Transcript Dynamic efficiencies? - Competition Law Association

Mergers efficiencies and
the failing firm defence –
a change of emphasis –
panel discussion
Sheldon Mills
Competition Law Association
26 February 2014
Outline
Efficiencies
● General framework
● Efficiencies are hard to demonstrate
● Types of efficiencies and a few (!) case examples
-
Supply side efficiencies
Demand-side efficiencies
Dynamic efficiencies?
● Difference between efficiencies and relevant customer benefits
Exiting firm scenario
● General framework
● Evidential hurdles and challenges
● Case study – Kingfisher/Focus
Falling short of the exiting firm scenario – space for flailing firm arguments?
Framework for Merger efficiencies in
the UK
● Efficiencies can enhance rivalry so that a merger does not give
rise to an SLC
● The OFT must be satisfied (or CC must expect) that
-
The efficiencies are timely, likely and sufficient to prevent an SLC from
arising
The efficiencies are merger specific
● To negate an SLC efficiencies must be rivalry enhancing so that
there is no substantial ‘net’ loss of competition
-
It should be possible to weigh them directly against other factors that
might make an SLC likely – so they should directly impact competition
Efficiencies that are not rivalry enhancing would not negate an SLC but
can be assessed as Relevant Customer Benefits and may give rise to
an exception to duty to refer (as explained later)
Efficiencies are hard to demonstrate
● In practice the evidentiary standard for efficiencies is high
-
Most of information concerning efficiencies is held by merging firms and
can often be difficult for the Authorities to market test
It can be difficult to weigh up whether efficiencies are sufficient to
negate an SLC or outweigh it
Merging parties may often be discouraged from submitting detailed
arguments and evidence on efficiencies
● But firms should assess whether they have a plausible case for
efficiencies because they can be quantified and verified and may
potentially negate an SLC
-
For example, Asda/Netto (the OFT took account of the evidence on
efficiencies, although it did not change the overall number of local SLCs
in the case)
Marginal SLC finding in some cases can reduce the overall burden the
efficiency argument must meet to overcome such concerns
Types of efficiencies
● Supply-side efficiencies
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Cost reductions
Product repositioning
● Demand-side efficiencies
-
Network effects
Pricing effects
Efficiencies in vertical mergers
● Dynamic efficiencies?
-
Combining complementary distribution or marketing assets
Economies of scale and scope in R&D
Upgrading management
Supply side efficiencies – cost
reductions
● Merger may lead to economies of scale or scope or
reductions in variable costs, for example, the merged firm
may benefit from more efficient production processes or
working methods of one of the merger firms
● Challenges:
-
Can be difficult to demonstrate that reductions in fixed costs would be
passed on, ultimately to consumers
Best approach is to seek to ascertain evidence on variable cost reductions
and weight these up against an SLC. The challenge is twofold: forward
looking data, held by the merging parties and therefore can be difficult to
test and verify assumptions and conclusions.
● Sources of verification do exist. For example, where
benchmarking across the merging firms is possible (e.g.
where one firm has access to cheaper inputs)
Supply-side efficiencies – cost
reductions
● Case example: Asda/Netto. Merger of two a major grocery store and a so-called
‘local assortment discounter’ with both parties operating across the UK.
● Parties submitted that merger would result in significant efficiency gains due to
-
higher purchasing volumes
variable cost savings with some suppliers due to consolidation of distribution
chain into one destination
● Evidence consisted of Asda’s existing internal analysis based on past experience
(not specifically produced for merger) as well as existing purchasing conditions.
● To the extent possible, the OFT took account of this evidence on efficiencies.
However, it was not sufficiently compelling to negate an SLC finding at a local level
and had no impact on the overall number of local SLCs in this case.
Supply side efficiencies – product
repositioning
● Mergers of producers of differentiated products may result in
product repositioning of the merged firm and its rivals. Can
increase variety, but price effect ambiguous.
● Likely to generally be very difficult to establish product
repositioning efficiencies in practice. However…
● Case example: Global/GCap. OFT accepted evidence on
demand side efficiencies partly from product repositioning and
product complementarities (products were to some extent
complements rather than substitutes; a particular set of
circumstances applied).
-
Efficiencies ‘tipped the balance’ in relation to campaigns in Greater London,
where a very marginal SLC was found. In other areas, SLCs were stronger
and evidence on efficiencies less compelling.
Supply side efficiencies – vertical
mergers
● Removal of double marginalisation
-
Vertical mergers may allow the merged firm to internalise any pre-existing
double mark-ups.
