Mergers: a 20 year Retrospective Retrospective Competition Law - - PowerPoint PPT Presentation

Mergers: a 20 year Retrospective Retrospective

Competition Law Conference Sydney 4 May 2013 Tim Grimwade and Jill Walker

20 years

Outline

Background and history of SLC in mergers Evolution of merger analysis and the Guidelines Merger moments: making a difference & contentious

matters matters

Merger authorisation: early activity (and untimely death) Evolution of Merger administration Merger moments: establishing credentials Evolution of remedies and use of s.87B Concluding remarks

Background and history

Once upon a time.........

1974-1977 SLC test Re QCMA decision (merger authorisation) Swanson Committee (1976):

“(a) merger provisions are necessary to prevent the possibility of achieving, by merger, “(a) merger provisions are necessary to prevent the possibility of achieving, by merger, anti-competitive results prohibited elsewhere in the same law; (b) Merger provisions ensure that the control of significant capital assets in the community does not change hands in circumstances that disregard any anti-competitive effects of the change.”

1977 – 1992 dominance test:

“The Government has decided that the categories of merger subject to the Act should be quite limited. There should be no unnecessary impediment, legislative or administrative, to the attainment of rationalisation of Australian industry. It is in Australia’s best interests to achieve economies of scale and improved international competitiveness” (J Howard)

Ongoing Debate 1977-1992

International competition: rationalisation & national champions v Porter

and non-traded inputs

Problematic mergers:

• Ansett-East West
• News Ltd-HWT
• Coles-Myer
• Dulux-British Paints
• Dulux-British Paints
• Dunlop-Goodyear
• Unilever-Bushells
• Ampol-Solo
• Visyboard-Smorgan

Logic of the Act: agreements v mergers 1984 Green Paper recommendation v response Griffiths Report (1989):

““There is significant support for the retention of the dominance test and for the belief that the test facilitates and promotes desirable industry rationalisation and increased international competitiveness… There is, at this stage, insufficient justification to recommend any amendment to the dominance test”

And so it came to be...

Cooney Report (1991)

“The dominance test was specifically introduced to facilitate the development of economies of scale in Australian industry, and to further its international competitiveness. … A growing body of economic theory now suggests that international competitiveness, both in large and small nations, is achieved not by encouraging industry leaders to merger, but by encouraging them to compete”

November 1992:

“After much consideration the Government has decided to amend section 50 to prohibit mergers or acquisitions which are “After much consideration the Government has decided to amend section 50 to prohibit mergers or acquisitions which are likely to substantially lessen competition and which have not been authorised by the Commission. In an Act which seeks to preserve competition it is appropriate that the merger test should focus on the effect on competition in a market rather than

• n the dominance of a particular firm. The effect of the amendment will be to broaden the range of transactions which can

be examined under section 50. This can only be procompetitive.” (M Duffy) but: “The Government’s position is a triumph for linguistic gymnastics. The problem is that in applying the test to actual situations, it will be difficult to predict the result. ... The matter will be thrown to the courts which no doubt will spend years clarifying the

• peration of the new provisions.” (P Costello)

S.50(3) and the Draft Merger Guidelines Authorisation amendments SLC (and s.87B) effective 21 January 1993

Guidelines and analysis

Draft Merger Guidelines1992

Concentration “safe

harbours”:

CR4<75% & market

CR4<75% & market

share <15%; or

market share <40%

“Flow Chart” “Commercial Radio

Guidelines” 1994

Draft Merger Guidelines1992 contd.

Market definition: SSNIP test Major (unilateral & coordinated

effects) theories of harm established

Vertical mergers but no Vertical mergers but no

reference to vertical theories of harm

Forward looking analysis and

prevention of competition theories

Supply and demand side

markets & SLC

Merger Guidelines 1996

ACCC has replaced TPC Guidelines much longer and more comprehensive, e.g.

demand side mergers; partial acquisitions

NCP backdrop - expanded coverage of TPA and concern with

mergers in sectors undergoing deregulation & privatisation mergers in sectors undergoing deregulation & privatisation

Retained the same basic analytical structure Ripple effects, functional & time dimensions and sub-markets Flow chart and concentration thresholds retained (IC Report) Indicative position of not opposing mergers if sustained and

competitive imports>10%

Consideration of efficiencies under SLC v “trade-off”

Merger Guidelines 1999

Export Guidelines 1997 No major change from 1996 Flow Chart approach retained Concentration thresholds unchanged Various refinements e.g.

