Vice President of the European Commission responsible for Competition Policy
EU merger control has come of age
“Merger Regulation in the EU after 20 years”, co-presented by the IBA Antitrust Committee and the European Commission
Brussels, 10 March 2011
Ladies and Gentlemen:
I would like to congratulate the Antitrust Committee of the International Bar Association and DG Competition for taking the initiative to organise today’s conference.
The EU Merger Regulation was a milestone in the prevention of anti-competitive market structures in Europe. In the two decades since its introduction, the text of the Regulation has seen important changes and the world around it changed too. We have seen the emergence of whole new industries, our internal market has become larger and deeper, globalisation has accelerated as new players have risen on the world scene, and more recently we’ve had to come to terms with the crisis and its legacy of firms in difficulties.
I will take this opportunity to look back and see how our policy on mergers and the Merger Regulation itself have fared amid these transformations. I will also review the significance mergers have today for our economy and society and I will close with a brief peek into the future.
1. The foundations of merger control
Let me start with a few general considerations. In some of my private conversations – and in particular when I talk with representatives of big companies – I am often asked questions that competition experts and practitioners take for granted. These are questions that go to the heart of our work such as: What is the rationale behind merger control? What has been its impact on the way companies do business in Europe? What benefits has it brought to us all? Why should we not let companies choose freely with whom they merge if that is what they feel is necessary to operate globally? I feel I have to explain better what we are doing as competition enforcers.
As a matter of fact, most of the time we do let companies merge to operate at the scale they deem appropriate, in domestic or global markets. Cases where competition concerns arise are a minority. Since the beginning of the Merger Regulation, more than 9 out of 10 mergers have been approved without conditions. Since 2010, for instance, of the 274 notified mergers, we intervened in only 16 of them and only prohibited one, simply because we know that mergers can allow companies to develop in ways that would not be feasible on a stand-alone basis. We are not against mergers as a matter of principle. On the contrary.
Mergers can recombine the assets of the merging firms and generate synergies. They can bring about new products and processes and these, in turn, may trigger fresh rivalry with competing firms. Horizontal mergers can allow firms to lower costs, expand operations, and displace inefficient management. Vertical mergers often remove the so-called double margins and lead to lower prices. More generally, mergers can be good for the economy. For example, they may disseminate know-how and boost innovation. Competition authorities, around the world and here in Brussels, are fully aware of this.
But this is only part of the picture. The full picture is more complicated, because mergers can also harm consumers and the economy when, for example, they allow firms to have too much market power. Instead of locking in efficiencies, some mergers can lock out competition; and for a very long time. Companies that say they must merge to compete globally, regardless of the competitive consequences for the home market, are not looking at the complete picture.
Without merger control, we would see many more companies buying up their competitors, weakening the competitive structure of markets, and reducing incentives to innovate. The very existence of our system acts as a deterrent. Because we have merger control, we see very few attempts to merge to monopoly.
Instead, the cases we usually see are not clear-cut. Some mergers would lead to efficiency benefits, but they would also risk harming the competitive structure of markets. Other mergers would give the companies concerned a more global reach, but they would also risk eliminating competition at home.
Assessing these cases is inevitably more complex. This is why we have introduced economic analysis as an integral part of our process, which allows us to go well beyond market shares in our assessment of a merger and to look at other factors as well. Among other things, our analysis considers if the products sold by the merging firms are differentiated or not; if there is spare capacity in the market concerned; or if past bidding patterns show that the firm acquired was a driver of competition. The main goal is to predict the likely effects of a merger in terms of price increases, choice of products and services, and incentives for innovation. When the data are available, our team of economists can put forward models explaining the rationale of mergers, their potential benefits and the possible harm to customers.
These are my views about some fundamental issues in merger control. More complex than the ones we were considering 20 years ago, indeed. Another question is: what do we gain from a merger-control system at EU level operating side-by-side with the national agencies in the Member States?
Here the answers are a lot simpler and shorter. Firstly, as our internal market becomes stronger, it just makes sense to have a central review of deals that have an effect beyond national borders. And our one-stop shop system makes cross-border integration within the EU easier. Secondly, our system produces large administrative savings. The European Commission has dealt with about 4,500 cases since the introduction of the Merger Regulation. Assuming that an average transaction involves four Member States – and this is a conservative assumption – in principle we have avoided 18,000 national proceedings in 20 years. I am sure that many people in the room will have a pretty good idea of how much money and hassle has been saved.
