or reduce competition in a market. Antitrust laws ensure businesses do not engage in competitive practices that harm other, usually smaller, businesses or consumers. These laws are formed to promote healthy competition within a free market by limiting the abuse of monopoly power. Competition allows companies to compete in order for products and services to improve; promote innovation; and provide more choices for consumers. In order to obtain greater profits, some large enterprises take advantage of market power to hinder survival of new entrants. Anti-competitive behavior can undermine the efficiency and fairness of the market, leaving consumers with little choice to obtain a reasonable quality of service.

<span class="mw-page-title-main">European Union competition law</span> Economic law of the European Union

In the European Union, competition law promotes the maintenance of competition within the European Single Market by regulating anti-competitive conduct by companies to ensure that they do not create cartels and monopolies that would damage the interests of society.

Competition law is the field of law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as antitrust law, anti-monopoly law, and trade practices law; the act of pushing for antitrust measures or attacking monopolistic companies is commonly known as trust busting.

The theory of the firm consists of a number of economic theories that explain and predict the nature of the firm, company, or corporation, including its existence, behaviour, structure, and relationship to the market. Firms are key drivers in economics, providing goods and services in return for monetary payments and rewards. Organisational structure, incentives, employee productivity, and information all influence the successful operation of a firm in the economy and within itself. As such major economic theories such as transaction cost theory, managerial economics and behavioural theory of the firm will allow for an in-depth analysis on various firm and management types.

In Economics and Law, exclusive dealing arises when a supplier entails the buyer by placing limitations on the rights of the buyer to choose what, who and where they deal. This is against the law in most countries which include the USA, Australia and Europe when it has a significant impact of substantially lessening the competition in an industry. When the sales outlets are owned by the supplier, exclusive dealing is because of vertical integration, where the outlets are independent exclusive dealing is illegal due to the Restrictive Trade Practices Act, however, if it is registered and approved it is allowed. While primarily those agreements imposed by sellers are concerned with the comprehensive literature on exclusive dealing, some exclusive dealing arrangements are imposed by buyers instead of sellers.

In economics, market concentration is a function of the number of firms and their respective shares of the total production in a market. Market concentration is the portion of a given market's market share that is held by a small number of businesses. To ascertain whether an industry is competitive or not, it is employed in antitrust law and economic regulation. When market concentration is high, it indicates that a few firms dominate the market and oligopoly or monopolistic competition is likely to exist. In most cases, high market concentration produces undesirable consequences such as reduced competition and higher prices.

Merger simulation is a commonly used technique when analyzing potential welfare costs and benefits of mergers between firms. Merger simulation models differ with respect to assumed form of competition that best describes the market as well as the structure of the chosen demand system

Market dominance is the control of a economic market by a firm. A dominant firm possesses the power to affect competition and influence market price. A firms' dominance is a measure of the power of a brand, product, service, or firm, relative to competitive offerings, whereby a dominant firm can behave independent of their competitors or consumers, and without concern for resource allocation. Dominant positioning is both a legal concept and an economic concept and the distinction between the two is important when determining whether a firm's market position is dominant.

Merger guidelines in the United States are a set of internal rules promulgated by the Antitrust Division of the Department of Justice (DOJ) in conjunction with the Federal Trade Commission (FTC). These rules have been revised over the past four decades. They govern the process by which these two regulatory bodies scrutinize and/or challenge a potential merger. Grounds for challenges include increased market concentration and threat to competition within a relevant market.

A vertical agreement is a term used in competition law to denote agreements between firms at different levels of a supply chain. For instance, a manufacturer of consumer electronics might have a vertical agreement with a retailer according to which the latter would promote their products in return for lower prices. Franchising is a form of vertical agreement, and under European Union competition law this falls within the scope of Article 101.

European Union merger law is a part of the law of the European Union. It is charged with regulating mergers between two or more entities in a corporate structure. This institution has jurisdiction over concentrations that might or might not impede competition. Although mergers must comply with policies and regulations set by the commission; certain mergers are exempt if they promote consumer welfare. Mergers that fail to comply with the common market may be blocked. It is part of competition law and is designed to ensure that firms do not acquire such a degree of market power on the free market so as to harm the interests of consumers, the economy and society as a whole. Specifically, the level of control may lead to higher prices, less innovation and production.

In competition law, a relevant market is a market in which a particular product or service is sold. It is the intersection of a relevant product market and a relevant geographic market. The European Commission defines a relevant market and its product and geographic components as follows:

  1. A relevant product market comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer by reason of the products' characteristics, their prices and their intended use;
  2. A relevant geographic market comprises the area in which the firms concerned are involved in the supply of products or services and in which the conditions of competition are sufficiently homogeneous.

Article 102 of the Treaty on the Functioning of the European Union (TFEU) is aimed at preventing businesses in an industry from abusing their positions by colluding to fix prices or taking action to prevent new businesses from gaining a foothold in the industry. Its core role is the regulation of monopolies, which restrict competition in private industry and produce worse outcomes for consumers and society. It is the second key provision, after Article 101, in European Union (EU) competition law.

Mergers and acquisitions in United Kingdom law refers to a body of law that covers companies, labour, and competition, which is engaged when firms restructure their affairs in the course of business.

United States v. Philadelphia National Bank, 374 U.S. 321 (1963), also called the Philadelphia Bank case, was a 1963 decision of the United States Supreme Court that held Section 7 of the Clayton Act, as amended in 1950, applied to bank mergers. It was the first case in which the Supreme Court considered the application of antitrust laws to the commercial banking industry. In addition to holding the statute applicable to bank mergers, the Court established a presumption that mergers that covered at least 30 percent of the relevant market were presumptively unlawful.

Mergers in United Kingdom law is a theory-based regulation that helps forecast and avoid abuse, while indirectly maintaining a competitive framework within the market. A true merger is one in which two separate entities merge into an entirely new entity. In Law the term ‘merger’ has a much broader application, for example where A acquires all, or a majority of, the shares in B, and is able to control the affairs of B as such.

References

  1. ↑ International Competition Network 2006, para. 1.6.
  2. ↑ International Competition Network 2006, para. 3.4.
  3. ↑ International Competition Network 2006, para. 2.6.
  4. ↑ "U.S. Department of Justice and the Federal Trade Commission Horizontal Merger Guidelines" . Retrieved 2023-05-04. para. 6.3
  5. ↑ Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings, para. 28
  6. ↑ International Competition Network 2006, para. 3.6.
  7. ↑ International Competition Network 2006, paras. D.3 and D.4.
  8. ↑ See Judgment of the Court of First Instance (Fifth Chamber, extended composition) of 6 June 2002. Airtours plc v Commission of the European Communities, ECLI:EU:T:2002:146, where these criteria were introduced.
  9. ↑ Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings, para. 41
  10. 1 2 International Competition Network 2006, para. 3.7.
  11. ↑ Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of concentrations between undertakings, para. 29
  12. ↑ Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of concentrations between undertakings, para. 30
  13. ↑ International Competition Network 2006, para. 3.10.
  14. ↑ International Competition Network 2006, para. 3.12.
  15. ↑ International Competition Network 2006, para. 3.13.
  16. ↑ International Competition Network 2006, paras. 3.14-3.15.
  17. ↑ See Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation)
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.