Theory Meets Practice in Merger Control

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Theory Meets Practice in Merger Control
1st ATE Symposium on Competition Policy Issues
Theory Meets Practice

• Koki Arai
• Senior Researcher for Economic Analysis
• Japan Fair Trade Commission

December 13, 2013 Massey University
The views in this presentation are my own, not
any organizations.
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Outline

• Theory Meets Practice in Merger Control
• Case Study ASML / Cymer
• Ex-post Evaluation of the effects of mergers

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Theory Meets Practice in Merger Control

• There are many studies on a merger.
• Many of them include policy implications.

Difficult to use a research that indicate
probability of welfare increase or decrease
through pure theory
Easy to explain analysis that describe an
incentive mechanism with a few examples
Who is user?
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Theory Meets Practice in Merger Control

• In merger control discussion, theory meets
  lawyers and businesses.
• For lawyers, it needs to give simple but
  reasonable economic explanation.
• For businesses, it needs to enforce rules based
  on evidences concerning ex-post assessment.

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Theory Meets Practice in Merger Control

• For lawyers, it needs to give simple but
  reasonable explanation.
• A case study in Japan Discussion of vertical
  merger and its remedy
• How to explain anticompetitive effect
• New measures to be theorized

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Theory Meets Practice in Merger Control

• For businesses, it needs to enforce rules based
  on evidences concerning ex-post assessment.
• Empirical studies of mergers effects and
  implications from competition policy
• Research from widely viewpoints
• CR04-11 CPRC Report (The Competition Policy
  Research Center)

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Case StudyASML / Cymer

• I. Introduction
• ASML US, the subsidiary of ASML Holdings N. V.
  that runs business of manufacturing and selling
  lithography systems used in the front-end process
  of semiconductor manufacturing, is planning to
  acquire all the shares of Cymer which runs
  business of manufacturing and selling light
  sources composing an important part of the
  lithography system.

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II. Particular field of trade1. Upstream
market(light source)

• Product Range
• KrF light source, and
• ArF light source
• (EUV lithography systems are under technical
  challenge)
• Geographic Range
• the whole world
• Lithography system manufacturers and
  distributors, domestic and overseas light source
  users give non-discriminatory treatment to
  domestic and overseas light source manufacturers.

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II.Particular field of trade1. Upstream
market(light source)

• (1) Product range
• Lightsource, a device that generates laser beams,
  is one of the essential and important parts of
  lithography systems as mentioned in
  II-2,below,and is used to print electronic
  circuits on wafers. The light source in which the
  parties currently have transaction is DUV (Deep
  Ultraviolet Light) light source.DUV light source
  can be divided into two major types KrF light
  source and ArF light source.
• Telling of a general nature of light sources, the
  shorter wavelength it generates, the higher
  resolution performance it achieves that enables
  print circuits to be done in more microscopic
  bandwidth. With regard to the wave lengthof the
  light source, KrF light sources have wavelength
  light of about 248nano meter (hereinafter nm)
  and ArF light sources have wavelength light of
  about 193nm. Light sources with longer wavelength
  light are used to print circuits with broad
  bandwidth. Light sources with shorter wavelength
  light are used to print circuits with narrow
  bandwidth.

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II.Particular field of trade1. Upstream
market(light source)

• (1) Product range
• Although there is another type of light source
  besides DUV light source called EUV(Extreme
  Ultraviolet Light)light source which has
  wavelength light of about 13.5nm, EUV light
  sources and EUV lithography systems are under
  technical challenge. Therefore, current sales of
  EUV light sources are marginal and made only for
  research and development purposes.
• As mentioned above, due to the differences of
  resolution performances and price ranges between
  KrF light sources and ArF light sources, users
  which are manufacturers of lithography systems do
  not recognize KrF light sources and ArF light
  sources as substitutable. Therefore, the JFTC
  defined one product range as KrF light sources
  and another product range as ArF light sources
  both are separately subject to its review.

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II.Particular field of trade1. Upstream
market(light source)

• (2) Geographic range
• Light source manufacturers and retailers(hereinaft
  er light source manufacturers) sell their light
  sources at a substantially same price all over
  the world. Moreover, lithography system
  manufacturers and distributors, domestic and
  overseas light source users, give
  non-discriminatory treatment to domestic and
  overseas light source manufacturers.
• Therefore, for each of the light sources as
  defined in (1), above, the geographic range is,
  respectively for each, defined as the whole
  world.

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II. Particular field of trade2. Downstream
market(lithography system)

• Product Range
• KrF lithography systems,
• ArF lithography systems, and
• ArF immersion lithography systems
• Geographic Range
• the whole world

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II. Particular field of trade2. Downstream
market(lithography system)

• (1) Product range
• Lithography system is a device that makes an
  image of electronic circuit patterns(circuit
  original plate)in reduced size, projected through
  its lens and prints the image on a wafer which is
  the basic structure of semiconductor integrated
  circuits.
• In case of light sources, one with shorter
  wavelength light has higher resolution
  performance that enables the light sources to
  print circuits with narrow bandwidth, a
  lithography system with ArF light source called
  immersion lithography system exists.
• This lithography is designed to enhance high
  resolution via application of refraction index of
  water created when the area between the lens and
  wafer is immersed with water.

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II. Particular field of trade2. Downstream
market(lithography system)

• (1) Product range
• With respect to resolution performances of
  lithography systems by the light source, the
  lithography system attached with KrF light source
  is capable of resolution performance of
  approximately 100-250 nm, the lithography system
  attached with ArF light source is capable of
  approximately 65-90 nm and the immersion
  lithography system attached with ArF light source
  is capable of approximately 45-65nm.
• Therefore, the resolution performance of ArF
  immersion lithography system is the highest among
  the lithography systems.

