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New policy guidance on European merger control Dr Johannes Luebking Deputy Head of Merger Control – Communication, Information, Media DG Competition The views expressed are personal to the speaker. Guidelines on non-horizontal mergers. Non-horizontal mergers: General principles.

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slide1
New policy guidance on European merger control

Dr Johannes Luebking

Deputy Head of Merger Control –

Communication, Information, Media

DG Competition

The views expressed are personal to the speaker

non horizontal mergers general principles
Non-horizontal mergers: General principles
  • No presumption of legality of non-horizontal mergers. “Balance of probabilities” standard applies.
  • Non-horizontal mergers are generally less likely to create competition concerns than horizontal mergers
    • no loss of direct competition between the merging parties
    • possible complementarity of merging parties
      • Scope for efficiencies, incl. pricing efficiencies (elimination of double mark-ups; Cournot effect)
    • however, there are circumstances in which non-horizontal mergers may change the ability and incentive to compete on the part of the merging company and the competitors in ways that cause harm to consumers
  • Convincing evidence required to support finding of harm
    • “Particularly important” when “chains of cause and effect are dimly discernible, uncertain and difficult to establish” (Tetra, par 44)
market share and concentration levels
Market share andconcentration levels
  • No threat to effective competition unless the merged entity has significant market power, which does not necessarily amount to dominance, in at least one of the markets concerned.
  • Safe harbours:

Commission unlikely to identify competition concerns when in each of the markets concerned:

    • Market share merged entity < 30% and
    • HHI < 2000

(Except where certain special circumstances are present which make market shares / HHI less informative)

  • No presumption of illegality above the safe harbours. Need for a case by case assessment.
vertical mergers theories of harm
Vertical mergers: theories of harm
  • Non-coordinated effects
    • Main concern: foreclosure
        • “any instance 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” and harming consumers as a consequence (par 18)
    • Two forms
        • Input foreclosure
        • Customer foreclosure
    • Other non-coordinated effects:
        • Access to sensitive information regarding rivals’ upstream or downstream activities
  • Co-ordinated effects
analytical framework
Analytical framework
  • Commission will examine:
    • Ability to foreclose
    • Incentive to foreclose
    • Likely impact on effective competition
example input foreclosure

Upstream

entity (market power)

Downstream

entity

Rivals

Reduction of competitive pressure?

Example: Input foreclosure

Efficiencies?

Raising rivals costs?

 Net effect on consumers ?

i ability to foreclose
(i) Ability to foreclose
  • Necessary conditions for the merged entity to have the ability to foreclose
    • the input must be important (e.g. in cost or technology terms)
    • merged entity must have market power upstream
        • E.g. other upstream rivals are less efficient, offer less preferred alternatives, cannot expand easily
        • Input foreclosure may also expose downstream rivals to independent upstream suppliers with increased market power
  • Check possible counter-strategies of downstream rivals
ii incentive to foreclose
(ii) Incentive to foreclose
  • Incentive depends on the degree of profitability of the foreclosing practice
  • Merged entity faces possible trade-off between
      • profit loss due to no longer supplying to downstream rivals and
      • profit gain due to expanding sales downstream and/or being able to raise price in that market
  • Incentive to foreclose may be higher in case
      • Profits upstream are low (compared with downstream)
      • Possibility to expand downstream high
      • Merged entity has high market share downstream
ilegality as a disincentive
Ilegality as a disincentive
  • Obligation to examine unlawfulness of conduct as a disincentive:
    • The Commission has to examine both the incentives of the merging parties to adopt a conduct and the factors liable to reduce, or even eliminate, those incentives, including the possibility that the conduct is unlawful.
    • That appraisal, however, does not require an exhaustive and detailed examination of the rules of the various legal orders which might be applicable and of the enforcement policy practised within them. (Tetra; pars 75-78)
  • Elements that the Commission will take into account, on the basis of a summary analysis, to assess whether the illegality of a conduct is likely to significantly disincentive the merged entity (par 44):
    • (i) likelihood that the conduct would be clearly, or highly probably, unlawful,
    • (ii) likelihood that the conduct could be detected, and
    • (iii) the penalties which could be imposed.
  • Examples:
    • GDP/ENI/EDP; EON/MOL
    • Thales/Finmecanica
iii likely impact on effective competition
(iii) Likely impact on effective competition
  • Effect: impede effective competition in the downstream market
    • Merger may raise rivals’ costs (e.g. increase input prices) thereby causing an upward pressure on rivals’ prices. This may in turn allow the merged entity to raise price
      • Effect more likely to be significant when proportion of foreclosed rivals is high or foreclosed rivals are close competitors
    • Merger may allow merger entity to raise entry barriers
      • In particular, if foreclosure establishes need for “two-level entry”.
effects the siec test
Effects: the SIEC test
  • New test introduced to:
    • Consolidate an effects based approach in merger assessment
    • Eliminate possible enforcement gaps
  • Impact of the new test for non-horizontal mergers:
    • No need to establish dominance in the market downstream
    • Need to establish likelyhood of significant impact in effective competition (e.g. price increase)
effects where
Effects: where?
  • Competition policy protects competition, not competitors. Consumer welfare standard is well established.
  • Problem: in vertical mergers some firms are both customers and competitors to the merged entity
  • Principle: Commission will focus on the effect on customers immediately below the merged entity (par 16)
slide14