Double marginalisation must be significant pre-merger (this may not be the case,
e.g., if pre-merger vertical supply agreements include a price mechanism which
eliminates the mark-up on the input).
Useful evidence: data on pre-merger mark-ups, vertical supply agreements.
● Solving the investment hold-up problem
-
Efficiencies may result from aligning the incentives within the merged firm to
invest in, for example, new products, new processes or marketing (for example,
a retailer may be reluctant to invest in promoting certain products if its
investment may also benefit competing retailers).
Useful evidence: verifiable facts for hold-up problem (incentives of merging
parties pre- and post-merger).
Demand side efficiencies
● Network effects
-
Whether direct or indirect, may arise when services are provided over a network or
through a platform, where customers value the network or platform more highly
when it is used by a greater number of other customers. Useful evidence: customer
valuation of network effects.
Case example: Digital Property Group/Zoopla. As part of assessment of
unilateral effects, OFT placed some weight on the argument that merged entity
would provide a stronger constraint on Rightmove than the parties were able to premerger. Efficiencies provided further weight to the overall arguments for clearance.
Support from third party evidence.
● Pricing effects/Cournot effect
-
May lead to product bundles at a lower combined price (bundling); similar effect to
double marginalisation in vertical mergers. Useful evidence: pricing models for
bundle offers; quantification of customer incentives.
Accepted in Global/Gcap in relation to campaigns in Greater London (a marginal
SLC).
● One-stop shopping
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A type of economy of scope, from the demand side. Useful evidence: quantification
of customer incentives; examples of industry practice.
Dynamic efficiencies
Examples of dynamic efficiencies
● Combining complementary distribution or marketing assets
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BSkyB/Easynet Group: merger facilitates a (more rapid) provision of triple play
services in competition with other providers. Efficiencies provided further weight
to the overall arguments for clearance.
● Economies of scale and scope in R&D
-
Limagrain/Advanta European Seed Business: the OFT noted that combining
the two breeding programmes will increase the merged parties’ chances of
developing better varieties. Efficiencies provided further weight to the overall
arguments for clearance.
● Upgrading management
-
Superior management team replaces target company‘s inferior team making
possible a sustained improvement in performance.
Dynamic efficiencies are even harder
to demonstrate
● Uncertainty
-
Dynamic efficiencies are generally more uncertain than static
efficiencies, particularly R&D
● Timing
-
Dynamic efficiencies might require several years to materialize
● Measuring Innovation
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R&D spending is not necessarily a good proxy for innovation as some
R&D spending might be far more productive than other
● Information asymmetry
-
Authorities often have to rely exclusively on information provided by the
merging parties
Relevant Customer Benefits (RCBs)
● A given efficiency may potentially be relevant either as a means of
preventing an SLC from occurring (rivalry-enhancing efficiencies) or as an
RCB
● At Phase 1, RCBs operate as a potential exception to the duty to refer
-
The OFT will have regard to the benefits of a Phase 2 investigation,
including the possibility of remedies being obtained that preserve any RCBs
RCBs must outweigh the SLC and the adverse effects of the SLC in all
affected markets
● At Phase 2, RCBs are considered once the existence of an SLC is
determined, by considering the extent to which alternative remedies may
preserve such benefits
● RCBs are limited by s.30(1) EA to benefits in the form of:
-
lower prices, higher quality or greater choice of goods or services in any
market in the United Kingdom, or
greater innovation in relation to such goods or services
● RCBs must be accrued to any customers (not just final consumers) within a
reasonable period from the merger, and would be unlikely to accrue without
the merger or a similar lessening of competition
Exiting firm scenario – general
framework
● The application of the SLC test involves a comparison of the merger
scenario against the competitive situation without the merger
(counterfactual analysis).
● Alternative counterfactuals may be used at Phase 1, where the prospect
of prevailing (pre-merger) conditions continuing is not realistic. In
practice, the use of alternative counterfactuals at Phase 1 is rare.
● Phase 2 may allow for additional detailed investigation of alternative
counterfactuals. However, only developments that are likely and
foreseeable on the basis of the facts available can be considered.
● The exiting firm scenario is often raised by merger parties. Three limbs
need to be met:
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Exit inevitable
No less anticompetitive purchasers
Sales go to the other merging party
Exiting firm scenario – evidential
hurdles and challenges
● Limb 1 - Would the firm have exited?