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II. Particular field of trade2. Downstream
market(lithography system)

• (1) Product range
• With respect to KrF lithography systems, ArF
  lithography systems and ArF immersion lithography
  systems, since there are differences between
  resolution performances and price ranges among
  them, the substitutability for semiconductor
  manufacturers and distributors and semiconductor
  manufactures to produce by order which are
  customers of lithography systems does not exist.
• Therefore, the JFTC defined the product ranges as
  KrF lithography systems, ArF lithography
  systems and ArF immersion lithography systems
  individually for each. ?

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II. Particular field of trade2. Downstream
market(lithography system)

• (1) Product range
• Nonetheless, chipmakers which are customers of
  lithography systems can freely choose any light
  sources manufactured by each of light source
  manufacturers when they purchase lithography
  systems.

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II. Particular field of trade2. Downstream
market(lithography system)

• (2) Geographic range
• Lithography system manufacturers sell lithography
  systems at substantially same price all over the
  world. Chipmakers which are domestic and overseas
  users give non-discriminatory treatment to
  domestic and overseas lithography system
  manufacturers. Therefore the whole world is
  individually defined as a geographic range.

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III. Review concerning substantial restraint of
competition 1. The status of the parties and the
competitive situation

• (1) Upstream market(light source)
• KrF HHI - 5,300.
• ArF HHI - 6,300.
• (2) Downstream market (lithography system)
• KrF lithography systems HHI - 8,300.
• ArF lithography systems HHI - 5,100.
• ArF immersion lithography systems HHI - 7,500.
• ?

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III. Review concerning substantial restraint of
competition 1. The status of the parties and the
competitive situation

• (1) Upstream market(light source)
• In the market for KrF light sources, the market
  share of Cymer would be approximately 60 (ranked
  in the first in the market) and the HHI would be
  approximately 5,300.
• In the market for ArF light sources, the market
  share of the parties would be approximately 75
  (ranked in the first in the market) and the HHI
  would be approximately6,300.
• Therefore, both products do not meet the safe
  harbor standards for vertical business
  combinations.
• Company A (a domestic manufacturer) is the only
  competitor of Cymer.

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III. Review concerning substantial restraint of
competition 1. The status of the parties and the
competitive situation

• (2) Downstream market (lithography system)
• In the market for KrF lithography systems, the
  market share of ASML would be approximately90
  (ranked in the first in the market) and the HHI
  would be approximately 8,300.
• In the market for ArF lithography systems, the
  market share of the parties would be
  approximately45 (ranked in the second in the
  market) and the HHI would be about 5,100.
• In the market for ArF immersion lithography
  systems, the market share of the parties would be
  approximately85 (ranked in the first in the
  market) and the HHI would be approximately 7,500.
  
• Therefore, all products do not meet the safe
  harbor standards for vertical business
  combinations.
• With respect to KrF lithography systems, Company
  X and Company Y (both of them are domestic
  manufacturers) are the only competitors of ASML.
  With respect to ArF lithography systems and ArF
  immersion lithography systems, Company X is the
  only competitor of ASML.

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III. Review concerning substantial restraint of
competition

• Three discussion points
• i) Refusal of sale, etc. of light sources
  transaction
• ii) Refusal of purchase, etc. of lithography
  systems transaction
• iii) Access to confidential information

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III. Review concerning substantial restraint of
competition2. Refusal of sale, etc. of light
sources transaction

• (1) Impact of refusal of sale
• In the downstream market, Company X and Company Y
  which manufacture and distribute KrF lithography
  systems, ArF lithography systems or ArF immersion
  lithography systems procure an appreciable extent
  of KrF light sources or ArF light sources from
  Cymer of the upstream market.
• As a result of the Acquisition, in case where
  Company X or Company Y are deprived of an
  opportunity to deal with Cymer or in case where
  Company X or Company Y is disadvantageously
  treated in transactions compared with ASML,
  Company X or Company Y are placed in a
  disadvantageous situation and there are some
  possibilities of resulting in market foreclosure
  or exclusivity.

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III. Review concerning substantial restraint of
competition2. Refusal of sale, etc. of light
sources transaction

• (1) Impact of refusal of sale
• Cymer occupies a high market share of the
  upstream market and there are few competitors in
  the upstream market.
• Therefore, if Cymer substantially sells light
  sources exclusively to ASML, and thus the
  competitors in the downstream market lose the
  primary procurement sources of light sources and
  result in market foreclosure or exclusivity, it
  is considered that such situation has a large
  impact on competition in the downstream market.

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Possibility of Refusal of Sales
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III. Review concerning substantial restraint of
competition2. Refusal of sale, etc. of light
sources transaction

• (2) Allegations of the parties and assessments
  thereof
• A. Allegations of the parties
• According to the parties claim, upon selling
  lithography systems, as to a light source which
  constitutes an important part of lithography
  systems, whereas it is chipmakers who decide to
  choose which light source of which light source
  manufacturer, if the parties engaged in input
  foreclosure, the parties lose not only their
  light source profit causes but also lose trust
  from chipmakers and that leads to have impact on
  ASMLs lithography sales.
• Therefore, the parties claimed that input
  foreclosures provide no incentive for them.

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III. Review concerning substantial restraint of
competition2. Refusal of sale, etc. of light
sources transaction

• (2) Allegations of the parties and assessments
  thereof
• B. Review and assessment of the allegations of
  the parties
• It is chipmakers that purchase lithography
  systems and choose light sources attached to
  lithography systems.
• According to the following facts, it is
  considered that chipmakers have countervailing
  power to a certain degree against the input
  foreclosure by the parties ?

