Transcript Developing Evidence of Conspiratorial Contacts

Investigating Mergers and
Acquisitions
Mark Woodward
African Competition Forum Workshop
March 25, 2013
The Goals of Merger Analysis

The central goals of merger analysis
and enforcement are:
1. To identify and prevent mergers that create
or enhance market power
2. To accomplish goal #1 without delaying or
obstructing mergers that enhance
competition and benefit consumers
2
U.S. Legal Background
• U.S. Law
– Clayton Act Section 7 – prohibits mergers and
acquisitions where the effect “may be
substantially to lessen competition, or to
tend to create a monopoly”
• U.S. courts develop case law interpreting
Clayton Act Section 7
• U.S. competition agencies issue merger
guidelines applying Section 7
3
Purpose of U.S. Horizontal Merger Guidelines
•
Stated rationales:
– Assist business community and antitrust
practitioners by increasing transparency
– Assist courts in developing appropriate analytical
framework
• Goals:
– Transparency/clarity
– Predictability/certainty
– Consistency
4
2010 U.S. Horizontal Merger Guidelines
• U.S. Merger Guidelines revised in 2010
–
–
–
–
–
–
–
Reject rigid interpretation of the analytical framework and
specific standards
Merger analysis is fact-specific process not limited to
single methodology or tools
New section on adverse effects evidence
Market definition not end in itself or even necessary
starting point
Updated hypothetical monopolist test
Expanded discussion on unilateral and coordinated
effects
New discussion on ease of entry
5
Overall Framework
•
Overview (§ 1)
•
Coordinated Effects (§ 7)
•
Evidence of Adverse Competitive
Effects (§ 2)
•
Powerful Buyers (§ 8)
•
Entry (§ 9)
Target Customers and Price
Discrimination (§ 3)
•
Efficiencies (§ 10)
•
Market Definition (§ 4)
•
Failure and Exiting Assets (§ 11)
•
Market Participants, Market
Shares, and Market
Concentration (§ 5)
•
Mergers and Competing Buyers
(§ 12)
•
Partial Acquisitions (§ 13)
•
•
Unilateral Effects (§ 6)
6
Themes and Evidence
•
Enhancing market power as central theme of HMG
–
“[M]ergers should not be permitted to create, enhance,
or entrench market power or to facilitate its exercise.”
–
A merger enhances market power if the merger is “likely
to encourage one or more firms to raise price, reduce
output, diminish innovation, or otherwise harm
customers as a result of diminished competitive
constraints or incentives”
–
Non-price effects included as potential harm
7
Themes and Evidence
•
Common types of evidence (HMG Section 2.1)
–
Actual effects observed in consummated mergers
–
Direct comparisons based on experience
•
Natural experiments: historical events, experience in similar
markets
–
Market shares, level of concentration, and change in concentration
•
May lead to rebuttable presumption of anticompetitive effects
–
Substantial head-to-head competition between merging parties
•
Actual or likely potential competition absent the merger
•
Particularly relevant for evaluating unilateral effects
–
Elimination of maverick (a firm that plays a disruptive role in the
market to the benefit of consumers)
8
Themes and Evidence
•
Common sources of evidence (HMG Section 2.2)
–
Merging parties
•
•
•
–
Customers
•
–
Emphasis on contemporaneous ordinary course of business
documents
Business decisions taken by the merging firms can be informative
about industry conditions
Explicit or implicit evidence about the merging firms post-merger
plans
Particularly on reactions to post-merger price increases,
attractiveness of substitutes, competitive effects
Other industry participants and observers
•
Suppliers, distributors, complementary product manufacturers,
competitors, analysts
9
Market Definition (HMG Section 4)
