It is evident that merger control takes an important place in competition law practice in every jurisdiction. This is because many jurisdictions require mergers to be notified ex ante. This results in many mergers being reviewed by the competition authorities. Jurisdictions need to adopt a definition of a merger and generally these definitions are designed broadly in order to include a vast number of transactions. However, this definition as to purpose of the merger control regulations changes as per jurisdiction.
In example, EU Regulation 139/2004 (“EU Merger Regulation”) is applied to the “concentrations” which arise from a merger of formerly independent businesses, from a change of control in a business or from a joint venture. As such definition implicates, the applicability of EU Merger Regulation is arguably broad and a considerable number of transactions, which may result in a change of control of an undertaking. Similarly U.S. merger control regime, which is regulated by Clayton Act is also designed to include a substantive number of transaction. With regard to Turkish merger control regime, the definition of concentration is set out very similarly to EU Merger Regulation as Turkey follows EU competition law very closely.
Purpose of Merger Control
Mergers, when compared with agreements between undertakings, usually tend to leave lasting effects on the market. Nevertheless, it is evident that mergers may also create substantial efficiencies and gives the owner of a business the opportunity to sell his business. Moreover, mergers, by enabling the transfer of assets to the people who may use them in a most efficiency way, provide for the society’s welfare. Mergers may help parties to reach the economies of scale, decrease the costs and increase the efficiency of research and development or distribution. Moreover, mergers also give a second option for the failing firms which are facing bankruptcy. Such option also prevents the unemployment and instability in the industry.
Despite such possible advantages or motives of mergers, they may have adverse effects on the market as well. In the simplest way, the motivation for parties in a merger may be their desire to enhance their market power. It is also evident that mergers were used for anticompetitive means along with trusts and pool agreements.
As a result, by merger control procedures, competition authorities aim to identify and prohibit mergers, which would result as having anticompetitive effects on the market and eventually detriment to the society.
Types of Mergers
From a competition law and merger control perspective, it is possible to separate mergers into three types: i) horizontal mergers, ii) vertical mergers, iii) conglomerate mergers.
Horizontal mergers can generally be defined as mergers between two or more competing undertakings. This means that the undertakings are active in the same product or service market. Distinctively from other types of mergers, horizontal mergers result in eliminating a competitor in the same market and naturally the market share of the merged entity post merger is higher. Therefore, horizontal mergers tend to raise the level of concentration the market, thus reducing the competitiveness. Because of such reasons, horizontal mergers usually are primary concerns for competition authorities, especially in highly concentrated markets.
While horizontal mergers consist of two or more competing undertakings in the same product or service market, vertical mergers are the mergers between the undertakings on different levels at the supply-chain of a specific product or service market. Even though vertical mergers may usually create efficiencies, they might also have adverse effects on the market. One of the main concerns regarding vertical mergers is the foreclosure effect that it may raise, making it harder for competitors to reach suppliers or distribution. In addition, vertical mergers may also raise two-level barriers of entry or ease the collusion between undertakings.
Last type of mergers, conglomerate mergers are defined as “mergers between firms that are in a relationship which is neither purely horizontal (as competitors in the same relevant market) nor vertical (as supplier and customer). Because of the fact that conglomerate mergers do not include undertakings competing horizontally, they do not raise obvious adverse effects. Nevertheless, it is generally accepted that conglomerate mergers may raise adverse effects on competition as well. The approach to conglomerate mergers and their anticompetitive effects are one of diverse aspects between U.S. and EU competition law practice.
Analysis of Conglomerate Mergers
One of the main concerns with regard to conglomerate mergers that they may create non-coordinated (unilateral) and coordinated effects, impairing the competition in the market. Non-coordinated effects of a merger results from the change in the market. As the name suggests, such effects are unilateral and rise in the absence of a tacit or explicit agreement whereas coordinated effects are caused by the coordination between undertakings in the market under an explicit or tacit agreement.
Possible Pro-Competitive Effects of Conglomerate Mergers
Some effects of conglomerate mergers may be pro-competitive, increasing the efficiency and enhancing welfare. First of all, conglomerate mergers may result in the realization of economies of scale. Economies of scale provide cost-savings for the undertakings, which further pass to the customers as lower prices. Even though this is not a result of enhanced competition in the market but increased efficiency of the undertakings, it enhances the welfare. Secondly, conglomerate mergers enable the undertakings to structure their business and distribute the risk. This may also enable the business to spare and invest more for innovation or increase their efficiency. Thirdly, when the products of two companies are complementary and dependent on each other, the cooperation and integration between the companies may have certain benefits.
Suppose there are two companies producing complementary products. Even though, one of these companies considers to reduce the price of its product (component) and thus they both sell one unit more due to price decrease in total, it may not do so since reducing the price results in total balance in profits for one company and raising the other’s profits. On the other hand, when these two companies are integrated, they would have an incentive to reduce the price of one component since the sales would be more and the profits would stay in the integrated company. However, it must be noted that the effects raised from such integration is usually analyzed under vertical integration, separately from conglomerate effects.