Ladies and Gentlemen:
The Commission has developed a sophisticated legal and economic analytical framework over the past two decades. The process has seen two major waves of reform since the adoption of the Merger Regulation. The first reforms were introduced in 1998 to simplify procedures for non-problematic cases and to better capture cross-border mergers; thus increasing the one-stop shop effect. We also improved our procedures, for instance by streamlining our analysis of joint ventures. The second wave of reforms followed a string of unfavourable Court rulings in 2002.
This fact encouraged a significant rethinking of our analysis by making clear that we should assess the likely effects of a merger, and not only focus on the size of the merging companies. This led to the reforms adopted in 2004, which improved our procedures and working methods; further strengthened the one-stop shop effect; and introduced the figure of the Chief Economist. However, we have preserved the spirit of the original Merger Regulation throughout the years, in particular the idea that the rules on mergers must be enforced on competition principles only.
2. Merger control in the global age
These are the main challenges that have driven the evolution of our system from within; but the EU merger control has had to adapt to external challenges as well. Over the past few years, our system has had to respond to the expansion of foreign trade and investment flows and to the growing interdependence between the different regions of the world. Globalisation has been changing the way companies do business beyond recognition: from supply chains to the reach of their products and services.
What has this meant for our assessment of mergers? The main consequence has been the need to always keep an open mind when it comes to market definition. Today more than ever, we must not use predefined views on market scope, structures, and outcomes.
There are many cases in which our market definitions have evolved. In the Alstom/Areva and Schneider/Areva decisions of March 2010, for instance, markets that had previously been assessed as national were considered European in scope. Also, for various telecommunication equipments as well as for sophisticated databases or enterprise application software – for instance in the recent SAP/Sybase merger –, our market definitions have broadened and become EU-wide, if not worldwide. Finally, in the pharmaceutical sector, some ingredients are now usually considered to be sold on a worldwide basis. In sum, our practice adapts to the evolution of markets.
My main message is that market reality, and market reality alone, must lie at the core of our merger analysis. Let me illustrate this point using the example of the Prysmian/Draka merger that we cleared last month. This was an unusual case because a separate cartel investigation, affecting the two European bidders, albeit not for the same market, is ongoing in several world jurisdictions, including the EU. And Draka was also courted by a Chinese company allegedly receiving public support from Beijing.
There was a big debate in the press, before we adopted our decision. But regardless of sensitive factors involved, our decision was based exclusively on competition analysis. We are bound to see many more cases with bidders from emerging economies. But regardless of where the bidders come from, EU merger control must remain anchored to its own rules and purposes. It is crucial to keep our merger review immune from non-competition considerations.
Our system – through article 21 of the Regulation – already allows Member States to take into account certain legitimate public interests, such as public security, media plurality or prudential rules. The recent BSkyB case is illustrative in this respect. There was no reason for us to intervene on competition grounds at EU level, and the review of other public interests was left to the UK authorities. The national considerations must be justified and in line with our internal market rules. Overall this system works well in this regard, and there is no justification for EU merger control to mix up non-competition considerations.
Of course, we must remain vigilant of State support granted for the purpose of making acquisitions – whether it benefits EU or foreign companies. But to this effect we need to use the right tools: State aid control within the EU and anti-subsidies policy instruments outside. We should rely on the WTO rules and on Free Trade Agreements – such as the one with Korea – to prevent illegitimate investment subsidies used for the purpose of making acquisitions.
And this will be in our best interest. The EU is the world’s largest foreign investor and remains the favourite destination for FDIs even after the contraction that followed the crisis. In 2010 Europe received about one quarter of the worldwide total of FDI inflows. If the EU plays the protectionist card in this game, we will lose more than anybody else. I can see no better alternative than to promote a balanced and fair trade policy designed to make the world’s markets as open as Europe’s are today.
3. New sectors
The rise of new and innovative sectors in the economy is another force that is driving the evolution of merger control. Merger control should be aware of the specificities of the different sectors; especially of their potential for innovation, growth, and job creation. So, the emergence of a new industry forces us to update and adapt.
