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Vice President of the European Commission responsible for Competition Policy
Policy Objectives in Merger Control
Fordham Competition Conference
New York, 8 September 2011
Ladies and Gentlemen:
It is a pleasure and an honour for me to speak at one of the leading annual events in competition law and enforcement, and I would like to thank Mr Barry Hawk for his kind invitation. My speech today will focus on how merger control is evolving at the European Commission.
At a time when globalisation and the enduring crisis are forcing businesses and public authorities to look for new ways to boost growth and competitiveness, merger control gives us a good perspective on the challenges that we are facing and on the objectives that we should pursue.
The growing interdependence between the different regions of the world will run through my choice of topics. When I meet European business leaders – particularly in some EU countries – they often ask me to soften our merger control and allow national or European champions to grow because – they argue – this is now a requirement to compete in a globalised world economy.
My answer is that competition policy is not about preventing the rise of vibrant and competitive European champions – far from it. On the contrary, enforcement of competition rules – including merger control – is a vital tool for public authorities to create the best possible conditions for firms to do business and to help the economy grow. And, indeed, growth is the number one priority in these times of crisis.
Precisely because this is our ultimate objective, our work must be based on a good understanding of companies’ strategies while keeping in mind the broader impact that a merger would have on the markets and the economy at large. The topics I would like to present today aim to illustrate these challenges from the competition standpoint.
First, I will discuss how competition authorities should approach the definition of product and geographic markets in their assessment of mergers. I will touch upon the current debates in the US and in Europe and I will explain how we factor global competition into our merger analyses at the European Commission. Then, I will talk about the growing need for cooperation among the different agencies across the world. Finally, I will examine the implications of merger control for foreign direct investments at a time when new and powerful players are emerging on the global scene. But first, let me give you a state-of-play account of merger control at the European Commission.
Merger control is a well-oiled machine which draws on many years of experience. Back in March, we celebrated the 20th anniversary of merger control in the EU and – as is common on these occasions – we looked back at the work done. Over these two decades, we have examined more than 4,500 mergers and we approved without conditions about 90% of them. When a transaction raised competition concerns, we tried to find viable remedies to preserve competition. Last year, for instance, we received 274 notifications and prohibited one merger – that between Olympic Air and Aegean Airlines of Greece. In the 16 other cases where we had identified problems– we were able to find adequate remedies. Companies are now well acquainted with the EU's merger-control system and know it is no longer conceivable for a company with operations in Europe to eliminate competition by simply buying off a close competitor.
Some of the mergers we assess are complex cases which require sophisticated technical and economic analyses. The Intel/McAfee case – a transaction in a fast-evolving industry – is a recent example of this kind of work. Computer chips and computer security solutions are neighbouring and rather complementary markets. As a consequence, the effects of this merger were not measured in terms of overlaps of products and services, but rather in terms of conglomerate effects. Security-technology companies need to access specific information from chip manufacturers to develop efficient solutions. Therefore, our main concern was that McAfee’s competitors might have suffered from a lack of interoperability with Intel chips. The remedies proposed by Intel ensured interoperability between the products of the merged company and those of their competitors. As a result, we cleared the transaction in Phase 1 – and it seems that the remedies are working well in practice.
To give you other examples of our analysis of the economic impact of mergers, let me mention two almost parallel transactions in the market for hard-disk drives currently in Phase 2. The first one is the planned acquisition of Samsung’s hard-disk operations by Seagate; the second is the Western Digital/Hitachi case. Our initial investigations told us that both deals could raise concerns. The mergers were notified to us within a very short time and, when this happens, we must give priority to the transaction that was notified first. In other words, the Seagate transaction is being assessed assuming that Western Digital and Hitachi are still separate competitors. The sector is already quite concentrated. If both mergers were approved, there would be only three or perhaps two players per product market. Hard disk drives are one of the backbones of the digital economy and their demand is forecast to grow significantly in the next few years. So, we need to look into these deals really well. More cases in the ICT sector are in the pipeline, including the proposed deal between Microsoft and Skype.
All these cases are in markets where innovation is constant and fast. Preserving and boosting innovation must lie at the heart of competition policy in general, which poses a specific challenge in merger control, because it is harder to predict the likely evolution of markets in dynamic industries. The matter is further complicated by the need to disentangle a merger’s potential for efficiency and innovation from its potential for foreclosure and excessive market power. Some acquisitions may allow the development of new technologies; others may eliminate competition between rival technologies and may result in entrenching the dominance of a player. The rush to acquire control of strategic IPRs is an indication that competition in innovative markets is about more than just price and quality.
