European Union Competition Law - Mergers and Acquisitions

Mergers and Acquisitions

Under the authority of Article 82 TEC, the European Commission became able not only to regulate the behaviour of large firms it claims abuse their dominant positions or market power, but also the possibility of firms gaining the position within the market structure that enables them to behave abusively in the first place. Regulation 139/2004 deals with mergers that have a "Community dimension" and lays out a procedure whereby all "concentrations" (i.e. mergers, acquisitions, takeovers) between undertakings are subject to approval by the European Commission.

A merger or acquisition involves, from a competition law perspective, the concentration of economic power in the hands of fewer than before. In the European Union, under the Merger Regulation 139/2004. This is known as the "ECMR", and the authority for the Commission to pass this regulation is found under Art. 83 TEC. Competition law requires that firms proposing to merge gain authorisation from the relevant government authority, or simply go ahead but face the prospect of demerger should the concentration later be found to lessen competition. The theory behind mergers is that transaction costs can be reduced compared to operating on an open market through bilateral contracts. Concentrations can increase economies of scale and scope. However, often firms take advantage of their increase in market power, their increased market share and decreased number of competitors, which can have a knock on effect on the deal that consumers get. Merger control is about predicting what the market might be like, not knowing and making a judgment. Hence the central provision under EU law asks whether a concentration would if it went ahead "significantly impede effective competition... in particular as a result of the creation or strengthening of a dominant position..."

Under EU law, a concentration exists when a...

"change of control on a lasting basis results from (a) the merger of two or more previously independent undertakings... (b) the acquisition... if direct or indirect control of the whole or parts of one or more other undertakings." Art. 3(1), Regulation 139/2004, the European Community Merger Regulation

This usually means that one firm buys out the shares of another. The reasons for oversight of economic concentrations by the state are the same as the reasons to restrict firms who abuse a position of dominance, only that regulation of mergers and acquisitions attempts to deal with the problem before it arises, ex ante prevention of creating dominant firms. In the case of Gencor Ltd v. Commission ECR II-753 the EU Court of First Instance wrote merger control is there "...to avoid the establishment of market structures which may create or strengthen a dominant position and not need to control directly possible abuses of dominant positions."

What amounts to a substantial lessening of, or significant impediment to competition is usually answered through empirical study. The market shares of the merging companies can be assessed and added, although this kind of analysis only gives rise to presumptions, not conclusions. The Herfindahl-Hirschman Index is used to calculate the "density" of the market, or what concentration exists. Aside from the maths, it is important to consider the product in question and the rate of technical innovation in the market. A further problem of collective dominance, or oligopoly through "economic links" can arise, whereby the new market becomes more conducive to collusion. It is relevant how transparent a market is, because a more concentrated structure could mean firms can coordinate their behaviour more easily, whether firms can deploy deterrents and whether firms are safe from a reaction by their competitors and consumers. The entry of new firms to the market, and any barriers that they might encounter should be considered.

Certain exceptions exist, by which a firm whose conduct may be prima facie anti-competitive can be sanctioned under the reference to "technical and economic progress" in Art. 2 of the ECMR. Another defence might be that a firm being taken over is about to fail or go insolvent, and taking it over does not diminish the competitive state any more than what would happen anyway. Mergers vertically in the market are rarely of concern, although in AOL/Time Warner the European Commission required that a joint venture with a competitor Bertelsmann be ceased beforehand. The EU authorities have also focussed lately on the effect of conglomerate mergers, where companies acquire a large portfolio of related products, though without necessarily dominant shares in any individual market.

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