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III. Review concerning substantial restraint of
competition2. Refusal of sale, etc. of light
sources transaction

• (i) chipmakers state that, should the parties
  exercise an input foreclosure after the
  Acquisition, chipmakers are still able to give
  their opinions regarding the choice of light
  source manufactures to the parties since the
  state where multiple choices of light sources are
  retained contributes to price and performance
  competition
• (ii) most of the sales of the parties are
  occupied by several major chipmakers and
• (iii) the development of lithography systems and
  light sources are carried out according to the
  roadmap of the whole semiconductor industry that
  includes such as chipmakers.

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III. Review concerning substantial restraint of
competition2. Refusal of sale, etc. of light
sources transaction

• (3)Measures proposed by ASML US
• After the JFTC explained to ASML US as saying
  that such input foreclosure might be a point
  potentially to argue in the review of the
  Acquisition, ASML US has proposed that it would
  take the following measures against the concern
  of the input foreclosure.

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III. Review concerning substantial restraint of
competition2. Refusal of sale, etc. of light
sources transaction

• (3)Measures proposed by ASML US
• (i) With respect to DUV light sources, Cymer will
  continuously do business with Company X and
  Company Y under fair, reasonable and
  non-discriminatory terms of trade as well as in
  the manner of paying regard to and being
  consistent with the existing agreements.
  Moreover, with respect to EUV light sources,
  after the Acquisition, Cymer will do business
  with Company X and Company Y under fair,
  reasonable and non-discriminatory terms of trade
  as well as in the manner of paying regard to and
  being consistent with the industry standard.
• (ii) Cymer will implement joint development
  activities with Company X and with Company Y
  under the reasonable terms of trade. With respect
  to DUV light sources, Cymer will implement it in
  the manner consistent with the existing
  agreements. ?

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III. Review concerning substantial restraint of
competition2. Refusal of sale, etc. of light
sources transaction

• (3)Measures proposed by ASML US
• (iii) For five years from the execution of the
  Acquisition, the parties will report the status
  of compliance with the measures mentioned above
  to the JFTC once a year.
• (iv) The report mentioned (iii) is to be created
  by an audit team independent from parties, which
  will be appointed subject to a prior approval of
  the JFTC.

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III. Review concerning substantial restraint of
competition2. Refusal of sale, etc. of light
sources transaction

• (4) Assessment under the AMA
• The measures proposed by ASML US mentioned (3),
  above, are as follows Cymer will continuously
  deal with Company X and Company Y in a manner
  consistent with the terms of trade equivalent to
  that of prior to the Acquisition. Moreover, an
  audit team independent of the parties, which
  will be appointed subject to a prior approval of
  the JFTC, conducts an audit and Cymer will report
  to the JFTC regarding the result of audit for a
  certain period of time after the Acquisition,
  thus the effectiveness of the measures will be
  ensured. Moreover, as mentioned in (2) B above,
  there is competitive pressure from chipmakers to
  a certain degree.
• Therefore, taking the measures proposed by ASML
  US, etc. into consideration, the Acquisition will
  not cause the input foreclosure.

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III. Review concerning substantial restraint of
competition3. Refusal of purchase, etc. of
lithography systems transaction

• (1) Impact of refusal of purchase on competition
• In the upstream market, Company A which runs
  business of manufacturing and selling KrF light
  sources and ArF light sources sells an
  appreciable extent of KrF light sources or ArF
  light sources to ASML of the downstream market.
• As a result of the Acquisition, there is a
  possibility of placing Company A in a
  disadvantageous situation and resulting in market
  foreclosure or exclusivity, in case where Company
  A is deprived of an opportunity to deal with ASML
  or Company A is treated disadvantageously in
  transactions compared to that of Cymer.

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III. Review concerning substantial restraint of
competition3. Refusal of purchase, etc. of
lithography systems transaction

• (1) Impact of refusal of purchase on competition
• ASML occupies a high market share of the
  downstream market and there are few competitors
  in the downstream market.
• Therefore, if ASML virtually procure light
  sources exclusively from Cymer, and thus the
  competitors in the upstream market lose sale
  destinations and excluded from the upstream
  market, it is considered that such situation has
  a large impact on competition in the upstream and
  downstream markets.

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Possibility of refusal of purchase
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III. Review concerning substantial restraint of
competition3. Refusal of purchase, etc. of
lithography systems transaction

• (2) Allegations of the parties and assessments
  thereof
• A. Allegations of the parties
• As mentioned in 2(2) A above, the parties alleged
  that there was no incentive for the parties to
  engage in the customer foreclosure because if the
  parties engaged in it, there would be competitive
  pressure from the chipmakers due to the fact that
  the choice of the light source is dependent on
  the decision of chipmakers.
• B. Review and assessment of the allegations of
  the parties
• As mentioned in 2(2)B above, chipmakers have
  countervailing power to a certain degree against
  the customer foreclosure by the parties.

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III. Review concerning substantial restraint of
competition3. Refusal of purchase, etc. of
lithography systems transaction

• (3) Measures proposed by ASML US
• After the JFTC explained to ASML US that such
  customer foreclosure might be a possible issue in
  the review of the Acquisition, ASML US has
  proposed that it would take the following
  measures against the concern of the customer
  foreclosure.

