Guidelines on Mergers [EU]

Guidelines on the assessment of horizontal mergers

under the EU regulation on the control of concentrations between undertakings

They provide guidance as to the European Commission’s approach when assessing the likely impact of mergers, within the scope of Article 2 of Regulation (EC) No 139/2004 (the Merger Regulation), where the firms concerned are actual or potential competitors in the same relevant market (horizontal mergers).

Through its review, the Commission can raise competition concerns when mergers would be likely to deprive consumers of the benefits of effective competition (for instance, lower prices, a wider choice of products or services, or innovation).

In the guidelines, the Commission explains when it may raise competition concerns, but also indicates when it will be unlikely to intervene.

The Commission can raise competition concerns when mergers and acquisitions increase the market power of the companies involved to an extent which is likely to have significant adverse effects for consumers, in particular by creating or strengthening a dominant position. This might be the case if the merger were to eliminate a competitor from the market or to make coordination between the firms present on the market more likely.

Market share and concentration levels

The Commission’s assessment of mergers normally involves:

• defining relevant product and geographic markets;
• competitive assessment of the merger.

The Commission defines the relevant market based on its notice of 1997. The main purpose of market definition is to identify in a systematic way the immediate competitive constraints facing the merged entity.

The Commission does not normally intervene where the merger does not result in market concentration levels exceeding certain specified levels, as measured by the firms’ market-share percentage or by the Herfindahl-Hirschmann Index (HHI)*.

Possible anti-competitive effects of a horizontal merger

There are 2 main ways in which horizontal mergers may significantly harm effective competition, in particular by creating or strengthening a dominant position:

• by eliminating important competitive constraints on one or more firms, which consequently would have increased market power, without resorting to coordinated behaviour (known as non-coordinated effects);
• by changing the nature of competition so that firms that previously were not coordinating their behaviour are now significantly more likely to do so and raise prices or otherwise harm effective competition. A merger may also make coordination easier, more stable or more effective for firms which were coordinating prior to the merger (known as coordinated effects).

The Commission assesses whether the changes brought about by the merger would result in any of these effects. Both instances mentioned above may be relevant when assessing a particular transaction.

Other aspects that the Commission takes into account include:

• Countervailing buyer power — the competitive pressure on a supplier is not only from competitors but can also come from its customers. Even firms with very high market shares may not be able, post-merger, to significantly impede effective competition, in particular by acting to an appreciable extent independently of their customers, if their customers have countervailing buyer power.
• Market entry — when it is sufficiently easy to enter a market, a merger is unlikely to pose any significant anti-competitive risk. Therefore, entry analysis is an important element of the overall competitive assessment. For entry to be considered a sufficient competitive constraint on the merging parties, it must be shown to be likely, timely and sufficient to deter or defeat any potential anti-competitive effects of the merger.
• Efficiencies — companies can claim that efficiencies are a mitigating factor to the likely competitive harm. Here, the merging parties need to be able to show that the efficiencies are merger-related, will benefit consumers and are verifiable.
• Failing firm defence — an otherwise problematic merger may nevertheless be considered compatible with the common market if one of the merging parties is a failing firm. The basic requirement is that any reduction in competition that follows the merger has not been caused by the merger.

Key Terms

Dominant position: where a firm has the ability to behave to a considerable extent independently of its competitors, customers, suppliers and, ultimately, the final consumer.
Herfindahl-Hirschmann Index (HHI): the index, which is calculated on the basis of the market shares of all the firms in the market, gives proportionately greater weight to the market shares of larger firms.

While the absolute level of the HHI can give an initial indication of the competitive pressure in the market post-merger, it is, above all, the change in the HHI that is a useful indicator for the change in concentration directly brought about by the merger.

Countervailing buyer power: in this context, this should be understood as the bargaining strength that the buyer has in relation to the seller in commercial negotiations due to its size, its commercial significance to the seller and its ability to switch to alternative suppliers.

The future direction of the EU mergers and acquisitions policy

This European Commission White Paper takes stock of how the EU has overseen mergers between companies over the past 10 years. It concludes that this has been effective overall, but suggests it could be improved in two areas by:

White Paper: Towards more effective EU merger control (COM(2014) 449 final of 9.7.2014)

This European Commission White Paper takes stock of how the EU has overseen mergers between companies over the past 10 years. It concludes that this has been effective overall, but suggests it could be improved in two areas by:

• allowing the Commission to review mergers from acquisitions of non-controlling minority shareholdings;—
• reforming the rules for transferring merger cases from national authorities to the Commission and vice versa.

The White Paper proposes that a company would have to notify the Commission if it is planning to take over a minority shareholding which could significantly affect competition.

It would have to provide data such as the companies’ turnover, a description of the transaction, the level of shareholding and some market information.

The Commission considers that this ‘targeted transparency system’ would not add unnecessary administrative burdens on companies, but would give it sufficient details to decide whether to investigate the merger further.

The proposed changes to the referral of mergers from national authorities to the Commission are designed to make the system faster and more effective.

The White Paper advocates that the companies involved inform the Commission directly, without the case first going through a national competition body (the current procedure). The national competition body would be informed of the proposed merger and could decide to review it itself. If it does not – and national authorities rarely veto such requests – the Commission will examine the case itself.

The EU’s merger legislation last had a major overhaul in 2004. It provides a harmonised set of rules for concentrations and corporate restructuring. This ensures that competition, and thus consumers, are not harmed by changes in the marketplace.

The Commission has only prohibited 24 mergers since 1990 and just six since 2004 – significantly less than 1 % of over 5 000 mergers notified.