•
Market definition plays two roles
–
–
•
Identifies the line of commerce and section of the country in
which the competitive concern may arise
Allows agencies to identify market participants and measure
market shares, market concentration, and the increase in
concentration
Market definition is not an end in itself
–
–
Agencies’ analysis need not start with market definition
Evidence of competitive effects can inform market definition
10
Market Participants, Market Shares and
Concentration (HMG § 5)
•
Significance of market shares, concentration and
changes in concentration
–
Higher market shares SUGGEST market power
•
–
Higher concentration level SUGGESTS less competition (fewer
significant competitors)
•
–
Large merged firm may be able to reduce output and increase
prices unilaterally
High concentration may make it easier to coordinate output
reductions and price increases
Higher changes in concentration SUGGEST greater merger
impact
11
Market Participants, Market Shares and
Concentration (HMG § 5)
•
Identifying market participants
–
All firms that currently earn revenues in the relevant market
–
Rapid entrants
•
•
•
•
Firms not current producers in the relevant market, but that would very
likely provide rapid supply in response to a SSNIP without incurring
significant sunk costs
Slower entry, and entry involving significant sunk costs, considered in entry
analysis
Types of rapid entrants include
–
Firms that produce the relevant product but to not currently sell in the
relevant geographic market and would likely enter in response to a
SSNIP
–
Firms that have the necessary assets and readily available capacity to
begin producing the relevant product
Rapid entry more likely where relevant product is homogeneous
12
Market Participants, Market Shares and
Concentration (HMG § 5)
•
Market shares measures
–
Best available indicator of firms’ future competitive significance in the
relevant market
•
•
•
–
•
Actual or projected revenues (typically used)
Unit sales where low-priced product can be substituted for a higher-priced
product
Available capacity or reserves (exclude committed capacity profitably
employed outside the relevant market that it would not likely be used in
response to a SSNIP in the relevant market)
Annual data typically used
Market concentration measures
–
–
HHI principal measure of concentration adopted by the agencies
HHI calculated by summing the squares of the individual market
shares of the firms in the market
•
•
Range 0 (atomistic market) to 10,000 (a monopoly)
Increase = double the product of the market shares of the merging firms
13
Significance of Market Concentration Measures
•
Three classifications of markets
–
–
–
•
Unconcentrated markets: HHI < 1500
Moderately concentrated markets: 1500 ≤ HHI ≥ 2500
Highly concentrated markets: HHI > 2500
General standards
–
–
–
–
Small change in concentration: mergers involving an increase less than 100 points
“unlikely to have adverse competitive effects and ordinarily require no further
analysis”
Unconcentrated markets: merger resulting in unconcentrated markets “unlikely to
have adverse competitive effects and ordinarily require no further analysis”
Moderately concentrated markets: merger resulting in moderately concentrated
markets that involve an increase of more than 100 points “potentially raise
significant competitive concerns and often warrant scrutiny”
Highly concentrated markets: mergers resulting in highly concentrated markets that
involve an increase of
•
100 to 200 points “potentially raise significant competitive concerns and often
warrant scrutiny”
•
more than 200 points “will be presumed to be likely to enhance market power”
14
Unilateral Effects