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III. Review concerning substantial restraint of
competition3. Refusal of purchase, etc. of
lithography systems transaction

• (3) Measures proposed by ASML US
• (i) When ASML develops in partnership with Cymer
  or Company A and places orders for products,
  parts and services of light sources to them, ASML
  will determine the supplier based on objective
  and non-discriminatory criteria, such as quality,
  logistics, technology, cost and chipmakers
  preferences etc.
• (ii) ASML will continuously permit chipmakers to
  choose light sources of their choice, and not
  unduly exert influence on the decision of
  chipmakers with respect to the choice of light
  sources.

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III. Review concerning substantial restraint of
competition3. Refusal of purchase, etc. of
lithography systems transaction

• (3) Measures proposed by ASML US
• (iii) ASML will substantially simultaneously
  provide both Cymer and Company A with information
  which is necessary in research and development of
  light sources and order placements for light
  source products, parts and services.
• (iv) For five years from the execution of the
  Acquisition, the parties will report the status
  of compliance with the measures mentioned above
  to the JFTC once a year.
• (v) The report mentioned (iv) is to be created by
  an audit team independent from parties, which
  will be appointed subject to a prior approval of
  the JFTC.

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III. Review concerning substantial restraint of
competition3. Refusal of purchase, etc. of
lithography systems transaction

• (4) Assessment under the AMA
• The measures proposed by ASML US mentioned (3)
  above represent its promise that after the
  Acquisition, ASML will continuously deal with
  Company A in a manner consistent with the terms
  of trade equivalent to that of prior to the
  Acquisition. Moreover, an audit team independent
  of the parties, which will be appointed subject
  to a prior approval of the JFTC, conducts an
  audit and ASML will report to the JFTC regarding
  the result of audit for a certain period of time
  after the Acquisition, thus the effectiveness of
  the measures will be ensured. Moreover, as
  mentioned in (2) B above, there is competitive
  pressure to a certain degree from chipmakers.
• Therefore, taking the measures proposed by ASML
  US etc. into consideration, the Acquisition will
  not cause the customer foreclosure.

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III. Review concerning substantial restraint of
competition4. Access to confidential information

• (1) Impact of access to confidential information
  on competition
• Light source manufacturers and lithography
  systems manufacturers share various confidential
  information, such as product development, product
  specification, their customers, etc. with each
  other in terms of developing, manufacturing, and
  selling products.
• Thus, after the Acquisition, there is a
  possibility that, Cymer accesses to Company As
  confidential information shared between ASML and
  Company A through ASML, or ASML accesses to
  Company X or Company Ys confidential information
  shared between Cymer and Company X or Company Y
  through Cymer.

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III. Review concerning substantial restraint of
competition4. Access to confidential information

• (1) Impact of access to confidential information
  on competition
• It is recognized that there is less possibility
  the parties and competitors take coordinated
  conduct because technological innovation is
  frequent in upstream and downstream markets and
  there is competitive pressure to a certain degree
  from chipmakers.
• However, there is a possibility that the parties
  may use the confidential information for their
  advantages, and thereby their competitors may be
  placed in a disadvantageous situation and
  foreclosure or exclusivity in market may be
  occurred.

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III. Review concerning substantial restraint of
competition4. Access to confidential information

• (1) Impact of access to confidential information
  on competition
• The parties occupy high market shares of the both
  upstream and downstream markets and there are few
  competitors in these markets respectively.
• Therefore, if the confidential information of
  competitors is shared between the parties and
  market foreclosure or exclusivity are resulted
  in, it is considered that such situation has a
  large impact on competition in the upstream and
  downstream markets.

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Possibility of access to confidential information
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III. Review concerning substantial restraint of
competition4. Access to confidential information

• (2) Measures proposed by ASML US
• After the JFTC explained to ASML US that handling
  confidential information of competitors might be
  a possible issue in the review of the
  Acquisition, ASML US has proposed that it would
  take the following measures against the handling
  of confidential information.
• (i)Directors/Employees of Cymer who are
  responsible for the confidential information of
  Company X or Company Y will be prohibited from
  providing the confidential information to
  directors/employees of ASML and enter into a
  non-disclosure agreement.
• (ii)Directors/Employees of ASML who are
  responsible for the confidential information of
  Company A will be prohibited from providing the
  confidential information to directors/employees
  of Cymer and enter into a non-disclosure
  agreement.
• (iii)To comply with (i)and (ii)above, the parties
  will create a protocol of information blackout
  for its employees.
• (iv)For five years from the execution of the
  Acquisition, the parties will report the status
  of compliance with the measures mentioned above
  to the JFTC once a year.
• (v) The report mentioned (iv) is to be created by
  an audit team independent from parties, which
  will be appointed subject to a prior approval of
  the JFTC.

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III. Review concerning substantial restraint of
competition4. Access to confidential information

• (3) Assessment under the AMA
• The measures proposed by ASML US as mentioned in
  (2) above represent its promise that after the
  Acquisition, the parties implement measures to
  prevent disclosure of confidential information
  which includes their directors/employees to enter
  into a non-disclosure agreement.
• Moreover, an audit team independent of the
  parties, which will be appointed subject to a
  prior approval of the JFTC, conducts an audit and
  ASML will report to the JFTC regarding the result
  of audit for a certain period of time after the
  Acquisition, thus the effectiveness of the
  measures will be ensured.
• Therefore, taking the measures proposed by ASML
  US, etc. into consideration, the Acquisition will
  not raise an issue of access to confidential
  information of competitors.

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IV Conclusion

• The JFTC concluded that, taking the measures
  proposed by ASML US, etc. into consideration, the
  Acquisition would not substantially restrain
  competition in any particular fields of trade.