Cluster markets Price discrimination markets Failing firms Strategic barriers to entry

Merger Guidelines 2008

Media Mergers 2006 SLC test established and participation in ICN Substantial overhaul of the 1999 Guidelines:

no “safe harbours” – replaced with indicative notification thresholds: substitutes

no “safe harbours” – replaced with indicative notification thresholds: substitutes

• r complements and > 20% market share

no flow chart – integrated analysis of constraints main theories of harm retained greater prominence to vertical foreclosure and conglomerates theories of harm increased prominence vs merger factors HHI adopted as concentration metric: <2000 or >2000 and <100 TLS approach to entry adopted Countervailing power

Merger moments: making a difference and contentious matters

Mergers opposed or modified that would not have been challenged under Dominance

• Caltex/Ampol (1995): co-ordinated effects in petrol refining/wholesaling
• Wattyl/Taubmans (1996 and 2006): co-ordinated effects in A&D paint
• Coke/Berri (2003): conglomerate effects/leveraging from CSD into fruit juice/drinks
• Patrick/FCL (2005): vertical foreclosure in rail line-haul and freight forwarding
• Boral/Adelaide Brighton (2006): unilateral and coordinated effects in concrete etc.
• Baiada/Bartter (2009): unilateral effects in the supply of processed chickens
• Baiada/Bartter (2009): unilateral effects in the supply of processed chickens
• Pfizer/Wyeth (2009): unilateral effects in various animal health products
• Gunns/ITC Timber (2009): acquisition of hardwood pulpwood
• Caltex/Mobil (2009): coordinated and unilateral effects in petrol retailing
• GUD/Breville (2009): unilateral effects in small electrical appliances
• Cargill/Goodman Fielder (2010): unilateral effects in bulk RBD edible oils
• NAB/AXA (2010): dynamic effects in retail investment platforms
• Foxtel/Austar (2012): potential competition in pay TV and telco
• Nestle/Pfizer (2012): unilateral and coordinated effects in infant formula

Contentious mergers opposed

Very few cases have gone to Court and Commission’s

Guidelines have largely prevailed

Completed court cases arguably “marginal”

• AGL v ACCC (2003)
• AGL sought to acquire Loy Yang - vertical merger of electricity

generation and retail

• Economic modelling of NEM
• Court found that the merger would not SLC
• Useful guidance on “likely” (real chance) and “substantial”

(meaningful or relevant to the competitive process)

• ACCC v Metcash (2011)
• Grocery merger similar to Davids/QIW (1993)
• ACCC defined narrow market and found SLC
• Court found broad market and no SLC
• Approach to “likely” SLC confirmed
• Counterfactual issue

Contentious mergers not opposed

Westpac/St George (2008)

Horizontal acquisition of #5 bank by major Combined market shares 15-25% Several remaining competitors Several remaining competitors St George not uniquely competitive

Vodafone/Hutchison (2009)

Horizontal merger of # 3 & 4 in mobile Vigorous & effective competitors Network capacity constraints Scale and investment pro-competitive

Merger authorisation: an important

• ption in the early years

Authorisation

Availability of authorisation was an

important option in the early years

• f the SLC test

1992 amendments: international

competition

Commission encouraged parties to Some parties successful:

Comalco/Gladstone Power (1994) Qantas/BA alliance (1995) Davids/QIW-CBL (1995 & 1996) Dupont/Ticor (1996) Adelaide Brighton/Cockburn (1999)

Commission encouraged parties to

use this avenue where there were significant efficiency claims

Little Company of Mary Health Care /St

Vincent’s Hospital Launceston (2005)