-
The inevitability of exit must be established for the exiting firm scenario to be
considered at Phase 1. A more nuanced analysis possible at Phase 2.
Firms failing financially are the classic case. Change in corporate strategy
(including divestment of a branch or subsidiary) may also be considered, but the
inevitability of exit is often difficult prove.
Evidence that has not been prepared in contemplation of the merger (e.g. exit
plans, balance sheets) is particularly important.
● Limb 2 - Would there have been an alternative purchaser for the firm or its
assets?
-
Challenges for parties to demonstrate that all plausible purchasers have been
approached.
Unwillingness of alternative purchasers to pay the seller the asking purchase
price would not rule out a counterfactual with an alternative purchaser.
● Limb 3 - What would have happened to the sales of the exiting firm?
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Paradoxically, an easy test to meet in merger to monopoly cases!
Exiting firm – case study
Kingfisher/ Focus
● Acquisition by Kingfisher plc, the parent company of B&Q, of 30 former Focus
DIY stores.
● Focus went into administration on 5 May 2011. OFT decision announced on 7
July 2011.
● Potential SLC finding in 10 local areas – but was an alternative counterfactual to
the prevailing conditions of competition appropriate?
● Discussions held with the administrator, investment bankers, Focus' former senior
management and its owners, possible purchasers and other relevant parties.
● OFT concluded that that there was no alternative purchaser which would result in
a less anti-competitive outcome.
● The OFT completed its investigation 19 working days, rather than the usual 40
working days. Prompt replies from third parties, OFT experience in retail mergers
and targeting the investigation on the core issues were key.
Falling short of the exiting firm
scenario – space for flailing firm
arguments?
● In certain exceptional circumstances, as part of the overall SLC
analysis, the fact that a firm may not continue to be a rivalrous force
in a market, absent the merger, can, taken in combination with other
factors, mitigate competition concerns. This is rare.
● Potential examples of this being a feature of cases include:
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2 Sisters Food Group/Vion Poultry
University College London Hospitals (UCLH)/Royal Free London
neurosurgery services
Imerys Minerals/Kaolin business of Goonvean
Links and resources
Guidance
● OFT1254/CC2, Merger assessment guidelines (September 2010)
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(http://www.oft.gov.uk/shared_oft/mergers/642749/OFT1254.pdf)
See in particular Sections 4.3 (The ‘counterfactual’) and (5.7 (efficiencies)
OFT1122, Mergers: Exceptions to the duty to refer and undertakings in lieu of
reference guidance (http://www.oft.gov.uk/shared_oft/mergers/Consultations/oft1122.pdf)
See in particular Section 4 (Relevant Customer Benefits)
CMA2, Mergers: Guidance on the CMA’s jurisdiction and procedure (January 2014)
(https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/270256/CMA
2_Mergers_Guidance.pdf)
Links and resources (cont’d)
Cases
● Limagrain/Advanta European Seed Business (OFT 2005)
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http://www.oft.gov.uk/OFTwork/mergers/decisions/2005/limagrain
BSkyB/Easynet Group (OFT 2005)
http://www.oft.gov.uk/OFTwork/mergers/decisions/2005/bskyb
Global/GCap (OFT 2008)
http://www.oft.gov.uk/OFTwork/mergers/decisions/2008/globalradio
http://www.oft.gov.uk/news-and-updates/press/2008/95-08
Asda/Netto (OFT 2010)
http://www.oft.gov.uk/OFTwork/mergers/Mergers_Cases/2010/Asda3
Kingfisher/Focus (OFT 2011)
http://www.oft.gov.uk/OFTwork/mergers/decisions/2011/kingfisher
http://www.oft.gov.uk/news-and-updates/press/2011/78-11
Digital Property Group/Zoopla (OFT 2012)
http://www.oft.gov.uk/OFTwork/mergers/decisions/2012/digital
University College London Hospitals (UCLH)/Royal Free London neurosurgery
services (OFT 2013)
http://www.oft.gov.uk/OFTwork/mergers/decisions/2013/ucl-hospitals
Imerys Minerals/Kaolin business of Goonvean (OFT 2013)
http://www.oft.gov.uk/OFTwork/mergers/decisions/2013/imerys-minerals
2 Sisters Food Group/Vion Poultry (OFT 2013)
http://www.oft.gov.uk/OFTwork/mergers/Mergers_Cases/2013/2Sisters
Mergers efficiencies and
the failing firm defence –
a change of emphasis –
panel discussion
Sheldon Mills
Competition Law Association
26 February 2014