Other integrated

suppliers of

rail vehicles

  • Example:Siemens/ VA Tech (M.3653)

Siemens

Electrical traction

VA Tech (ETR)

Electrical traction

Siemens

Rail vehicles

CAF

”Even if the non-integrated suppliers of rail vehicles, including the main

non-integrated supplier CAF, were eliminated from the market for electrical rail vehicles, there would continue to be in the individual Member States a sufficiently large number of actual and potential competitors in the overall train market.”

effects efficiencies
Effects: efficiencies
  • Efficiencies can counteract adverse effects on competition
  • General principles apply
      • to be identified by the merging parties;
      • be verifiable / be merger-specific/ benefit consumers
  • Specific efficiencies to vertical mergers:
      • Internalisation of double mark-ups
      • Reduction of inventories costs (e.g. co-ordination of production and distribution)
      • Alignment of incentives (e.g. increased investment in distribution)
conglomerate mergers
Conglomerate mergers
  • Theories of harm:
      • Focus on anti-competitive foreclosure, through tying and bundling
        • common practices, that often have no anticompetitive consequences
        • in some circumstances they may deter entry or harm consumers by reducing the rival’s ability or incentives to compete
      • No stand-alone « portfolio effects » theory of harm :
        • « the fact that the merged entity will have a broad range of products does not, as such, raise competition concerns »
  • Three-step analytical framework:
      • ability / incentives / effects
      • including assessment of efficiencies e.g. Cournot effects; economies of scope.
next steps
Next steps
  • Public consultation on draft ended on 12 May 2007.
  • 32 comments received. They are available at:

http://ec.europa.eu/comm/competition/mergers/legislation/non_horizontal_consultation.html

  • Commission’s adoption of definitive version expected by November 2007
reasons and objectives of review
Reasons and objectives of review
  • Reflect conclusions from Commission’s Merger Remedies Study (2005)