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Contribution of Economics

• Theory Meets Practice
• The foreclosure doctrine states that the main
  purpose of an acquisition of an upstream or
  downstream firm is to weaken the extent of
  competition in either market by foreclosing
  competitors from that part of the market taken by
  the acquired firm.
• A theory of extending market power from one stage
  to another must be explicit about what vertical
  integration allows the firm to do that control
  over the upstream price does not. (Salinger, 1988
  QJE)

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Contribution of Economics

• Theory Meets Practice
• New measures to be theorized
• There is a possibility that the parties may use
  the confidential information for their
  advantages.
• The authority considers remedial measures with
  case-by-case approaches.
• There is little knowledge of this type of measure
  like a firewall shared in the authority from the
  theoretical point of view.

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Behavioral Remedies

• The USDOJs Policy Guide to Merger Remedies
  deleted the structural remedies principles
• A. Structural Remedies Are Preferred in III. A.
  of the Policy Guide of October 2004 is deleted in
  the Policy Guide of June 2011.
• Several behavioral remedies are taken in recent
  cases such as US v. GrafTech/Seadrift, and US v.
  Georges Foods.

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Behavioral Remedies

• We have developed several useful merger analyzing
  tools such as UPP, GUPPI, IPR and First-Order
  Approach.
• Recent merger control establish two pillars
  applying these tools (UPP in 2010 US Merger
  Guidelines) and taking thorough measures
  including the behavioral remedies.

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Need to be theorized

• The thorough measures including behavioral
  measures are needed to be theorized from the
  economics viewpoints.
• The practitioners are seeking to appropriate
  measures, and the wide range of theoretical
  analysis and suggestion is required in the
  cutting-edge competition policy.

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Theory meets practice in merger control
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Ex-post Evaluation of the effects of mergers

• For businesses, it needs to enforce rules based
  on evidences concerning ex-post assessment.
• Empirical studies of the effects of mergers and
  the implications for competition policy
• Research from widely viewpoints
• CR04-11 CPRC Report (The Competition Policy
  Research Center)
• Hiroyuki Odagiri, Koki Arai, Noriyuki Doi,
  Yasushi Kudo, Takuji Saito, Kuninobu Takeda, and
  Chiharu Yanagita

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????? ?15?Anti-Monopoly Law in Japan, Section 15

• ??????????????????????????????????
• ??????????????????????????????????????
• No company shall effect a merger if any of the
  following items applies
• When the effect of the merger may be
  substantially to restrain competition in a
  particular field of trade.
• This regulation applies to all types of business
  combination.

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The Industrial Structure Vision 2010 by
Industrial Ministry in Japan (METI)

• Competition policy ensured transparency of
  procedures, conversion to corporate merger review
  that considers the medium- to long-term and the
  global market.

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Business integration of Nippon Steel and Sumitomo
Metal (Press release, Feb. 3, 2011))

• Objectives
• The companies would, through the business
  integration, accelerate their global strategies
  and realize a level of competitiveness which is
  globally outstanding in all aspects, including
  technology, quality, and cost, by combining their
  respective resources that each has built up, and
  generate synergies through consolidation of the
  superiority area in their respective businesses.
• Through the business integration, the companies
  aim to better respond to the needs of customers
  both in Japan and overseas and desire to
  contribute to further development of the Japanese
  and global economy and improvement of global
  society.

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63
Business integration of Nippon Steel and Sumitomo
Metal (continued)

• Goals of the integrated company
• 5. Maximizing corporate value and the improving
  evaluation from shareholders and capital markets
• By implementing the foregoing measures, the
  integrated company would seek to maximize its
  corporate value and would use its utmost efforts
  to obtain a high evaluation from shareholders and
  capital markets by further improving its
  profitability, promoting the strategic
  utilization of funds and assets, and building up
  a stronger financial base.

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Analyzing Effects of Mergers with an Oligopoly
Model

• The oligopoly model suggests that a merger raises
  the market price, reduces the output and profits
  of merging firms (but may increase the profit
  rate), and increases the profits of non-merging
  firms. The social welfare is hurt.
• The results may change when the merger
  contributes to efficiency increase and thereby
  reduces the merging firms marginal cost.

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Merger Guidelines (JFTC, March 2007)

• When improvements in efficiency, whether through
  economies of scale, integration of production
  facilities, specialization of factories,
  reduction in transportation costs or efficiency
  in research and development, is deemed likely to
  make the company group take competitive action
  after the business combination, this factor will
  also be considered to determine the impact of the
  business combination on competition.

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Considerations of Efficiency in the Guideline

• Efficiencies to be considered in this case are
  determined from three aspects
• (i) efficiencies should be improved as effects
  specific to the business combination
• (ii) improvements in efficiencies should be
  materialized and
• (iii) improvements in efficiency contribute to
  the interests of users.
• gt Condition (iii) requires that the interests of
  users (i.e., consumer welfare) to increase.
  Therefore, the efficiency increase must be very
  large.

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Needs for Empirical Studies

• Have mergers in the past really achieved such
  aims?
• Improve its profitability Did profit rates
  rise?
• High evaluation from shareholders Did stock
  prices rise?
• Competitiveness in technology, quality, and
  cost Did RD expenditures increase? Did
  inventions increase?
• Better respond to the needs of customers Did
  prices not rise?

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68
CPRC Joint Research Project on Post-Merger
Evaluation

• We evaluate post-merger profitability, stock
  prices, RD, and selling prices, using the data
  from mergers that occurred after 2000.
• For a similar study on mergers that occurred
  during the 1990s, see an earlier CPRC research
  report (CR02-03, 2003).

