ACCC releases draft new merger guidelines for consultation
12 February 2008The much anticipated draft new merger guidelines were released by the Australian Competition and Consumer Commission (ACCC) for public comment on Friday.
The draft guidelines outline the principles used by the ACCC to analyse the competitive effects of mergers and acquisitions.
A substantial rewrite of the guidelines has occurred with many significant changes in content and approach. The draft guidelines are a clear improvement over the old 1999 merger guidelines and the ACCC has obviously taken great care in their formulation.
Key points
The most important changes are as follows:
The so-called ‘safe harbours’ based on CR4 ‘concentration ratio’ and 40 per cent market share have been replaced by voluntary notification thresholds
Under the new thresholds, the ACCC encourages pre-merger voluntary notification if any of the following criteria are likely to apply:
The merged firm would operate in at least one market that is concentrated
A market is considered ’concentrated’ if its Herfindahl-Hirschman Index (HHI) exceeds 2000. The HHI is a measure of market concentration routinely used for merger analysis in jurisdictions such as the United States and is calculated as the sum of the squares of the market shares of all firms in the relevant market.
The merger parties are ‘number 1’ and ‘number 2’
A substantial number of customers consider the products of the merger parties to be particularly close substitutes such that the merger parties represent their first and second choices.
The target firm is a ‘maverick’
The target firm has shown a recent rapid increase in market share, has driven innovation or has tended to charge lower prices than its competitors in one or more markets in which the merged firm would operate.
The merged firm would be a clear market leader
The merged firm would have a significantly higher market share than any of its rivals in one or more markets.
The firm or industry is under ACCC scrutiny
The ACCC has indicated to a firm or industry that notification of proposed mergers in that industry would be advisable, given past history in that industry or the level of acquisitive activity.
The ACCC says that it will rarely investigate a merger if it falls outside these notification thresholds.
However, these thresholds are set at a low level. In practice, we would expect that many proposed acquisitions will cross these thresholds but raise no competition concerns.
Greater emphasis is placed by the ACCC on gathering supporting evidence
Supporting information and documents are likely to be subject to a higher level of ACCC scrutiny, consistent with recent ACCC practice.
For example:
- the ACCC makes several references in the draft guidelines to the content of relevant Board Papers and ‘internal company strategy, marketing and sales documents’ in order, for example, to identify whether the merger could result in the elimination of a target firm that was otherwise an effective competitor
- the ACCC now seeks market share data from the parties covering all relevant metrics, namely sales by volume, sales by value and capacity shares over the previous three recent annual periods. If this information cannot be provided, the ACCC will expect an explanation.
Greater emphasis is placed by the ACCC on identifying and analysing the long term competitive effects of mergers
The ACCC has identified its key theories of competitive harm, categorised by type of merger. These theories explore such issues as the scope for post-merger strategic behaviour by one or more firms in an industry, including, for example:
- increased scope and incentives for tacit price coordination, flowing from a horizontal merger, and
- increased scope and incentives to foreclose competitors, flowing from a vertical merger.
Merger analysis under the new guidelines will be more tailored to the specific features and context of the particular merger and its long term consequences for industry structure and behaviour.
Consistent with recent practice, the guidelines also identify that the ACCC will determine the materiality of any lessening of competition by identifying the extent to which it confers an increase in market power on the merged firm that is significant and sustainable. The ACCC may consider this to occur if the merged firm is able profitably to increase prices by around 5–10 per cent for a period of 1–2 years.
Likely consequences and implications
We do not expect that the draft guidelines will result in any dramatic shift in approach by the ACCC towards the consideration of mergers.
The 1999 merger guidelines were overdue for a review. The ACCC has taken the opportunity to update the guidelines to ensure that they are consistent with recent legislative changes and case law and international regulatory best practice.
The draft guidelines also articulate the ACCC’s recent practice and current thinking, much of which is already well known. By way of example, the so-called ‘import test’ has been toughened so that several additional conditions must now be met for imports to defeat a lessening of competition. These additional conditions test the extent to which imports would realistically constrain any market power of the merged firm and had previously been implicit in the ACCC’s analysis.
However, the draft guidelines are likely to have the following implications:
- the ACCC will expect more mergers to be voluntarily notified, consistent with the proposed voluntary notification thresholds
- merger analysis will tend to be more resource intensive and fact-specific, potentially increasing compliance costs and ACCC timelines. However, the ACCC has continued to emphasise that it is primarily reliant on qualitative rather than quantitative information
- the ACCC may be more confident in blocking certain types of merger, typically borderline mergers that raise complex competition issues. The draft guidelines provide the ACCC with greater scope to identify compelling reasons to block a merger should it wish to do so
- while the introduction of the draft guidelines may create initial uncertainty, they are well crafted, so this should be transitory in nature, and
- ultimately, the quality of ACCC decision making should improve. However, as a more complex and fact-intensive level of analysis is proposed, this should increase the scope for informed debate with the ACCC over key issues.
Opportunity to influence content
Public submissions on the draft guidelines are due to the ACCC by Friday 28 March 2008.
However, the draft guidelines have been carefully crafted and are clearly the result of substantial background thought. We therefore believe the ACCC may be reluctant to make substantive revisions flowing from the public consultation process.
More detail on guidelines
Freehills is preparing a more detailed briefing note on the content of the draft guidelines and the nature and implications of the new analytical methodology proposed by the ACCC. If you would like a copy of this briefing note, please let us know.
Likewise, please contact us if you have any questions or wish to make a submission in relation to the draft guidelines.
For more information please contact
Title : Partner
Office : Sydney
Phone : +61 2 9225 5523
Fax : +61 2 9322 4000
Email : donald.robertson@freehills.com
Title : Partner
Office : Perth
Phone : +61 8 9211 7712
Fax : +61 8 9211 7878
Email : pauld.evans@freehills.com
Title : Partner
Office : Sydney
Phone : +61 2 9225 5697
Fax : +61 2 9322 4000
Email : paul.hughes@freehills.com
Title : Partner
Office : Melbourne
Phone : +61 3 9288 1636
Fax : +61 3 9288 1567
Email : michael.pryse@freehills.com
Title : Partner
Office : Melbourne
Phone : +61 3 9288 1628
Fax : +61 3 9288 1567
Email : bob.baxt@freehills.com
Title : Partner
Office : Sydney
Phone : +61 2 9225 5286
Fax : +61 2 9322 4000
Email : michael.gray@freehills.com
Title : Partner
Office : Melbourne
Phone : +61 3 9288 1416
Fax : +61 3 9288 1567
Email : chris.jose@freehills.com
Title : Partner
Office : Brisbane
Phone : +61 7 3258 6632
Fax : +61 7 3258 6444
Email : mark.darwin@freehills.com