These challenges underline the delicate nature of our work in innovative sectors such as ICT, but they are not confined to high-tech industries. Financial markets have also been transformed by new technologies, and the proposed merger between Deutsche Börse and NYSE Euronext – with the sophisticated economic analysis it requires – is testimony of this transformation. Our investigation is focusing in several areas, in particular the trading and clearing of derivatives. The NYSE Euronext/Deutsche Börse deal would give the merged company by far the leading position in derivatives’ trading in Europe. We are looking at this transaction under several angles, including the potential loss of head-to-head competition between the parties, the risk of lower innovation in products and technology, and the impact of the transaction in related markets such as clearing. Also within this crucial sector, we will continue to look at the implications that mergers in financial markets have for market data, indices, trading technology, access to collateral, clearing and settlement as they are all vital to keep them competitive and fair.
More evidence of our commitment to preserving a good competition environment in financial services comes from the antitrust investigations we have recently opened in the cases of Markit – the leading provider of financial information in the CDS market – and ICE Clear Europe – a clearing house. These cases show that, since the spectacular growth in size and complexity of financial services, oversight of the financial sector must extend beyond traders and commercial or investment banks to include infrastructure owners, intermediaries, and information services providers.
The next topic I would like to discuss today is the definition of product and geographic markets as part of our overall analysis of mergers. The level of analysis I have just recalled as I talked about financial cases show that our effects-based approach has enriched our toolbox beyond structural factors, and a similar process has taken place on this side of the Atlantic as well.
Since the publication of the revised Horizontal Merger Guidelines last year, there has been a lively debate on the impact of these alternative tools – such as the Upward Pricing Pressure concept – on the use of market definition. Sometimes I’ve been asked whether these tools render the intermediate step of market definitions unnecessary. I agree that the ability to define the markets affected by a merger, and to calculate the market shares of the various players and the existing degree of concentration, is not the main goal of our assessment. The main goal is predicting the likely competitive effects of the transaction. To do so – and when there are enough data to produce significant results – we can use various economic methods. But this does not mean that one tool will offset the other; in fact, they are complementary.
Let me give you an example of how market definition can be used together with economic techniques. In the recent Unilever/Sara Lee case, we first identified the affected markets and then found that the brands involved in the deal – Sanex, Dove and Rexona – were close competitors. We then used various economic methods that pointed to likely price increases. Ultimately, the case was cleared with remedies – the EU-wide divestment of the Sanex brand.
Defining markets – and hence measuring market shares – remains a useful stage of the analysis. Market shares give us a first indication of the market power of the company that would result from the deal. But above all, this preliminary study can help us discard unproblematic cases early in the process. Under our rules, I can decide that when certain cases fall below a given market-share threshold, they are not likely to raise competition concerns. This is very important for our practice; over the last few years, more than half of our decisions have been adopted under this simplified track. In all these cases companies were not required to provide extensive information and there has been no need to run market investigations. In other words, market definition can make us more business friendly and more taxpayer friendly.
The debate in Europe, instead, is not about the demise of market definition at the hand of snazzier analytical tools, but about the geographic scope of markets. Often companies tell us that our market definitions are too narrow and that we should broaden them because of globalisation and of new competition from emerging markets. This is a fair point, because defining the markets affected by a merger which involves companies and competitors with operations in several regions of the world can be a very complex exercise. However, we try to respond to the challenge by constantly adjusting our market definitions to changing market realities. In telecommunication equipments and enterprise software applications, for instance, our definitions have become EU-wide if not worldwide. Also, in the pharmaceutical sector, some ingredients are now usually considered to be sold on a worldwide basis.
And then, there is another point to make. I do not believe that globalisation makes all markets automatically worldwide – that depends on the prevailing competitive conditions. For example, the scope of the markets for electricity distribution or for consumer goods does not change simply because some suppliers – utilities and retailers – extend their operations into more countries. Customers in these countries may still be faced with very different prices and choices. In sum, when it comes to the geographic scope of markets, we apply a simple maxim: we take the markets as we find them.
To round up these debates, let me tell you that we can – and do – use various methods to examine the effects of a merger. But precisely which tools we will pick from the toolbox and at what stage will always be determined by the conditions of each individual case. The facts of the case remain the beacon of our analysis.
