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MERGER REMEDIES VERSUS EFFICIENCY DEFENCE. Does the current EC merger remedy practice create a disincentive to reveal efficiencies?. PETER L. ORMOSI. ESRC Centre for Competition Policy, University of East Anglia. ACLE Competition & Regulation Meeting on EC Competition Enforcement Data

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merger remedies versus efficiency defence

MERGER REMEDIES VERSUS EFFICIENCY DEFENCE

Does the current EC merger remedy practice create a disincentive to reveal efficiencies?

PETER L. ORMOSI

ESRC Centre for Competition Policy, University of East Anglia

ACLECompetition & Regulation Meeting onEC Competition Enforcement Data

Amsterdam, 10-11 April 2008

introduction
Introduction

Commission approves problematic mergers if companies:

a. prove that the efficiency gain is significant enough, so that the competition authority will overlook the market power increase, or

  • offer a commitment to eliminate this market power increase, or
  • combine (a) and (b) together

Technically, the choice is on companies, but the Commission has a strong influence

This paper attempts to find evidence for this influence

review of references
Review of references

Merger remedy guidelines

  • EC (2001), (2008)
  • FTC (1999), DOJ (2004)

Academic literature

  • Cosnita et al (2006)
  • Farrel (2003)
  • Röller et al (2006)
  • Lyons et al (2007)
  • Werden et al (2005)
the data
The data

2001-2007 EC merger intervention cases

(intervention: prohibition or conditional approval)

  • Purposive sampling
  • Data availability problems
    • Older decisions are more fuzzy
    • Only English and French texts have been analysied
the data collection

YRS: Number of years before savings are realised

PV: This is an annuity to be realised in YRS years (assumed that this annuity would last for 5 years)

From which the present value now:

PA: Price of the acquired business

VAL=PV/PA

The data - collection

EFF: dummy for efficiency arguments

Searched the decision for phrases such as: efficiencies, synergies, savings, (price) reduction, economies.

EFF = 1 if these phrases refer to efficiency considerations

ED: dummy for efficiency defence

ED = 1 if EFF = 1 and the efficiency argument came from the merging parties.

EFFother: dummy for efficiency claims in other sources (news archives, industry reports etc.)

  • CS: dummy for cost saving expectations
  • Three major sources
  • Annual reports: for the year when the merger was announced.
  • Company press releases
  • Google news archives
  • At least 3 different news sources to confirm the data

OVL: Number of total horizontal overlaps (product * geographical markets)

OVL2: Number of horizontal overlaps that create a competition concern

OVLP = OVL2/OVL

CON: Number of consumers living in the area covered by OVL

CON2: Number of consumers in the area covered by OVL2

CONP = CON2/CON

the timing of events used as variables

TLENGTH

LENGTH

REMDIFF2

REMDIFF

REM2

REM1

REM0

PHASE2

START

Final remedy offer

First remedy offer

Article 6(1)(c) decision

Notification

Announcement

Final decision

The timing of events used as variables

Collected from the Commission decisions or from Hearing Officer’s report (where available)

Except for START: collected from news archives

experience reduces the probability of phase ii
Experience reduces the probability of phase II
  • Proportion of phase I cases increases
  • (p(phase II | CNo=1800) = 61%, p(phase II | CNo=4600) = 16%)

The Commission and the parties are becoming more experienced

  • What should the merging parties do for shorter procedures?
  • Earlier commitments are expected to result in shorter procedures.
  • The investigation of efficiencies requires phase II (e.g. Korsne / Assidomd Cartonboard (2006) merger)
  • More complicated mergers to take longer (more overlaps, vertical, conglomerate, oligopoly issues)
earlier commitments and no efficiency defence results in shorter procedures
Earlier commitments and no efficiency defence results in shorter procedures
  • Earlier commitments result in shorter procedures
  • Not revealing efficiencies result in shorter procedures
  • The partial effect of OVLP VERT CONGL and COOR is not significant
  • Once efficiencies are investigated, the effect of the timing of the first commitment becomes very weak
the ec fails to provide the sufficient reward for revealing efficiencies
The EC fails to provide the sufficient ‘reward’ for revealing efficiencies
  • Efficiency investigations lead to longer (phase II) procedures (Korsne/Assidomd Cartonboard merger)
  • Remedies are not adjusted to efficiencies. (Areva/Urenco)
  • One strong incentive to reveal efficiencies:
  • Counter-productive remedies can hinder merger-specific efficiencies (Group4/Securicor)
exogenous circumstances affecting p ed
Exogenous circumstances affecting p(ED)?

Revealing efficiencies leads to longer procedures.

 Urgent mergers: less likely to apply for ED

Preparing for an ED cases takes longer.

 Early notification is less likely to be followed by ED

Experience (both EC and business) should also affect ED

p(ED) = VAL + START + YEAR + u

large saving expectations later notification and more experience increase p ed
Large saving expectations, later notification, and more experience increase p(ED)

z = (-2.75) (2.66) (2.69) (2.74)

pseudo r2 = 0.2974

do more efficient mergers seek faster approval
Do more efficient mergers seek faster approval?
  • Four ‘time-related’ variables:
  • REM1: timing of the first commitment
  • REMDIFF: proxy for the scope of the first commitment offer
  • START: timing of the notification
  • p(PHASE): probability of phase II procedure
  • Cost saving expectations realised later if the procedure is delayed.
  • If time matters, experience (CNo) is expected to have a negative effect.
  • Number of overlaps to remedy (OVL2) is also expected to have an effect
  • The size of the parties (TOVER): to measure better litigation skills
slide19
More overlaps lead to less sufficient, larger saving expectations and experience result in more extensive initial remedy offers
conclusion
Conclusion
  • More savings signalled to public  more urgent integration
  • Earlier and more extensive commitments  shorter procedure
  • Investigating efficiencies  longer procedure
  • More efficient mergers will less likely to reveal efficiencies and will more likely to offer an early and more extensive commitment
  • What is the relevance of these findings?
  • It is capable of hinting that efficiencies are not important for the EC
  • Reluctance to reveal efficiencies:
    • Remedies, where they would not be necessary
    • Remedies can hinder efficiencies
future work
Future work
  • A market-by-market analysis as opposed to case-by-case
  • Improving the data (law firms)
  • Ideas for theoretical work:
    • Welfare effects of an efficiency impeding remedy
    • Opportunistic behaviour to achieve fast integration (including regulatory approval) by all means.