Mergers and EC Merger Policy

By Kevin Hinde

Aims

Aims– To explore the rationale for and impact of

mergers in Europe.– To demonstrate the role of regulators in

controlling merger developments

Learning Outcomes

By the end of this session you will be able to– describe and analyse trends in merger activity

in the EC in recent times.– analyse the rationale for merger activity and

assess their welfare implications using Williamson’s trade off model.

– critically assess the institutional framework controlling European mergers.

Data

TABLE 3 3

Motives for Merger

Market Power. Efficiency. Financial Motives Risk Reduction Empire Building, Failing Firms and Ageing

Owners EC policy developments and Globalisation

Welfare Effects

Horizontal Mergers Vertical Mergers Conglomerate Mergers

P

0 Q

AC=MC

AC1=MC1

P2

P1

Q2 Q1

d

a

e

C f b

Welfare Effects

Mergers can– offer cost savings– improve long term viability of investment– enhance economic integration

But they can also– raise prices– deter actual competition– prevent potential competition

EC Merger Policy

1990 EC introduced a new Merger Regulation. An EC taskforce must discover whether a merger/joint venture

creates a concentration has a community dimension

– World wide annual turnover of > 2.5bn ECU– EU Annual Sales of >100 Million ECU

Action 1990 to 1999

1027 cleared at phase 1(45 with undertakings) 51 withdrawn 51 fall outside the scope 9 full referral back to national authorities 58 required a phase 2 examination

Of the latter 36 were compatible with conditions and obligations 11 compatible without obligation 11 were prohibited

Evaluation

A distinct procedure has emerged for assessing notified mergers once Community jurisdiction has been established.– determine the relevant product market– determine the relevant geographical market– assess whether a merger creates or strengthens

a dominant position

Evaluation

Four elements are examined:– the market position of the merged firm (market

share and other competitive advantages)– strength of the remaining competitors– customers’ buying power– potential competition

Prohibitions to 1999

Aerospace/De Havilland (1991) MSG Media Service (1994) Nordic Satellite Distribution (1995) RTL/Veronica/Endemol (1995) Gencor/Lonrho (1996) Kesko/Tuko (1996) Saint Gobain/Wacker Chemie/NOM (1996) Blokker/ Toys ‘R’ Us (1997) Bertelsmann/Kirch/Premiere (1998) Deutsche Telekom/Betaresearch (1998) Air Tours/ First Choice (1999)

Issues

Only large mergers being caught.– Threshold levels still considered high– Dominance may persist in smaller industries.

Most mergers occurring in technologically dynamic industries. To what extent will this bring benefits?

Concerns about the relationship between member states and EC.

Test

List three trends in EC merger development over the past decade or so.

List the reasons why mergers occur. What are the costs and benefits of mergers? What are the main problems for regulators?

Any Questions?