Unilateral effects relating to pricing of differentiated
products

Unilateral effects relating to bargaining and auctions

Unilateral effects relating to capacity and output for
homogeneous products

Unilateral effects relating to innovation and product variety
15
Unilateral Price Effects

Will the merged firm have the ability to successfully raise
its prices?


Price effects turn on ability of competing firms to
increase production or reposition products in response
to a price increase by the merged firm
Generally, unilateral effects occur in differentiated product
markets
‒ The products of the merging firms are viewed by many consumers
to be better substitutes for one another than the products produced
by other firms
16
Diversion Ratios
• What is the diversion ratio?
–
The diversion ratio measures the fraction of all consumers
currently purchasing Product A that switch to Product B in
response to a price increase
DRAB = ΔQB/ΔQA
–
Our example: If in response to a price increase for Product A,
its sales fall by 10 units, and the sales for Product B rise by 5
units, the diversion ratio is 5/10 = 0.50 or 50%
PROPOSED MERGER
A
-10
B
C
D
F
5
2
2
1
17
Diversion Ratios
•
Why is diversion important to unilateral effects analysis?
–
The diversion ratio reflects the extent of direct competition
between the products of the merging firms
–
Post-merger, the merged firm will take into account the diverted
sales (which it now recaptures) when setting price
• The higher the diversion ratio of the merging firms’ products,
the more likely is significant harm to competition
• Significant unilateral effects may occur even though a nonmerging product is the “closest” substitute for every merging
product
• Significant unilateral effects may occur even where overall
market concentration is low (HHI levels of limited predictive
value)
18
Merger to Monopoly: Case Example
•
Glaxo Wellcome-SmithKline Beecham (2000)
–
Glaxo Wellcome and SmithKline Beecham, which manufactured and marketed
numerous pharmaceutical products, proposed to merge
–
For most products, the transaction raised no significant competitive issues, but
it did raise competitive concerns in several product lines, including the market
for R&D, manufacture, and sale of second generation oral and intravenous
antiviral prescription drugs used in the treatment of herpes infections
»
»
»
Glaxo manufactured and sold Valtrex
SmithKline manufactured and sold Famvir
No other company was producing or developing a similar drug
–
Entry barriers: regulatory approval created a substantial entry barrier
–
Merger would eliminate the only competition that existed in the market for
second generation prescription oral and intravenous antiviral drugs for the
treatment of herpes infections (i.e., merger to monopoly)
–
Result: Consent agreement requiring divestiture of SmithKline’s Famvir-related
assets
19
Pricing of Differentiated Products: Case Example
•
Nestle-Dreyer’s (2003)
–
Product market at issue: super premium ice cream
•
Nestle (Haagen-Dazs brand) = 36.5% market share
•
Dreyer’s (Dreamery, Godiva, and Starbucks brands) = 19.1% market share
•
Unilever (Ben & Jerry’s brand) ≈ 42.4% market share
–
HHIs: Pre-merger = 3,501; Post-merger = 4,897; Change = 1,396
–
Quantitative evidence of likely unilateral anticompetitive effects
•
Econometric analysis of point of sale data showed the diversion ratios
between the Nestle and Dreyer’s super premium brands were sufficient to
make a significant unilateral price increase by the merged firm likely
•
Diversion ratios with Unilever’s super premium ice cream were sufficiently
high to make a post-merger price increase by Unilever also likely
–
Result: Consent agreement requiring divestiture of two brands and key
distribution assets
20
Pricing of Differentiated Products: Case Example
•
Fortune Brands-Allied Domecq (2005)
–
Transaction: Fortune Brands (owner of Knob Creek bourbon) proposed to
acquire Allied Domecq’s Maker’s Mark bourbon brand
–
Candidate product market: premium bourbon
–
Candidate theory of harm: whether the acquisition would create or enhance
unilateral market power for premium bourbon
–
Econometric analysis of retail scanner data showed
•
Several other large whiskey brands, including bourbons, competed strongly
with Knob Creek and Maker’s Mark
•
Substantial cross-price elasticities among the several whiskey brands
•
Diversion ratios among Makers’ Mark and Knob Creek were low
–
Result: staff closed the investigation
21
Coordinated Effects

Will the merger facilitate coordinated price
increases by firms in the market?

Turns on the number of firms in the market and
their ability to reach agreement on price or output
and detect and punish deviations from the
agreement
22
Core Problem for Coordination