When it comes to high-tech industries, we need to make sure that the players in this sector – many of whom are awash with money – do not use mergers to close off competitors. Mergers in these markets can produce efficiencies and growth, but they can also lock in customers and raise barriers to entry in sometimes novel ways. Our system is nimble enough to move with these developments. We already engage in a thorough, fact based, and careful assessment of how future markets would look like.
We also try to devise remedies that can preserve the incentives to innovate both for the merged firms and for their competitors of today and tomorrow. An example of this approach is the Intel/McAfee merger, which was cleared last January subject to remedies. These remedies ensured that Intel – the dominant chip producer for PCs – does not leverage its market power into the security solutions market. At the same time, they will not prevent the companies from reaping the benefits of future innovative solutions.
4. The crisis
I will close my overview with the challenges brought to the EU merger control by the financial crisis since 2007. The stability of our system has been put to the test, especially because of the repeated calls for a more lenient approach in the enforcement of our competition rules. Just when the new approach was taking hold, the crisis put new challenges before us. However, we have resisted these calls and have kept a fair and firm approach, because maintaining competitive market structures is just as important in lean years as it is in fat years.
Our instruments have proved to be both robust and flexible. They have allowed us to take the difficult economic context into account and, at the same time, to preserve the basic principles of European competition law and – what really counts – the integrity of the internal market.
The recession has determined an overall drop in mergers and acquisitions. However, merger activity has remained brisk in some sectors even during the crisis, such as in the energy sector – where former incumbents have tried to expand beyond their borders - and air-transport industries – where the size of the network matters. We have also observed a drop in the activity of private equity funds and leveraged buy-outs. Accordingly, and also because of defensive strategies, there has been a higher proportion of mergers between companies in the same sector.
This trend is well illustrated by the Sara Lee cases. The businesses the company decided to sell in 2009 attracted the interest of companies active in the same markets; namely Procter and Gamble, Unilever, and SC Johnson. You will understand that we’ve had to look into these deals with great care. One of these cases, the Unilever/Sara Lee merger, also exemplifies our efforts to look for the most effective remedies in this business environment. You may remember that we accepted Unilever’s pledge to sell its Sanex brand for all European countries. I offer this as an example of our preference for remedies that are clear cut, structural, and immediately effective.
Fortunately, good solutions can be found in many cases. But when there is no effective remedy proposed, as it was recently the case in the Aegean/Olympic merger, we were obliged to block the transaction.
Before closing, I would like to turn to a couple of important issues that will be discussed in this conference: the efforts to foster closer coordination between European and national authorities, and the issue of minority shareholdings, where we are probably looking at an enforcement gap.
The Merger Regulation does not apply to minority shareholders, whereas some national systems – both in the EU and outside – make room for the review of such acquisitions. I have instructed my services to look into this issue and see whether it is significant enough for us to try and close this gap in EU merger control.
As to the relations between national and European agencies; I am happy to report that our cooperation is very good; in particular, the referral mechanisms function well. However, companies are calling for more convergence on procedures, substantive tests, and remedies. So, I would like to launch a debate by asking how we can strengthen our partnership in merger control, perhaps adapting the pattern of the existing ECN structure for antitrust.
Strengthening our relations with partners outside the EU is another path of development for merger control. In the past few years we have seen substantive progress with major jurisdictions, such as Japan, Korea, Australia and the US. To build on this success, I can see four areas where we can advance together: communication between agencies, coordination on timing, collection and evaluation of evidence, and remedies.
As to the emerging economies, our cooperation is bound to increase in the future. We stand ready to share our experience and expertise to help them grow in pace with the weight of their economies. The signing, later today, of a Memorandum of Understanding with the Russian Competition Authority is illustrative of this commitment.
Ladies and Gentlemen:
I have come to the end of my overview of merger control in Europe. We have seen some of the basic principles that inform our practice and the main challenges brought to it by globalisation, by the emergence of innovative industries, and by the new landscape that is taking shape in the wake of the crisis.
Above all, we have seen that, in its first twenty years, the Merger Regulation has gone through many changes, but it has managed to keep pace with them and evolve. As a result, merger control at EU level is now mature and stable. I have no doubt that the Merger Regulation will continue to serve us well for many years to come.
I wish you all a productive debate.