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Mergers: Merger Guidelines 2008

ACCC Merger Guidelines (November 2008) (Analytical guidelines)

 

About

The ACCC's 2008 Merger Guidelines provide analytical guidance to parties seeking to merge.

 

Notification

Notification remains voluntary in Australia, but the ACCC encourages parties to notify the ACCC in advance of completing a merger where (a) 'the products of the merger parties are either substitutes or complements' and (b) 'the merged form will have a post-merger market share of greater than 20 per cent in the relevant market/s' (p 9 Guidelines).

 

Competition test

The Guidelines note, at 3.1, that competition is 'a state of ongong rivalry between firms'. Only mergers which substantially lessen competitoin are prohibited by s 50. The Guidelines (at 3.14) note that section 50 requires 'forward-looking' analysis into effect or likely effect of a merger and the ACCC will focus on the 'foreseeable future' - normally one to two years - when considering market definition and the factors set out in s 50(3). The future 'with and without' test used to assess likely the impact of a merger on competition is discussed on page 13 of the guidelines. The ACCC's treatment of failing firm arguments is dealt with on page 14 of the Guidelines.

 

Market definition

Chapter 4 of the Guidelines discusses the ACCC's approach to market definition, noting that the ACCC's starting point will be to identify 'the products and geographic regions actually or potentially supplied by teh merger parties' and then focussinng on 'defining markets in areas of activity where competitive harm could occur' (page 16). Substitutes are then considered. The ACCC will apply the hypothetical monopolist test (HMT) to help define the relevant markets (see pages 17-18) - although it will not apply it strictly, but rather as an 'intellectual aid'. Page 19 of the Guidelines sets out som of the information the ACCC will rely on to assess substitution possibilities.

The relevant market must be a 'substantial market in Australia, a state, territor or region of Australia' (s 50(6)). The ACCC notes that it considers that it is possible for a 'small' market to nevertheless still be 'substantial' (at 4.29). In particular, it is noted that a market might be geographically small but nevertheless 'substantial within the region in which it is located' (at 4.30).

The Guidelines consider issues that might arise in market definition (such as product differentiation and indirect substitution) at pages 20-23.

 

Unilateral effects

Chapter 5 is devoted to unilateral effects. Para 5.4 acknowledges that vertical and conglomerate mergs will normally be less likely to raise competition concerns than horizontal mergers; the chapter is, therefore, divided in to sections on horizontal mergers and non-horizontal mergers. In relation to non-horizontal mergers, the Guidelines note that the ACCC will only be concerned with non-horizontal mergers 'where the merged firm has the ability and incentive to use its position in one market to anti-competitively foreclose rivals in another market in a way that lessens competition' (para 5.22) and, in determining whether foreclosure woud be likely to increase unilateral power of the merged firm the ACCC will consider (1) 'the merged firm's ability to foreclose', (2) any incentive the merged firm may have to foreclose' and (3) 'the likely effect of any such foreclosure'.

 

Coordinated effects

Chapter 6 deals with the potential for mergers to lessen competition through coordinarted effects.

 

Merger factors

Chapter 7 deals with each of the factors set out in s 50(3) which must be considered in determining whether a merger would substantially lessen competition.

The first section discusses concentration and market share. The 1999 Guidelines applied a test based solely on market share; the new Guidelines take into account the Herfindahl-Hirschman Index (HHI) in assessing market concentration (see para 7.9 and 7.12-7.16). The ACCC is 'less likely to identify horizontal competition concerns when the post-merger HHI is: * less than 2000, or * greater than 2000 with a delta less than 100. (para 7.14; calculating HHI and delta is set out at 7.13).

Other sections discuss barriers to entry, actual and potential import competition, availability of substitutes, countervailing power,dynamic characteristics of the market, removal of a vigorous and effective competitor, vertical integration, ability to increase prices or profit margins and other factors. Othe factors include efficiencies which are discussed at p 51-52. The Guidelines note, at 7.65, that "The ACCC generally only considers merger-related efficiencies to be relevant to s 50 merger analyses where it involves a significant reduction in the marginal production cost of th merged firm and there is clear and compelling evidence that the resulting efficiencies directly affect the level of competition in a market and these efficiencies will not be dissipated post-merger".

 

Undertakings

Appendix 3 sets out the circumstances in which it might accept undertakings to alleviate competitive concerns raised by a merger.