Mergers Flashcards
Merger/concentration
The possibility of exercising decisive influence
(Actual) merger
- Two undertakings merge into a new undertaking – e.g. GlaxoSmithKline.
Concentration
- Previously independent undertakings come under common control
- Acquisitions of control (de jure or de facto).
- Asset acquisitions.
- The establishment of joint ventures.
Different types of mergers
Horizontal
- Merger between actual or potentiel competitors
- Unilateral and/or coordinated effects.
Vertical
- Merger between firms operating at different, but complementary, levels of the market
- Often enhance or be neutral when it comes to eonomic efficiencies
- Possibility of forclosure or collusion
Conglomerate
- Neither horizontal or vertical
Reasons for merging
Ecomies of scale and scope
- Product-specific –> Enanle a product to be produced more cheaply
- Plant-specific –> Use of a multi-product plant is optimized
- Firm-specific –> Lower overall costs
Other efficiency gains
- Take over distributor rather than establish own
- Backward integration –> take over supplier
- Aquire patents and know-how
National champions
- Better enabled to compete, also on an international level
Exiting the industry
- If a firm wishes to exit, merges offeres a way to do so
- Gives the incentive to take risks of starting a new firm
Meaning of a concentration
Change of control on a lasting basis
- A shift in control (as a starting point) triggers a duty to notify
Mergers
- Two or more independent undertakings merge
Acquisition of control
- Confer the possibility of exercising decisive influence
- De jure –> Acquisitions of shares, assets or shareholders’ agreements
- De facto –> A position of economic dependence, typically quite rare
- Successive transactions –> can be treated as one if within two-year period
- Sole control –> Owns the majority of rights or minority shareholder is able to veto decisions
- Joint control –> Two or more undertakings have possibility of exercising decisive influence
Full function joint venture
- JV can act independently on the market;
- JV carries out activities beyond what the mothers instructs it to do;
- JV – following a start-up period – trades on arms length terms with its mothers; and
- JV is created to operate on a lasting basis.
One-stop merger control
Concentration having Union dimension, should only be investigated by the Commission
- Memberstate is not allowed to apply it legislation
Refferal
Reffarel of concentrations with Union dimension to a memberstate
- Pre-notification reffarels –> Request from the parties to concentration prior to notification
- Post-notification reffarels –> request from a memberstate after notification
- Usually on cases where the effects will be felt in a national market or narrower
Reffarel of concentrations not having Union dimension to the Commission
- Pre-notification –> Parties can make request if concentration being reviewed in at least three MS
- Post-notification –> MS can request for concentration that affect trade between MS an threaten to affect significantly
Legitimate interest
- Allows MS to protect legitimate interest other than those conisdered in the EUMR
- Public security and so on
Union dimension
If Union domension the concentration must be notified to the Commission prior to implementation
The EMCR covers only mergers, that
- 1) are between larger firms (turnover),
- 2) undertakes activities on the common market, and
- not mainly within a single member state (2/3).
Primary thresholds
- Worldwide turnover –> 5 bil.
- Union wide turnover –> 2,5 bil.
- Unless 2/3 of turnover for each undertaking is within one memberstate
Alternative thresholds
- Worldwide turnover –> 2,5 bil
- Turnover of at least 100 mil in each of three memberstates
- Turnover of two of the three undertakings 25 mil
- Union wide turnover of at least two undertakings –> 100 mil
- Unless 2/3 of turnover for each undertaking is within one memberstate
Undertakings concerned
- Concept used to identify those undertakings whose turnover is to be included
- “Rule of thumb” is: (i) target, (ii) acquirer, and (iii) acquirer’s group (not the sellers group)
Merger
- The merging parties
Acquisition of control
- A acquires B – both are undertakings concerned.
- A acquires part of B – A and the part of B acquired will be undertakings concerned
- A and B jointly controls C and A acquires B’s stake in C – undertakings concerned are A and C.
- A and B establish new entity, C – undertakings concerned are A and B.
- A and B acquires joint control over C – undertakings concerned are A, B and C.
NB: Special rules for acquisitions by joint ventures!
Turnover
- Turnover from the most recent financial year, including parents and subsidiaries.