http://ec.europa.eu/comm/competition/mergers/studies_reports/remedies_study.pdf

  • Incorporate recent jurisprudence
    • Important guidance in EDP/GDP, GE, Tetra, Cementbouw and easyjet judgements
  • Reflect experience gained in recent Commission practice
    • Relevant recent remedies cases such as Inco/Falconbridge or GDF/Suez
  • Update with regard to changes introduced in 2004 Merger Review
    • Mainly concerns options to extend deadlines to discuss and assess remedies
general principles
General Principles
  • Allocation of responsibilities(EDP/GDP/ENI, GE/Honeywell)
    • Commission informs the parties of the competition concerns identified
    • It is for the parties to propose remedies, Commission cannot unilaterally impose conditions
    • Commission has to assess the effects of the operation, as modified by the remedies
    • Commission has eventually to prove that remedies are not sufficient to remove competition concerns
  • Proportionality (Cementbouw)
    • Parties do not need to submit remedies that go further than what is necessary to remove competition concerns
    • If they do so, however, Commission cannot reject them and impose different ones
general principles21
General Principles
  • Assessment standard(GE/Honeywell, easyjet)
    • Commitments have to eliminate competition concerns entirely and to be comprehensive and effective from all points of view
    • Certainty as to the implementation
    • Probability as to the assessment of the operation (“more likely than not that the operation modified significantly impedes effective competition”)
  • Appropriateness of different types of remedies
    • Divestitures generally preferred, including for non-horizontal concerns
    • Other structural commitments, such as access remedies, acceptable if same effect as divestiture – divestitures as “benchmark”
    • Where market structure is affected only by future behaviour of the merging parties, also other remedies may have to be assessed (Tetra)
    • Commitments on future behaviour, however, only exceptionally accepted. Certainty of implementation and effective monitoring particularly required (easyjet)
divestitures scope
Divestitures. Scope
  • Insufficient scope of the divested business is the major source of remedy failure (remedies study).
divestitures scope24
Divestitures. Scope
  • All assets and personnel necessary to ensure viable and competitive business to be transferred
    • Independent access to supply (Inco/Falconbridge; GDF/Suez; Evraz/Highveld), IP rights,…
    • Shared assets (duplication, if necessary) and personnel to be transferred
  • Modalities:
    • Preference for stand-alone business
    • Carve-outs acceptable
      • Risks for viability and competitiveness to be limited by requiring transfer of a stand-alone business >>>carve out started in interim period
      • Reverse carve out as option
  • Divestiture of individual assets, brands, licenses, re-branding:
    • Acceptable in exceptional circumstances
    • If resulting business will be immediately viable in hands of suitable purchaser
    • In case of doubts concerning purchaser or licensee, fix-it-first or up-front solution preferable
  • Alternative divestitures (“Crown jewels”)
    • In case of uncertainties for business to be divested, parties can propose alternative divestiture, to be implemented if the first one does not take place in a short deadline.
divestitures additional information requirement
Divestitures. Additional information requirement
  • There is a clear asymmetry of information on the right scope of viable business; Commission has the burden of motivation to reject commitments
  • New information obligation of the parties in the Implementing Regulation: Form RM
    • Nature and scope of commitments offered;
    • Conditions for their implementation; and
    • Suitability to remove any impediment to effective competition
    • Deviations from Commission’s Model Texts
    • For divestitures, in particular, detailed factual description required on how the business is currently operated; to be compared with scope of Divested Business as offered in the commitments
divestiture purchasers
Divestiture. Purchasers

Divestiture only effective once business is transferred to suitable purchaser

  • Suitable purchaser to be agreed within fixed time-limit
    • Normal procedure.
      • Multitude of purchasers available (also including special purchaser requirements)
      • No specific issues interfere with divestiture
  • Up-front buyer
    • Uncertainty of implementation
      • Obstacles for divestiture, e.g. third party rights
      • Uncertainty that Business will attract suitable purchaser
    • Difficult interim preservation:
      • If high risk of degradation
  • Fix-it-first remedy
    • Preferable where identity of purchaser is crucial for effectiveness of remedy
    • E.g. if viability is ensured by specific assets of the purchaser (Inco/Falconbridge) or where purchaser needs to have specific characteristics (tele.ring)
divestiture process
Divestiture process
  • Short divestiture two-step process (normally 6+3 months)
  • Interim preservation and hold separate obligations
  • Monitoring Trustee:
      • Timely appointment as up-front trustee
      • Trustee explicitly responsible for third party complaints
      • Publication of identity and tasks
  • Hold-separate manager:
      • Clear definition of role in commitments
      • Immediate, up-front appointment
      • Supervision/removal by Trustee
non divestiture remedies
Non divestiture remedies
  • Removal of links with competitors
    • Divestiture of minority shareholding or, exceptionally, waiving rights related to minority stakes
    • Termination of distribution or other contractual arrangements
  • Access commitments:
    • Granting of non-discriminatory access to infrastructure, networks, technology/IP rights or essential inputs.
    • Acceptable, to lower barriers to entry or eliminate foreclosure concerns, if same effect as divestiture
    • For lowering entry barriers
      • Ex.: pay-TV platforms; airport slots; gas release programs
      • Likely entry of new competitors
    • For foreclosure concerns
      • Access to pipelines, telecom networks, telematics networks
      • Likely use by competitors
    • For foreclosure concerns by IP rights or key technology
      • Granting of non-exclusive licenses
      • Ex.: GE/Instrumentarium; Axalto/Gemplus
    • Monitoring of such commitments
      • Self-enforcement of commitments via market participants
        • Via arbitration clauses (ARD, easyjet)
        • By national regulators
non divestiture remedies29
Non divestiture remedies
  • Other non-divestitures:
    • To be assessed on a case-by-case basis (Tetra)
    • May be accepted in specific circumstances, such as conglomerate concerns
    • Difficulty of monitoring and risks of effectiveness: they may only amount to mere declarations of intentions
procedure phase i remedies
Procedure: Phase I remedies
  • Remedies have to rule out “serious doubts”.
  • Only acceptable when competition problem is readily identifiable and can easily be remedied (recital 30 ECMR).
  • To be submitted within 20 WD (extension 10 WD)
  • Only limited modifications acceptable after deadline (Philips)
  • Commission will offer opportunity to withdraw remedies if concerns finally not arise in one or more markets
procedure phase ii remedies
Procedure: Phase II remedies
  • Remedies must remove competition concerns
  • They should be submitted before day 65
    • If submitted before day 55, no extension
    • If submitted after day 55 or before day 55 but modified version submitted after, extension of 15 WD.
    • Art 10.3 extension possible
  • Late modified remedies in phase-II:
    • Commission not obliged, but allowed to accept late remedies (i.e. modified remedies submitted after day 65). (Edp/GDP/Eni)
    • Conditions described in Remedies Notice:
      • Modified remedies fully and unambiguously remove competition concerns without need for further investigation or market test
      • Commission must be able to properly consult with Member States, (i.e. to keep 10 WD deadline)
    • No Art 10.3 extension will normally be granted after day 65
next steps32
Next steps
  • Public consultation on draft ended on 29 June 2007
  • 23 Comments received. They are available at:

http://ec.europa.eu/comm/competition/mergers/legislation/merger_remedies.html

  • Commission’s adoption of definitive version expected by early 2008.
scope and sources
Scope and Sources
  • Consolidation of current jurisdictional Notices
    • Concept of Concentration
    • Joint Ventures
    • Undertakings concerned
    • Calculation of Turnover
  • Covers all issues relevant for Commission’s original jurisdiction under Merger Regulation
  • Sources for review
    • New Merger Regulation
    • Recent jurisprudence, i.e. Cementbouw and Endesa
    • Decisional practice of Commission
  • Adopted on 10 July 2007
concentration
Concentration
  • Acquisition of control by investment funds
  • Normally
    • Investment company acquires indirect control under Article 3 (1), (3)
    • Investment company indirectly holds rights in portfolio companies under Article 5(4)
    • Consequence: turnover of all portfolio companies is taken together, even if held by different funds organised by same investment company
concentration36
Concentration
  • Object of control
    • Assets constituting a business with market presence
    • Outsourcing cases: Concentration only if
      • Transfer of assets and/or personnel
      • That allow acquirer to develop market presence beyond outsourcing client
      • Time-frame similar to start-up period for full-functionality of JVs
concentration37
Concentration
  • (Joint) acquisition and immediate split-up of target
  • Separate concentrations if
    • Legally binding agreement on break-up
    • No uncertainties that second transaction takes place within short time-frame
    • Maximum normally 1 year
concentration38
Concentration

Parking/warehousing transactions

  • Interim purchaser acquires target “on behalf“ of ultimate purchaser on basis of agreement on future on-sale
  • Often major part of economic risk shifted to ultimate purchaser who may be granted specific rights
  • First transaction considered first step in single concentration comprising lasting acquisition of of (parked) target by ultimate purchaser
  • First transaction no concentration in its own right and not considered to fall under Article 3(5)
concentration39
Concentration
  • Interrelated transactions: when are several transactions considered one concentration?
  • Under Article 3: Cementbouw, recital 20:
    • Transactions unitary in nature
    • Transactions de jure or de facto interconditional
    • Only if control is acquired by same undertaking(s), not in cases of assets swaps or de-mergers of JVs
    • Examples:
      • One business, one economic entity
      • Parallel (EQT/H&R/Dragoco) or serial acquisition (Kingfisher)
  • Under Article 5(2)(2):
    • Successive transactions between same parties within two-year period considered one concentration for calculation of turnover
    • Assessment under Article 3 is precedent
types of control
Types of control
  • Sole control comprises
    • Positive sole control
    • Negative control by minority shareholder
  • De facto sole control: on basis of past voting pattern and prospective analysis
  • Joint control: more on commonality of interests and de facto situations
  • Reduction in number of shareholders: concentration only if change from joint to sole control
joint ventures
Joint Ventures
  • Distinction between
    • Joint acquisition of control of existing undertaking, falling under Article 3(1)
    • Creation of a JV, falling under Article 3(4)
  • Clarification of full-functionality criteria
community dimension
Community Dimension
  • Relevant date for establishing jurisdiction: Earlier of
    • Date of notification to Commission or national competition authorities
    • Conclusion of agreement, announcement of public bid, etc.
  • Turnover calculation
    • Normally based on audited accounts of previous financial year
    • Adjustments to be made in case of permanent changes in economic reality of undertakings concerned (CFI in Endesa)