Collectively, firms have incentives to
coordinate prices:
Higher prices → Increased profits
BUT
Each firm has an incentive to cheat
23
Coordinated Interaction
Factors To Consider:
 Concentration
 Excess capacity
 Firm and product homogeneity
 Size of buyers
 Market stability
 Availability of information
 History of collusion
24
Coordinated Effects: Case Example
•
LaFarge-Blue Circle (2001)
–
Three markets at issue
»
Cement market in Great Lakes Region
»
Merged firm = 47% market share; top four firms = 91% market share
»
Post-merger HHI > 3,000 with increase > 1,000
»
Cement market in Syracuse, New York Region
»
Merged firm = 68% market share; top 2 firms = 100% market share
»
Lime market in Southeastern United States
»
Merged firm + Blue Circle joint venture = 85% market share
–
Product homogeneity: cement is a homogeneous, highly standardized commodity
over which producers compete principally on price
–
Market transparency: producers publicly announced price increases months in
advance
–
Transaction size and frequency: sales transactions tend to be frequent, regular, and
relatively small
–
Competitive constraints: high barriers to entry
–
Result: Consent agreement requiring certain divestitures
25
Merger Process at FTC - Overview
1. Review pre-merger filings
2. Collect public industry information
3. Interview market participants (customers,
competitors, merging parties)
4. If concerns, issue “second request” for
documents and data
5. Review documents and data
6. Conduct hearings of merging parties, others
7. Decide whether to close, challenge, or settle
26
The Whole Foods Case
Whole Foods/Wild Oats Merger
• Proposed Merger (2007)
• “Premium” food stores focusing on natural,
organic foods:
– Whole Foods
– Wild Oats
– Other regional stores
• Other supermarkets in United States:
– Safeway, Giant, Kroger, Albertsons, many others
28
Product Market
• FTC: Premium Natural Organic Stores
(PNOS)
• Defendants: PNOS, Conventional
Supermarkets, Trader Joe’s, Gourmet
Stores like Wegmans, Club Stores, etc.
29
30
31
32
Investigational Hearing Testimony
John Mackey, CEO of Whole Foods:
“One of the motivations is to eliminate a
competitor. I will not deny that. That is
one of the reasons why we are doing this
deal. That is one of the reasons why we
are willing to pay $18.50 for a company
that has lost $60 million in the last six
years. If we can’t eliminate those stores,
then Wild Oats, frankly, isn’t worth buying.”
33
Epilogue
• FTC lost case at district court level after 2-day
hearing
– Rejected FTC’s product market definition
• Appeals court reversed, ruling for FTC
– Found FTC had met its burden of proof
– But parties had already merged
• FTC settled with Whole Foods
– Requiring certain stores be divested
34
How to Proceed Expeditiously
Top 10 Tips
To clear Non-problematic Transactions
To Narrow and Refine Issues
35
TIP ONE
•
Begin investigation even before receiving formal
filing/notification from merging parties.
–
Trade press
–
Mass media
–
Citizen complaints
–
Notification courtesy copy (merging parties may come
in for pre-notification consultations and provide a draft
filing)
36
TIP TWO
•
Start fast.
Immediately begin gathering information to determine
whether the transaction can be promptly cleared or is
potentially anti-competitive.
37
TIP THREE
•
Check media sources of information.
– Web sites of merging parties
– News stories
– Google
– Presentations to securities analysts
38
TIP FOUR
•
Check institutional knowledge
– Experienced staff on earlier matters
– Prior written assessments of industry
39
TIP FIVE
•
Check other government agencies.
– Sectoral regulators
– Other government experts
– Securities filings
40
TIP SIX
•
Prioritize and focus.
–
Are there competitive product and geographic overlaps?
–
Does the available information suggest any compelling way
the transaction poses a potential competitive problem?
–
Is there any information that rules out a potential for a
competitive problem, such as a large number of significant
competitors or low barriers to entry?
–
Are there leads for further investigation?
41
TIP SEVEN
•
Contact the parties.
–
–
–
Learn parties’ view on antitrust issues.
•
What is the rationale for the transactions?
•
Do they expect to generate any efficiencies?
Have the parties’ business people educate you.
•
Talk to the marketing people or the person that can tell you how
prices are set or negotiated
Ask the parties to back it up. Obtain key ordinary course of business
document such as –
•
strategic and business plans
•
market shares/studies
•
board presentations on deal, particularly those describing any
synergies from the transaction
•
pricing plans
42
TIP EIGHT
•
Interview customers, suppliers and competitors.
–
Verify any facts supporting clearance or approval or confirm any concerns.
–
Start early -- arranging interviews is time-consuming.
–
Learn from competitors
•
Product overlaps…how firms compete on price, service or innovation.
•
Entry conditions…market shares, market structure, and history
–
Learn from customers
•
The number and strength of competitors?
•
What substitutes are available?
•
Do they have any concerns?
•
Are there anecdotes of past competition between the merging parties.
43
TIP NINE
•
Develop an investigation plan
– Focus!
– Prioritize!
– Continually reevaluate! Shift the focus of the
investigation according to the facts learned!
44
TIP TEN
•
Test any competitive concerns by disclosing them to
the parties.
– The disclosure will help you to learn the evidence
and arguments that you will need to overcome in
any challenge.
45
International Competition Network
•
ICN has adopted two documents addressing the procedural
aspects of merger notification and review:
–
Guiding Principles for Merger Notification and Review
•
–
http://www.internationalcompetitionnetwork.org/uploads/library/doc591.pdf
Recommended Practices for Merger Notification Procedures
•
http://www.internationalcompetitionnetwork.org/uploads/library/doc588.pdf
•
Non-binding aspirational statements intended as guidance for all
members
•
Incorporate best practices across ICN member agencies
•
Agencies should seek to coordinate their review of mergers that
may raise competitive issues of common concern
46