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Many studies for ex-post evaluation recently

• Retrospective Analysis of Agency Determinations
  in Merger Transactions Symposium, June 28-29,
  2013, ABA
• International Journal of the Economics of
  Business
• Special Issue Hospital Mergers and Antitrust
  Policy, Volume 18, Issue 1, 2011
• Special Issue Issues in Empirical Merger
  Analysis, Volume 13, Issue 2, 2006,

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Limitations of the Study

• Due to limitations of the study, the results
  remain tentative.
• Dependence on published reports (except the price
  study) financial reports and share price data of
  non-public firms are unavailable, which
  unfortunately are actually many.
• Short post-merger period However, business
  experts tend to say that mergers need to have
  effects within 3 years.
• Diversity of merger motives and types Quite a
  few seem to have been made to rescue failing
  companies.

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Mergers and Profitability
72

• The purpose of the project is to estimate the
  impact of mergers on corporate performance. To do
  so, we need to distinguish two types of the
  impact merger itself and merged firms
  characteristics.

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73
We need to analyze this effect only.
Company character-istics
Company perform-ance
Merger
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74
Selecting Control Firms against Merged Firms

• A simple comparison of pre- and post-merger
  changes in financial indicators (e.g. ROE)
  between merged firms and non-merged firms may not
  capture merger effects alone. In this study, we
  apply a propensity score matching method to
  select control firms, and then compare financial
  indicators of merged firms to those of control
  firms.

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Selecting Control Firms witha Propensity Score
Matching Method

• We begin by estimating firms propensity scores
  for undertaking mergers, using firm
  characteristics as the explanatory variables.
  Then, based on the estimated propensity scores,
  we match a non-merged control firm to each merged
  firm. Finally, we compare changes in performance
  between them (average treatment effects).

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The Industry to be Analyzed in this Study

• We analyze mergers among first regional banks and
  second regional banks.
• Years 2000 - 2006 (Fiscal Year).
• Number of merger cases 6.

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Estimation Result of the Propensity Score

• Result of Logit Estimation (Sample Size 773)

Explanatory Variables Estimated Coefficients Significance
Constant -407.693
ROE 0.188
Square of ROE -0.020
Operating Cost Ratio 4.769
Capital Asset Ratio -1.899
Bad loans Ratio 0.535
Log of Assets 52.613
Square of Log of Assets -1.723
Growth Rate of Regional Production 0.541
The explanatory variables except constant are
lagged ones. Standard errors are adjusted for
banks, and , and mean statistically
significant at 1 , 5, and 10, respectively.
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Merged Banks and selected Control Banks
Merged Banks (Month / Year of Merger) Control Banks
The Kinki Osaka Bank (April / 2000) The Towa Bank
The Shinwa Bank (April / 2003) The Chukyo Bank
Tsukuba Bank (April / 2003) Suruga Bank
Momiji Bank (May / 2004) The Yachiyo Bank
The Nishi-Nippon City Bank (October / 2004) The Yachiyo Bank
The Kiyo Bank (October / 2006) The Hokuto Bank
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Measurement of Corporate Performance

• We employ ROE (Current Profit / Net Worth) as a
  measure of corporate performance, and look at its
  changes from one year before merger as defined
  below. For merged banks before the merger, we
  create hypothetical merged banks by summing up
  the two firms data, to compute ROEi,base. To
  control the effects of business fluctuation, we
  subtract the annual average from ROE to make
  year-adjusted ROE.

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Year-adjusted ROE in a Year before Mergers

• Merged Banks and Control Banks

Merged Banks ROE Year-adjusted ROE Merged Banks ROE Year-adjusted ROE Control Banks ROE Year-adjusted ROE Control Banks ROE Year-adjusted ROE
The Shinwa Bank 9.696 The Chukyo Bank 11.928
The Kinki Osaka Bank 34.664 The Towa Bank 25.079
Tsukuba Bank 4.784 Suruga Bank 16.084
Momiji Bank 11.682 The Yachiyo Bank 2.017
The Nishi-Nippon City Bank 3.334 The Yachiyo Bank 2.017
The Kiyo Bank -14.035 The Hokuto Bank 3.282
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Comparison of Corporate Performance (ROE)

• The Shinwa Bank and The Chukyo Bank

• The Kinki Osaka Bank and The Towa Bank

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Comparison of Corporate Performance (ROE)

• Momiji Bank and The Yachiyo Bank

• Tsukuba Bank and Suruga Bank

83
Comparison of Corporate Performance (ROE)

• The Kiyo Bank and Hokuto Bank

• Nishi-Nippon City Bank and The Yachiyo Bank

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Comparison of Corporate Performance (ROE)

• Number of merger cases in which ROE decreased
  relatively to non-merging banks
• 1st year after the merger 3 (out of 4)
• 2nd year after the merger 4 (out of 6)
• 3rd year after the merger 3 (out of 6)
• Note that statistical significance is lacking in
  the changes in performance (both means and
  medians).

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Conclusion

• We used the sample of regional banks in Japan,
  applied the propensity score method to select
  matching firms, and estimated the impact of
  mergers on corporate performance. Our results
  suggest that mergers rarely contribute to
  increases in profitability.

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Mergers and Stock Prices (An Event Study)
87

• Methodology
• Applying an event study method, we analyze the
  extent that the announcement of a merger
  influences the stock price.
• The effect of merger is calculated as the excess
  of actual post-announcement rate of return over
  the expected rate of return calculated with a
  market model.