- Turnover to be allocated to the home-country of the customer
Standstill and gun jumping
Obligation to notify the transaction prior to implementation
Obligation not to implement the transaction before clearance is obtained
Time limits
Pre-notification
- Used to discuss the case with DG Comp, including any potential issues.
- Preparation for a “complete” filing – pre-notification is typically a long lasting “process”!
Phase 1:
- 25 working days.
- Can be extended to 35 working days in case of referral requests or offered remedies.
Phase 2 (”raises serious doubts”):
- 90 working days.
- Can be extended to 105 working days, if remedies are offered between day 55 and day 65 of Phase 2.
- Can – upon the parties’ request – be extended with further 20 working days.
- The time-limits can under extraordinary circumstances be suspended (stop the clock – in Denmark, similar rules have been introduced recently).
The SIEC test
Significant impediment to effective competition
- in particular with the creation or strengthening of a dominant position
- Changed due to the problem that some mergers resulted in the creation of an oligopolistic market
Burden of proof on the Commission
Casual link between the concentration and the SIEC
- Failing firm defence
- Uses the counterfactual to prove that there is a casual link between the concentration and the negative effects
Affected markets
Parties are obligated to provide information on any “affected market”:
Total market share (two or more parties have combined):
- Horisontal: >20 %
- Vertical: >30 %
- Includes information of HHI before and after merger, barriers to entry
Horizontal mergers
Primarily looks at prices
Market shares and concentration levels
- Useful first indication
- > roughly 40% = dominance test;
- 25-40% = if significant impediment of competition
- <25% = normally not the case
- HHI and delta –> indicator of the absence of competition concerns
Non-coordinated effects
- Strengthening of a dominant position or creation of a non-collusive oligopoly
- Theory of harm
- Price increase, quality reduction, limiting innovation, limited switching possibilities, incentive to reduce supply, hinder expansion by competitors
Coordinated effects
- Used less
- Reaching terms of coordination, monitoring, credible deterrent mechanism, no constraint from outsiders.
Merger with potential competitor
- Anti-competitive effects, if:
- 1) Potential competitor exerts a significant constraining influence
- 2) Lack of other potential competitors that could maintain competitive pressure after the merger
Entry
- Sufficently easy –> unlikely to lead to a SIEC
- Entry must be likely, sufficient and timely
Efficiencies
- Must benefit consumers, be merger-specific and verifiable
- Not a defence, but will be factored into the overall assessment
Failing firm defence
- Alleged failing firm would in the near future be forced out of the market without the merger
- No less anti-competitve alternative than the merger
- Assets of failing firm would exit the market woithout the merger
Vertical mergers
Looks at forclosure
Less likely to impede competition
- No loss of direct competition
- Provides substantial efficiencies
Market shares and concentration levels
- Market shares below 30% after merger –> unlikely to have competition concerns
- HHI and delta –> indicator of the absence of competition concerns
Non-coordinated effects
- Input forclosure –> Restrict access to products or services downstream (ability and incentive)
- Customer forclosure –> Hinder upstream rivals access to downstream customers (ability and incentive)
Coordinated effects
- Reaching terms of coordination, monitoring, credible deterrent mechanism, no constraint from outsiders
Full-function joint venture
Assessed the same as horizontal aand vertical mergers
Spill-over effects
- Enables coordination between independent undertakings (typically the owners)
- Will the JV enable the parents to coordinate in te upstream market, due to their knowledge to the other parent through the JV
Ancillary restrictions
Restriction that are neccessary for the implementation of a merger
- fx if JV, non compete between the parents for the product the JV produces
- Purchase or supply agreements
Neccessary –> the merger could not be implemented without the restriction
- only under considerably mor uncertain conditions, higher cost, longer period or greater difficulty
Remedies
If the merger is considered to be problematic (SIEC test), the Commission must block it.
- However, the parties can offer remedies in order to “fix” the problem.
- The Commission can attach conditions and obligations to a merger decision.
Criteria for accepting remedies
- Eliminate the harmful effects.
- Timely implementation.
- Cannot create new competition issues.
- Able to effectively implement and monitor.
- Proportional.
Types of remedies:
- Structural (e.g. divestment of activities or assets) – preferred, very direct and easy to monitor. A viable business, if operated by a suitable purchaser, can compete effectively on a lasting basis.
- Behavioural (e.g. duty to supply or license, or granting access to a key infrastructure, termination of agreements.)