The latest point brings me to the next issue I want to discuss with you; the need for more convergence among competition authorities. We have seen many transactions recently involving several jurisdictions at once. It is one of our policy objectives to achieve more convergence on analysis and on process – for example in terms of timing.
As more and more companies operate globally, competition rules can no longer be enforced exclusively at regional or national level. Competition authorities in the different regions of the world must learn to work together and should have a common understanding of the principles that must guide our reviews. At present, more than one hundred countries have merger-control regimes in place, and we would all stand to lose from a lack of coordination. The good news here is that we do not start from scratch.
The excellent relationships that we have established over the years between the authorities in the EU and the US can be used as a model for the kind of global convergence I have in mind. We are currently working together – in Washington and in Brussels – to update our 2003 Best Practices, notably on remedies and on the timing of our investigations. I believe that this work will improve the effectiveness of our respective reviews.
In the past few years we have also made good progress with other major jurisdictions, such as Japan and Korea – I recently visited both countries – and we remain staunch supporters of our multilateral forum, the International Competition Network. Finally, I predict that our cooperation will also intensify with the agencies in the emerging economies. As the companies from these countries become more prominent in the international markets, so will their competition authorities. Our overall aim is to limit conflicting outcomes and reducing the burden for the parties. But we should also bear in mind that there may be cases when different market structures lead to different outcomes.
Finally, let me stress one point. More international cooperation is also good for business. It is in the best interest of the companies that are planning a merger that different authorities align their assessments, remedies, and the timing of their decisions. It is therefore surprising that some companies still refuse to cooperate and effectively prevent us from conducting parallel procedures. I would like to remind the lawyers in this hall and their colleagues elsewhere that playing one authority against the other does not pay. At the end of the day, it will only complicate the review for everyone.
I will now turn my last topic, the relations between merger control, global investments and cross-border integration. Recently, some have suggested the possibility that we establish some form of screening of foreign investments at EU level – including mergers and acquisitions. The advocates of this idea – which at times conceal a request for protectionist measures – fear that a foreign owner would spirit away the technology and move the workforce outside of Europe. This argument can encourage populist politicians, but in my personal view it’s a really weak basis for policy-making. A responsible policy-maker needs to see good evidence, not anecdotes.
Europe should continue to welcome foreign investments – just as we wish European investments to be welcomed in other parts of the world – because these deals bring benefits to everyone. Our economies need access to competitive services and investments, and our companies can only become real European or global champions if they are encouraged to become more innovative and efficient; not if they are shielded from competition. Closing home markets as a reaction to protectionism abroad can only be a damaging move for everyone. Therefore, we must work for reciprocity in opening markets – not in closing them.
Competition authorities around the world have a fundamental role to play in this debate, not least in the field of merger control. They must keep their analysis clear of considerations that do not belong with competition enforcement. And I can assure you that EU merger control will remain on that track. I can give you concrete examples of this. Earlier this year we cleared without conditions a string of mergers involving companies owned by the Chinese state: China National Bluestar/Elkem, DSM/Sinochem, Petrochina/Ineos, and Huaneng/Intergen.
In all these cases, we applied the same criteria that we adopt to assess mergers involving companies controlled by EU countries. This goes to show that our analysis is based on competition considerations only, and is irrespective of the nationality of the companies. And I expect that European companies will enjoy the same treatment when competition authorities in other parts of the world review their merger projects.
To conclude, let me summarise the main points I have discussed with you today. The evolution of competition policies and our enforcement work do not happen in a vacuum; they respond and – whenever possible – anticipate the most significant trends in our economies and societies. Globalisation is one of these trends, perhaps a hallmark of our time, and it is our responsibility as policy-makers and enforcers to draw all its consequences for our decisions and for our practice. One of these consequences is the growing need for companies to reach the size required to play in today’s global markets. Then, we have seen that an increasing number of mergers occur on a global scale and how this affects the instruments we use in our analysis of mergers, starting from market-definition. We have also seen that in an integrated business environment, there is a growing need for tighter cooperation between competition authorities across the world.
Finally, we have seen why competition control must remain anchored to its own rules and purposes. The independence and neutrality of competition control are the best guarantees of a transparent and predictable process, which is what companies need as they draw their strategies and take their decisions. Our neutrality also translates into practice the traditional commitment of the EU to free trade and to keeping the internal market open to the rest of the world. At a time when our economies are increasingly integrated on a global scale, Europe will remain fully committed to free trade and will continue to be a welcoming investment environment for companies the world over.