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• Model
• Calculate estimated parameters ,
• Stock rate of return of firm i, period t
• Market rate of return, period t

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89

• (2) Calculate abnormal rate of returns
• (3) Calculate cumulative abnormal rate of
  returns,

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90

• Cases of Business Combination Studied 15
• Mergers (6)
• Establishment of holding company (8)
• Establishment of a consolidated subsidiary (1)

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• An example
• Establishment of a joint holding company by
  Sankyo Co., Ltd. and Daiichi Pharmaceutical Co.,
  Ltd.(2005)
• Event day February 21, 2005

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• Case Mergers of Sankyo and Daiichi
  Pharmaceutical

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93

• The CAR of merger companies (Sankyo Daiichi)
  was positive immediately after the merger
  announcement but eventually became negative
  (though statistically insignificant), while that
  of the rival companies remained positive.
• Suggests that the stock market expected the
  long-run profitability of the merged firm would
  rather decrease, while that of the rival firms
  would increase.

94

• Results of the 15 Case Studies Summary

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95

• In 11 cases out of 15 (i.e., 73), CAR was
  positive immediately after the merger
  announcement however, after a week, it was
  positive only in less than a half of the cases,
  that is, 6 cases or 40 of the cases. In the
  majority of the cases, CAR was not significantly
  different from zero.

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Conclusion

• In the capital market, the investors will make an
  investment decision based on the predicted
  present value of the firms long-run profits.
  Hence, if the merger is expected to raise
  efficiency of the firm and thereby its long-run
  profitability, the merger announcement should
  raise its stock price and result in a positive
  CAR.
• According to our study of 15 cases, such a
  positive effect was observed immediately after
  the announcement in many of the cases but, after
  a week, the effects were obscure in the majority
  of the cases.

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97
Mergers and RD
98
Purpose

• To analyze the impact of mergers on innovation
• To examine the post-merger RD activities of
  Japanese manufacturing firms, after 2000
• Indices to be studied are
• RD expenditures (as an intensity, i.e., a ratio
  to sales)
• The number of published patent applications

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99

• Review of Theoretical Empirical Studies
• Theoretical predictions
• Quiet life hypothesis vs. Schumpeterian
  hypothesis
• In controversy
• Innovation aversion (Farrell Shapiro2010)
• New products may compete against the merger
  partners products, lessening incentives for
  innovation.
• The effect of a merger depends on two relations
  
• Market technology relatedness within the
  merging firms
• Relations between merging and non-merging firms

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100

• Empirical Analyses Diversity of Evidences
• More evidences suggest the negative effects
• Colombo Garrone 2006 suggest the following
• Mergers, particularly horizontal mergers, tend to
  reduce RD
• Tend to reduce RD when the merger partners
  technologies are substitutable

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101

• Conclusion from the survey of theoretical and
  empirical analyses
• Today, competition authorities tend to give more
  weight to the investigation of the impact of
  mergers on innovation in their enforcements.
  Unfortunately, economic studies suggest that this
  impact is neither simple nor universal.

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• Empirical Analysis
• Methodology
• 39 mergers after 2000
• Comparison of RD activities before and after
  mergers
• RD measures
• RD intensity (RD expenses/sales) (consolidated)
• Number of published patent applications
  (published after 1.5 years from application)
  (non-consolidated)

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• Results 39 Cases after Year 2000
• B3A3 B3A5 B3A3-5
  
• ?gt0 ?lt0 All ?gt0 ?lt0 All ?gt0
  ?lt0 All
• RD intensity 17 22 39 17 17 34
  16 19 34
• Published application 11 28 39 9 25 34
  11 23 34
• ? post-merger value less pre-merger value (?gt0
  or lt0 )
• B33-years mean, pre-merger A3(5) 3
  (5)-years mean, post-merger
• A3-5 3-years mean during the 3rd to 5th
  year after merger

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104

• Results concerning RD Intensity
• RD intensity increased in less than half of the
  cases
• In RD-intensive industries, it increased in the
  majority of cases
• (9 out of 15 among firms with RD intensity
  3, 7/10 with RD intensity 4)
• It increased in 5 of the 6 cases that were
  subject to JFTCs review

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105

• Results concerning published patent applications
• Decreased in the majority of cases, similarly to
  RD intensity
• Even in RD-intensive industries, it increased in
  less than half of the cases
• (5 out of 14 among firms with RD intensity
  3, 4/10 with RD intensity 4)
• Also, it increased in just 2 of the 5 cases that
  were subject to JFTCs review
• However, the effect of time lag between RD and
  patent applications need be examined.

106

• Result Published Applications
• ?gt0 ?lt0 All
• 2-year lag (BA3 and A3-5 compared) 12 22 34
• 3-year lag (A3 and A4-5 compared) 12 22 34
• BA3 3 years-mean during pre-merger 1st year to
  post-merger 2nd year
• A3 3-years mean during post-merger 1st to 3rd
  year
• A3(4)-5 3 (2)-years mean during post-merger
  3rd (4th) to 5th year

107

• Conclusion
• No evidence that mergers always promote RD.
• In RD-intensive industries, there were more
  cases in which mergers promoted RD however,
  they rarely resulted in more patents.
• However, the study is constrained by imperfect
  measures of innovation activities and the lack of
  detailed information. An examination of such
  detailed information will be needed in actual
  merger investigations.

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108
Mergers and Prices
109

• The Purpose
• In this study, we examine the price effect of
  mergers by analyzing how retail prices of goods
  in the market changed before and after the
  mergers.

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110

• Methodology and Model
• Using retailer scanner data and following the
  methodology of Ashenfelter and Hosken (2008), we
  compare pre- and post-merger monthly changes in
  retail prices of the products of merged firms (or
  firms in a combined group) with those of others
• We will also apply the method for the estimation
  of the effects on sales and market shares.