GrainCorp and AWB (2005)

Others not:

CSR/Mackay Sugar (1994) Silver Top/North Suburban (1995) Wattyl/Taubmans (1996) Bristol/Pioneeer (1997) API/Sigma (2002) Qantas /Air NZ alliance (2003)

Evolution of merger administration

Key processes and early successes

Prior to the SLC test, the TPC had been conducting a

voluntary, informal clearance process for mergers

However, the TPC wanted greater business adoption of the practice of

notifying mergers before they occurred The TPC needed an approach that encouraged the The TPC needed an approach that encouraged the

notification of mergers that warranted review

It outlined a series of principles for informal clearance in its early guidelines,

which have stood relatively unchanged for 20 years

Notification encouraged Confidential mergers reviewable Non-notified transactions treated differently Timeframes for decisions Public register Anti-competitive mergers restrained

Merger moments: establishing credentials

TPC was not afraid to act decisively

TPC v Rank Commercial (1994)

• Rank (NZ) to acquire FAL and on-sell the

WA wholesaling business to Coles Myer

• TPC notified at 11th hour
• Ex parte injunction and undertaking
• Interim injunction and appeal

Other proceedings played a

continued role in deterring anti-competitive mergers:

Wattyl/Taubmans (1996)

• Interim injunction and appeal

TPC v Pioneer (1996)

• Completed acquisition of the assets of A Class

Blocks & Q Blox (1994)

• A Class blocks had driven price reductions
• A Class agreed to close and sell the assets to

Pioneer

• Prices subsequently rose
• Court held acquisition of assets breached s.50

and awarded penalties & costs $5 million Boral/Adelaide Brighton (2004) Toll/Patrick (2007)

Growing criticisms

Criticisms grew about lack of transparency and

consistently applied procedural framework

While principles had been established, processes had not. Initially no consistent approach to seeking information Lack of rigour in the coordination of the merger processes In the early days, decisions of the TPC were not generally published The ACCC did not have sophisticated technology available to it to

facilitate the management or transparency of its informal process

The Dawson Review

The Dawson Review

The Dawson Committee’s 2003 report

Considered there were two fundamental weaknesses of the informal

merger review process: limited transparency; lack of review mechanism

Criticisms of the ACCC’s approach to accepting merger undertakings Development of a parallel formal clearance process Development of a parallel formal clearance process Proposal that merger authorisation applicants bypass the ACCC and

have their decisions made by the Tribunal directly

No merger authorisations since Dawson

Practical option for resolving some anti-competitive mergers appears to

have been lost

Lack of merits review should be of concern

Merger administration post-Dawson

Dawson – the catalyst for change, but not the key The Dawson review anticipated minor changes to the

informal process and adoption of a new formal clearance process clearance process

The changes went beyond addressing simply criticisms of

accountability and transparency

Formal clearance process unused – too formal? Corporate governance of merger administration

‘Merger Commissioner’; ‘Mergers Panel’; ‘Mergers Review Committee’

Merger administration post-Dawson

Improvements to

transparency in the informal process:

Public Competition Public Competition

Assessments (PCAs)

Statements of Issues

(SOIs)

More sophisticated and

responsive electronic public register

Merger administration post-Dawson

PCAs intended to ensure greater certainty

and understanding of the ACCC’s approach

First PCA issued: ACCC’s decision to reject the Coca-

Cola/Berri merger in 2003 125 PCAs since then

125 PCAs since then

SOIs intended to provide greater understanding of

the ACCC’s concerns before a final decision is made

Recently supplemented by ‘transparency letters’ First SOI was issued in 2005 in the Pacific Dunlop/Joyce merger,

which was ultimately opposed

Disquiet by merger parties who want more access to the submissions

• f third parties

Merger administration post-Dawson

Electronic public register

Identification of the stage of the matter, various links, contact points

within the ACCC, indicative timeline

Boral/Adelaide Brighton review

Review of internal structures

Review of internal structures

Mergers group Mergers Investigations branch Mergers Coordination and Strategy branch ‘Pre- assessment’ of matters Merger Undertaking Compliance Intelligence Gathering

