Merger Analysis

Market Analysis

The first  step is to identify whether the market is such that it is conducive to collusion and coordination.  Where products are homogenous, and there is a lesser degree of transparency in market conditions, coordination is more likely.

The ease of maintaining collusion is considered.  An inherent pressure on collusive cartel behaviour is the risk of one party breaking from the arrangement and seeking to obtain higher profits, at least for a period.

Where the possibility of breaking out from a collusive arrangement is reduced, there is a greater competition concern. The easier it is for the merged firms to sanction the entity that breaches the cartel, the greater the competition risk.

If a maverick player, who has historically deviated from the market behaviour of rivals, is absorbed, there is a greater risk of the lessening of competition. Its maverick behaviour may be checked.

Barrier to Entry

Barriers to entry may be high if the existing market players control the assets for the production of the supply of relatively important elements, components, ingredients or resources.  There may be high or insurmountable barriers by way of technology or intellectual property rights. There may be legal or administrative barriers to entry.

A merger with a potential market entrant may have an adverse effect on competition.  It eliminates a threat that may constrain the existing firms.  It may also eliminate actual future competition.

If the barriers to entry are sufficiently low, a post-merger price increase is unlikely to be sustainable, and the threat to competition is less.  The threat of entry may itself constrain existing market players. Regard is had to the time frame in which a new entrant may emerge and provide an effective threat.

Efficiencies

It may be that the anti-competitive effects are offset by increases in efficiency arising from the merger. The eventual market prices may not rise, not rise significantly or may fall as a result of the merger. Even if prices do not fall, overall consumer welfare may not be adversely affected or may be improved by the efficiencies gained.

The efficiencies must be tangible and demonstrable.  They may arise from economies of scale. Compelling evidence will be required of the overall effect.

Efficiencies arising from saved overheads, greater buyer power and economies of scale are not generally considered.  Efficiencies that reduce the marginal cost of the particular goods will not generally be sufficiently  relevant.

The efficiencies must reduce the actual cost or production, as opposed to fixed cost or overheads.  The efficiencies must be sufficient in quantum relative to the anti-competitive effect.

Failing Firm Defence

A merger may not substantially lessen competition if one or both of the entities in the market will otherwise leave the market in the event that the merger does not take place.  This so-called “failing firm” defence, is only available where it could be demonstratively shown that the firm will fail in the near future, that there is no successful alternative reorganisation available through examinership or otherwise.

The firm must have attempted to seek alternative offers that would keep its productive assets in the relevant market.  It must be clear that without the merger, the assets concerned will no longer be available in the market. The financial crisis has given rise to a number of mergers of firms that would otherwise fail.

Relevant Market

The relevant market for mergers legislation purposes is defined by reference to the products sold or services provided by the parties to the merger.  It examines a substitute product or service within the relevant geographical area.  The market is considered relative to the product provided by the firm or business, with reference to a hypothetical monopolist, applying a small but significant and non-transitory increase in price.

The relevant product market is a product or group of products, such that if a hypothetical monopolist in that product imposed a small but significant non-transitory increase in price above the existing level (if the conditions of sale of all other products remained the same), then in response, there would be a reduction in sales of the product, significant enough that the hypothetical monopolist would find it unprofitable to impose the increase in price. This product is the next best substitute for the product of the merging firm in the relevant market.

Subsequent products are added in the same way hypothetically until it would be profitable for the monopolist to impose the small but significant and nontransitory increase in the price of the group of products, including that of one of that of the merging firms. This is the relevant product market for the purpose of analysing the merger.  The relevant product market is generally the smallest one that satisfies the above test.

Hypothetical Price Change

A price increase of 5 to 10 percent above prevailing levels for a year is assumed. Regard is had to the existing prices of the products of the merging firms. The hypothetical monopolist is assumed to have obtain maximum profitably by increasing the prices.

The Authority in having regard to the likely reaction of buyers to a price increase,  takes into  account all evidence, including

• evidence that buyers have previously purchased substitute goods or  would consider producing substitute goods in response to the relevant price change;
• evidence that sellers are basing business decisions on the prospect of buyer substitution,
• response to change, cost and timing of switching,
• influence of downstream competition to which buyers face in the output market.

Geographic Market

The relevant geographic market is where the hypothetical monopolists of the product may profitably impose a small but significant non-transitory increase in price on the same terms of sale for all products produced elsewhere.

If the reduction in sales of the products at that location due to switching by its suppliers will be large enough, such that the monopolist would find it unprofitable to impose the increase, the next closest location where the relevant products may be purchased by consumers is added.  The process is finished as soon as a group of locations is identified so that a monopolist over that area can profitably impose an SSNIP.

Evidence similar to that to define the relevant market is used.  This may include evidence of any of the above matters.

Substitutes

Substitutes include those which are not available but which could be made available in response to a hypothetical price increase by the monopolists. A six months period is generally assumed, although this will vary from market to market.

Where substitutes are included, the Authority takes account of the technical feasibility, cost and feasibility of substitution by potential a suppliers, whether potential suppliers are available to switch production and the consumer’s point of view.

If a hypothetical monopolist of the products imposed a small but significant and non-transitory increase in the price of the products, including the price of a product of at least one of the merging firms (where the conditions of sale of all other products remain constant) if in each successive price increase.