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• i product, j region, t month
• pi,j,t sales-weighted price index
• ai,j product- and regionspecific factor
• posti,j,t 0 before the merger 1 after the
  merger
• MPPi Merging Party Product
• ( 1 if merging firms product 0
  otherwise)
• ei,j,t error term

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112

• Cases for the analysis
• Household flavor seasonings (3000 items)
• Sugar (850 items)
• Instant noodles (2200 items)

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113

• Data
• The data were compiled from the POS
  (point-of-sales) data of more than 600 stores in
  8 regions and consist of monthly sales and
  quantity.
• 8 regions Hokkaido, Tohoku, North Kanto,
• Tokyo Metropolitan, Hokuriku, Tokai, Kinki,
  Chugoku, Shikoku, and Kyusyu

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114

• Estimated Coefficients

ß1 Post ß2 PostMPP
Flavor Seasoning 0.0016 0.0039
Sugar 0.0528 0.0384
Instant noodles -0.0023 0.0013
115

• Results
• ß1 (the coefficient of post) is positive ? an
  increase in the average market price after the
  merger (red column)
• ß2 (the coefficient of postMPP) is positive ? an
  increase in the prices of the merger firms
  products (blue column)

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116

• In depth study Flavor seasoning (Ajinomoto
  Yamaki)
• The cross term with Ajinomoto was positive and
  significant while that with Yamaki was negative
  and significant
• Relative to the market, Ajinomoto raised its
  prices while Yamaki lowered its prices after the
  acquisition.
• Possibility that merging parties changed their
  product positioning and differentiated their
  products in order not only to avoid
  cannibalization but also to gain new customers.

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117

• Ajinomoto vs. Market Yamaki vs. Market

Black line maket price level Gray line
Ajinomotos price level
Black line market price level Gray line
Yamakis price level
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118

• Estimation Results on Sales and Market Shares
• After the merger, sales of merger firms and their
  market shares decreased (flavored seasoning and
  sugar) while sales of the average firm in the
  industry increased (flavored seasoning) or
  decreased (sugar).
• Also a case in which the merger firms increased
  their sales (instant noodles).

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119

• Estimated effects on sales and market shares

Market Sales ß1 Post ß2 PostMPP
Flavor Seasoning 1.18 -3.29
Sugar -0.74 -21.79
Instant noodles -23534 68902
Market Shares ß1 Post ß2 PostMPP
Flavor Seasoning 0.00000 -0.00002
Sugar 0.00003 -0.00021
Instant noodles -0.00000 0.00000
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120

• Conclusion
• After the merger, in all the three markets
  studied,
• The average market price increased (except
  instant noodles).
• The price of the merger firms product (weighted
  average of the prices of the firms entire
  products) increased more than the average market
  price.

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121

• Conclusion (continued)
• Effects on product positioning
• In the flavored seasoning market, one of the
  merger partners raised its price while the other
  lowered its price, suggesting a change in the
  product positioning strategy.
• gt Suggested is the need to examine the effects
  on product composition and positioning that a
  merger may cause. Some of the consumers may
  benefit whereas the others may be hurt.

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Summary of Empirical Analyses

• Effects on Profitability and Stock Prices
• No significant effect on profit rate was
  observed. Though statistically insignificant,
  there were more cases of declining profit rates.
• The stock prices rose in many cases on the day of
  announcement but declined within a few days,
  making the cumulative abnormal returns not
  significantly different from zero in the majority
  of cases.
• gt Thus suggested is that efficiency increase was
  rarely large enough to raise profitability and
  stock performance.

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123

• Effects on RD expenditures and number of patents
• Both RD expenditures and the number of patents
  decreased in the majority of cases.
• However, there were also cases in which RD
  expenditures increased, usually in RD intensive
  industries.
• The measures may not have captured the innovation
  activity accurately. More detailed case-specific
  investigations are needed.

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124

• Effects on prices
• The study is confined to 3 industries.
• The average market prices increased (except
  instant noodles), and the average prices of the
  merger firms products increased further.
• In an industry with product differentiation, the
  merger firm may raise the prices of some products
  while lowering the prices of others, suggesting
  product re-positioning.

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125
Thus, in a nutshell,

• Decreased consumer welfare (in the three cases
  studied).
• Unlikely to have improved efficiency enough to
  increase the firms profitability and to raise
  consumer welfare.
• Questionable if the mergers contributed to
  long-term competitiveness as the Industrial
  Structure Vision hopes.
• However, differences across cases need be noted.

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Implications for Merger Investigations

• The priority for competition policy offices
  should be to watch the impact on prices and the
  consumer welfare.
• On efficiency increase and the increase in
  long-term competitiveness, the firm needs to
  show the detailed plans, together with the scope
  for implementation.

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127
Use of Economic and Quantitative Evidences

• Merger evaluations in Japan have tended to be
  based on qualitative evaluation based on
  interviews, etc.
• A wider use is needed of more economic
  evaluations based on quantitative analyses,
  including SSNIP test, UPP test, and merger
  simulations.

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Theory Meets Practice in Merger Control

• In case of merger control discussion, theory
  meets practice in two aspects
• Case Study ASML/Cymer
• Competition Authorities enforce the law
  case-by-case basis, with attention to the theory.
• Ex-post assessment from various perspectives
• Not only enforcement but also theory is needed
  to be assessed after the fact.

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Thank you for your attention.

• Questions and Comments are welcomed.
• E-mail Koki.arai_at_nifty.ne.jp