Development in ACCC investigative methods

Trend of using more sophisticated economic analysis

and data requests in latter decade

Review of Woolworths acquisition of 22 Foodland stores in 2005

Section155 Notices Section155 Notices

Used on third parties and merger parties

International coordination on reviews of mergers

International Competition Network established in 2001 Coordination agreements and established working relationships ACCC Commissioner part of decision making process with NZCC

Commission on merger matters with an Australian dimension, and vice versa

Total mergers considered and

• pposed

Evolution of remedies and use of s.87B

Merger undertakings

TPA amended to provide for the ability of the TPC to

enforce undertakings

Around 100 merger undertakings accepted

Structural undertakings were preferred Structural undertakings were preferred

But the ACCC would be flexible as circumstances required – 1996

Mergers Guidelines and early annual reports

Behavioural undertaking is directed towards reducing the ability of a

merged firm to exercise market power

Structural undertaking addresses the structure of the market, rather

than the conduct

Quasi-structural undertakings (e.g. access undertakings) are

conduct undertakings that affect market structure, particularly entry

Merger undertakings

Merger undertakings – key moments

• Davids/IHL

1994

• Ampol/Caltex undertakings

1996

• Simultaneous divestiture - Frito Lay/Smiths
• Behavioural merger remedy –Caroma/Fowler merger
• Behavioural and quasi-structural - Westpac/Bank of Melbourne

1997

• Commonwealth/Colonial merger

2000

• Sell down of Franklins

2001

• Divestiture undertaking - Ramsay/Affinity merger

2005

• Toll/Patrick

2006

• Behavioural remedies – Smorgon/Onesteel

2007

• International coordination - Pfizer/Wyeth; Agilent/Varian

2009/10

• Quasi-structural remedies –Foxtel/Austar; Nestle/Pfizer

2012

Merger undertakings

Administrative boundaries for the ACCC

Ampol/Caltex matter in 1997

Federal Court made clear a refusal to vary an undertaking was a

reviewable decision under the ADJR Act

In 2005, a third party sought review of a decision to vary an In 2005, a third party sought review of a decision to vary an

undertaking by Ramsay involving the divestiture of a number of hospitals

Federal Court clarified that the ACCC was under no obligation to

afford procedural fairness to third parties in respect of decisions it makes under s87B

1997 House of Representatives Standing Committee recommendation

Some early lack of rigour in enforcing compliance

Merger undertakings

Significant changes through practical experience Toll/Patrick merger in 2006

Institution of proceedings Acceptable undertaking, which divested the

share of Pacific National being acquired

Subsequent Toll/Asciano de-merger In 2008, Toll instituted proceedings in

relation to aspects of its undertaking – dismissed by Federal Court in 2009

Issues arising from the negotiation of

undertakings

Merger undertakings

Changes to the way the ACCC did things

Template provisions for future undertakings Undertakings Compliance Unit

The ACCC began detecting instances of failure to The ACCC began detecting instances of failure to

comply, and took action as needed

In August 2007, the ACCC settled

proceedings with Alinta in relation to a failure to comply with a whole separate undertaking

In 2008, the ACCC instituted proceedings

against ABC Learning Centres for a failure to divest under a s87B

Merger undertakings

Merger undertakings became

increasingly sophisticated

Development of boilerplate provisions

Foxtel/Austar NAB/AXA

Increased coordination by international agencies of

merger undertakings to resolve trans-national competition problems

Pfizer/Wyeth; Agilent/Varian

Continued innovation in remedies

Nestle/Pfizer

Concluding remarks

Concluding remarks

SLC now accepted in Australia and ROW Main theories of harm established early Evolution vs revolution of Guidelines/analysis

Increasingly forensic and sophisticated analysis

Increasingly forensic and sophisticated analysis ACCC not afraid to act decisively Constancy of principles Refinement of processes Acceptance of informal merger review process