New policy guidance on European merger control

1

• 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

2
Guidelines on non-horizontal mergers

3
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)

4
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
• HHI
• (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.

5
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

6
Analytical framework

• Commission will examine
• Ability to foreclose
• Incentive to foreclose
• Likely impact on effective competition

7
Example Input foreclosure
Efficiencies?
Raising rivals costs?
? Net effect on consumers ?
8
(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

9
(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

10
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

11
(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.

12
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)

13
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)

14

• Example Siemens/ VA Tech (M.3653)

VA Tech (ETR) Electrical traction
Siemens 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.
15
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)

16
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 rivals 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.

17
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/legis
  lation/non_horizontal_consultation.html
• Commissions adoption of definitive version
  expected by November 2007

18
The new remedies policy

19
Reasons and objectives of review

• Reflect conclusions from Commissions Merger
  Remedies Study (2005)
• http//ec.europa.eu/comm/competition/mergers/studi
  es_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

20
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

21
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)

22
Conclusions of the Remedy Study on divestitures
23
Divestitures. Scope

• Insufficient scope of the divested business is
  the major source of remedy failure (remedies
  study).

24
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.

25
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 Commissions 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

26
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)

27
Divestiture process

• Short divestiture two-step process (normally 63
  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

28
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

29
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

30
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

31
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

32
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/legi
  slation/merger_remedies.html
• Commissions adoption of definitive version
  expected by early 2008.

33

• The Consolidated Jurisdictional Notice

34
Scope and Sources

• Consolidation of current jurisdictional Notices
• Concept of Concentration
• Joint Ventures
• Undertakings concerned
• Calculation of Turnover
• Covers all issues relevant for Commissions
  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

35
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

36
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

37
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

38
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)

39
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/HR/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

40
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

41
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

42
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)