Understanding Regulation

Facts, Analysis and Comment

Merger Control

The most obvious way to stop firms gaining too much market power is is to prohibit mergers which seem likely to result in a substantial lessening of competition. This leads to the most common piece of competition jargon:- 'the SLC test' as in "did they find an SLC?".

All competition regimes exempt smaller mergers from scrutiny, although the test of size varies from country to country. In the UK, mergers are exempt from scrutiny if the turnover of the firm being taken over is £70m or less and the combined firms will have no more than 25% market share.

And all competition regimes operate a two phase review process for larger mergers, in which they endeavour to sift out (and so approve) those mergers which do not appear problematic, reserving detailed scrutiny for the minority which might lead to SLCs. Most countries allow the phase 1 sift and the phase 2 detailed scrutiny to be carried out by the same authority. But there is an inevitable suspicion that - having identified a potential problem - the same authority will want to prove that its initial suspicions were justified, especially as an understandable response to the companies likely complaint that the phase 1 decision was totally incompetent and unjustified. In the UK, there are typically phase 1 reviews of around 200 mergers a year, but only refers 10 or 15 proceed to phase 2, at which a good few are cleared. Overall, therefore, the UK regime manages to be both professional and unobtrusive.

The Competition and Markets Authority follows a fairly standard process for all phase 2 merger investigations, which usually need to be completed within 24 weeks:

Remedies

As noted on the 'interesting issues' webpage, structural remedies (e.g. banning a merger) are much preferable to behavioural remedies, under which the merging companies will make all sorts of apparently binding promises to behave properly in future so as to enable an otherwise objectionable merger to proceed. The trouble is that such promises are hard to monitor and, some years later, hard to enforce, especially when circumstances have changed.

A good example was the behavioural remedy offered by Rupert Murdoch when he persuaded the British authorities, in 1981, to allow him to own both The Times and The Sunday Times. In order to do so, he undertook that the editors would not be appointed or dismissed without the approval of the majority of a number of independent national directors - an apparently strong commitment. In practice, however, he continued to dismiss and appoint as he wished (including sacking well-regarded but independent minded Times Editor James Harding in 2012) for no editor could possibly survive unless they had his confidence. In a submission to the 2012 Leveson inquiry into press standards, the independent directors wrote: 'We see our presence as the editorial equivalent of a nuclear weapon - a deterrent to possible proprietorial interference, and therefore reassuring for the two editors.' But they conceded that their functions were limited, as it was implausible that a proprietor with strong views would propose an editor with very different views and 'similarly the removal of an editor may be achieved by means other than dismissal'. Put another way, there was no conceivable circumstances in which they would fire their nuclear weapon, so it was no weapon at all. And the directors are hardly truly independent as they are (I understand) appointed and paid for by News International.

In this context, it is perhaps worth mentioning the 1986 Guinness/Distillers merger which was not, in the end, referred to the CC's predecessor body. However, in the course of the controversial and acrimonious takeover battle, Guinness promised that a Scottish chairman would be appointed for the whole business, whose head office would be located in Edinburgh. These 'assurances' (which were not legally binding) were immediately reneged on when the takeover was completed. It is perhaps interesting to speculate what would have happened if the merger had been considered by competition authorities. First, the headquarters assurances would, if appropriate, have been turned into legally binding undertakings - almost certainly time-limited. But it is possible that they may not have been felt relevant to the decision whether or not to allow the merger to proceed. And, nowadays, the CC cannot consider wider 'public interest' issues but can only examine the competition aspects of a merger, so they would not take any interest in the location of a head office etc.

The Takeover Code

Companies that bid to acquire UK companies whose share prices are quoted on a stock exchange must comply with the complex rules in the Takeover Code, which is enforced by the very powerful Takeover Panel - a statutory body. This system, which is quite separate from the merger control summarised elsewhere in this note, is designed to ensure that shareholders are treated fairly, are not denied an opportunity to decide on the merits of a takeover, and are afforded equivalent treatment by an offeror.

Evaluations

The following reports contain useful summaries of some interesting UK merger cases, and give a good feel for the issues which need to be considered by competition authorities when deciding whether or not to allow certain mergers to proceed. Both reports are on the CMA's website.

Current and Recent Cases

The proposed merger of two large mobile phone operators (Hutchison Whampoa-owned Three and O2) would have reduced the number of such UK operators from four to three. (The others are BT-owned EE, incorporating Orange and T-Mobile, and Vodafone.) One would expect such a merger to lead to reduced competitive pressure and increased prices, as happened in Austria following a similar merger, so it was not surprising that the European Commission refused to allow the merger to proceed.

Across the Pond, the New York Times printed this interesting editorial in April 2017, following an ugly incident on a United Airlines flight:

There is no mystery why air travel has gotten so ugly. Four large airlines — American, Southwest, Delta and United — commanded nearly 69 percent of the domestic air-travel market in 2016, up from about 60 percent in 2012, according to government data. Those numbers actually overstate how much competition there is. Many people have only one or two options when they fly because the big airlines have established virtual fortresses at their hub airports. United, American Airlines and three regional airlines affiliated with them served nearly 80 percent of passengers at O’Hare last year. Disgruntled travelers may howl on Twitter or send furious emails, but airline executives know their bottom lines are for the moment secure. It was not surprising that none of the Big Four made a list of the 10 best airlines in the world that TripAdvisor published on Monday based on passenger reviews. Two smaller companies did — JetBlue (No. 4) and Alaska Airlines (No. 9). Much of the blame for the increased industry consolidation rests with antitrust officials in the Obama and Bush administrations who greenlighted a series of megamergers between airlines like American and US Airways; United and Continental; and Delta and Northwest. In addition, the Department of Transportation has historically been reluctant to regulate the industries it oversees — an unwillingness that persists in the Trump administration. ... As long as the big airlines face neither rigorous competition nor a diligent government watchdog, they will be able to treat customers like chattel and get away with it.

 

Martin Stanley