Adverse Effects of Conglomerate Mergers
Adverse effects of conglomerate mergers may be examined under two main topic: i) Non-coordinated effects, which mostly concerns with foreclosure through tying and bundling and ii) coordinated effects with regard to the concern that a conglomerate merger may raise the level of or ease the coordination in the market. In addition, the loss or termination of potential competition is another possible adverse effect of conglomerate mergers.
While U.S. agencies see the impairment of potential competition as the only possible reason to prevent a conglomerate merger, in EU the mergers with the possibility to terminate the potential competition are currently reviewed under horizontal mergers.
Harm to Potential Competition
Non-Horizontal Merger Guidelines of 1982 of U.S. Department of Justice adopts the theory of potential competition as the adverse effect of non-horizontal mergers (including conglomerate mergers). Guidelines examine the theory in two aspects: i) harm to perceived potential competition and ii) harm to actual potential competition. Perceived potential competition is the perceived threat of the competition of the acquired party in the market. Accordingly, acquired party may be deemed as a potential competitor by the undertaking that are already active in the market, in example, limiting their ability to raise prices. On the other hand, actual potential competition is that the possibility of entry in a more precompetitive way. In other words, actual potential competition may be harmed when the acquirer enters the market by the merger instead of entering in a more precompetitive way.
In this direction, Department considers several factors in deciding whether the merger harms actual potential competition or perceived potential competition. These factors include, market concentration, entry (including the entry advantage of the acquiring firm).
Non-Coordinated Effects (Foreclosure)
The main concern of the EU Commission regarding the conglomerate mergers is the foreclosure through bundling or tying, leveraging strong market position into another market. It must be noted that these concern may only occur in a merger of companies in related markets. Regarding the foreclosure effect, Guidelines first examine the ability and incentive to foreclose, which may rise after the merger and then at last examine whether foreclosure has an adverse effect.
Following a conglomerate merger, the merged undertaking may leverage its market power in one market to the other by tying or bundling, “conditioning sales in a way that lings the products in the separate markets together.
Tying and bundling are generally accepted as common practices which customers can benefit from, specifically in cases where the products are complementary. However, it may also be possible for the merged entity where it would have the ability to execute such practices to the detriment of consumers. Nevertheless, for bundling and tying to harm competition and consumers, market power at leas in one market is necessary. Without the existence of a market power, it is possible to say that the customers will benefit from such practices. However, such market power does not have to be on the level of dominance pursuant to the Guidelines. Secondly, the tied or bundled products must have “a large common pool of customers” in order for the bundling or tying to have a significant effect. Thirdly, such practices are more likely to create foreclosure effects in industries with economies of scale.
On the other hand, there are other factors that may prevent the foreclosure effect and the ability to foreclose of the merged entity. The ability of competitors to counter-act against the anticompetitive behavior of the merged firm may prevent the ability to foreclose through bundling or tying.
The incentive of the merged firm to engage in tying or bundling in order to foreclose competitors depends on whether such strategy would be profitable or not. Even though tying and bundling may be used to achieve or expand the market power, it may also result in a loss in the sales since some customers may not choose to buy the product because of the bundle or tying.
Like any merger, conglomerate mergers result in an elimination of an undertaking in a specific market. Accordingly, Guidelines also note that conglomerate mergers, in certain circumstances, may create coordinated effects. By the elimination of an undertaking, the coordination in a market may be more likely and easy. Additionally, foreclose on competitors may reduce their incentive to compete due to the loss in sales. In such case, competitors may prefer not to compete and hold on to higher prices.
Nevertheless, it must be noted that the likelihood of coordination in a market is dependent on several factors. Those include concentration in the market, symmetry between the companies, transparency and most importantly the barriers to entry.
It is evident that the merger control is a substantial part of competition law practice and assessment of conglomerate mergers remains important due to the discrepant practice between U.S. and E.U. Because of such discrepancy, there is a risk that a multi-jurisdictional conglomerate merger may be cleared in the U.S. whereas it is prohibited in E.U as the case of General Electric – Honeywell Merger.
It is possible to argue that the possible concerned adverse effects of conglomerate mergers may be prevented by ex-post control and prohibition of abuse of dominant position. Even though such argument may be countered by the claim that the merger control cannot be replaced by the prohibition of abuse of dominant position, the U.S. practice shows that together with the private actions, prohibition of abusive practices may provide sufficient deterrence.
Consequently, when the efficiencies may be realized by conglomerate mergers are taken into consideration, the utmost elaboration should be provided in the assessment of conglomerate mergers and they should not be prohibited unless the adverse effects are proven to be likely.