Mergers: a 20 year Retrospective

Mergers: a 20 year RetrospectiveRetrospective

Competition Law ConferenceSydney4 May 2013

Tim Grimwade and Jill Walker

20 years

Outline� Background and history of SLC in mergers� Evolution of merger analysis and the Guidelines� Merger moments: making a difference & contentious

mattersmatters� Merger authorisation: early activity (and untimely death)� Evolution of Merger administration� Merger moments: establishing credentials� Evolution of remedies and use of s.87B� Concluding remarks

Background and history

Once upon a time.........

� 1974-1977 SLC test� Re QCMA decision (merger authorisation)� Swanson Committee (1976):

“(a) merger provisions are necessary to prevent the possibility of achieving, by merger, “(a) merger provisions are necessary to prevent the possibility of achieving, by merger, anti-competitive results prohibited elsewhere in the same law;

(b) Merger provisions ensure that the control of significant capital assets in the community does not change hands in circumstances that disregard any anti-competitive effects of the change.”

� 1977 – 1992 dominance test:“The Government has decided that the categories of merger subject to the Act should be quite limited. There should be no unnecessary impediment, legislative or administrative, to the attainment of rationalisation of Australian industry. It is in Australia’s best interests to achieve economies of scale and improved international competitiveness” (J Howard)

Ongoing Debate 1977-1992� International competition: rationalisation & national champions v Porter

and non-traded inputs� Problematic mergers:

� Ansett-East West� News Ltd-HWT� Coles-Myer� Dulux-British Paints� Dulux-British Paints� Dunlop-Goodyear� Unilever-Bushells� Ampol-Solo� Visyboard-Smorgan

� Logic of the Act: agreements v mergers� 1984 Green Paper recommendation v response� Griffiths Report (1989):

““There is significant support for the retention of the dominance test and for the belief that the test facilitates and promotes desirable industry rationalisation and increased international competitiveness…There is, at this stage, insufficient justification to recommend any amendment to the dominance test”

And so it came to be...� Cooney Report (1991)

“The dominance test was specifically introduced to facilitate the development of economies of scale in Australian industry, and to further its international competitiveness.… A growing body of economic theory now suggests that international competitiveness, both in large and small nations, is achieved not by encouraging industry leaders to merger, but by encouraging them to compete”

� November 1992:“After much consideration the Government has decided to amend section 50 to prohibit mergers or acquisitions which are “After much consideration the Government has decided to amend section 50 to prohibit mergers or acquisitions which are likely to substantially lessen competition and which have not been authorised by the Commission. In an Act which seeks to preserve competition it is appropriate that the merger test should focus on the effect on competition in a market rather thanon the dominance of a particular firm. The effect of the amendment will be to broaden the range of transactions which can be examined under section 50. This can only be procompetitive.” (M Duffy)but:“The Government’s position is a triumph for linguistic gymnastics. The problem is that in applying the test to actual situations, it will be difficult to predict the result. ... The matter will be thrown to the courts which no doubt will spend years clarifying the operation of the new provisions.” (P Costello)

� S.50(3) and the Draft Merger Guidelines� Authorisation amendments� SLC (and s.87B) effective 21 January 1993

Guidelines and analysis

Draft Merger Guidelines1992

� Concentration “safe harbours”:

CR4<75% & market � CR4<75% & market share <15%; or

� market share <40%

� “Flow Chart”

� “Commercial Radio Guidelines” 1994

Draft Merger Guidelines1992 contd.� Market definition: SSNIP test� Major (unilateral & coordinated

effects) theories of harm established

� Vertical mergers but no � Vertical mergers but no reference to vertical theories of harm

� Forward looking analysis and prevention of competition theories

� Supply and demand side markets & SLC

Merger Guidelines 1996� ACCC has replaced TPC � Guidelines much longer and more comprehensive, e.g.

demand side mergers; partial acquisitions� NCP backdrop - expanded coverage of TPA and concern with

mergers in sectors undergoing deregulation & privatisationmergers in sectors undergoing deregulation & privatisation� Retained the same basic analytical structure� Ripple effects, functional & time dimensions and sub-markets� Flow chart and concentration thresholds retained (IC Report)� Indicative position of not opposing mergers if sustained and

competitive imports>10%� Consideration of efficiencies under SLC v “trade-off”

Merger Guidelines 1999� Export Guidelines 1997� No major change from 1996� Flow Chart approach retained� Concentration thresholds unchanged� Various refinements e.g.

� Cluster markets� Price discrimination markets� Failing firms� Strategic barriers to entry

Merger Guidelines 2008� Media Mergers 2006� SLC test established and participation in ICN� Substantial overhaul of the 1999 Guidelines:

no “safe harbours” – replaced with indicative notification thresholds: substitutes � no “safe harbours” – replaced with indicative notification thresholds: substitutes or complements and > 20% market share

� no flow chart – integrated analysis of constraints� main theories of harm retained � greater prominence to vertical foreclosure and conglomerates� theories of harm increased prominence vs merger factors� HHI adopted as concentration metric: <2000 or >2000 and <100� TLS approach to entry adopted� Countervailing power

Merger moments: making a difference and contentious matters

Mergers opposed or modified that would not have been challenged under Dominance� Caltex/Ampol (1995): co-ordinated effects in petrol refining/wholesaling� Wattyl/Taubmans (1996 and 2006): co-ordinated effects in A&D paint� Coke/Berri (2003): conglomerate effects/leveraging from CSD into fruit juice/drinks� Patrick/FCL (2005): vertical foreclosure in rail line-haul and freight forwarding� Boral/Adelaide Brighton (2006): unilateral and coordinated effects in concrete etc.� Baiada/Bartter (2009): unilateral effects in the supply of processed chickens� Baiada/Bartter (2009): unilateral effects in the supply of processed chickens� Pfizer/Wyeth (2009): unilateral effects in various animal health products� Gunns/ITC Timber (2009): acquisition of hardwood pulpwood� Caltex/Mobil (2009): coordinated and unilateral effects in petrol retailing� GUD/Breville (2009): unilateral effects in small electrical appliances� Cargill/Goodman Fielder (2010): unilateral effects in bulk RBD edible oils� NAB/AXA (2010): dynamic effects in retail investment platforms� Foxtel/Austar (2012): potential competition in pay TV and telco� Nestle/Pfizer (2012): unilateral and coordinated effects in infant formula

Contentious mergers opposed� Very few cases have gone to Court and Commission’s

Guidelines have largely prevailed� Completed court cases arguably “marginal”

� AGL v ACCC (2003)� AGL sought to acquire Loy Yang - vertical merger of electricity

generation and retail� Economic modelling of NEM� Court found that the merger would not SLC� Useful guidance on “likely” (real chance) and “substantial”

(meaningful or relevant to the competitive process)

� ACCC v Metcash (2011)� Grocery merger similar to Davids/QIW (1993)� ACCC defined narrow market and found SLC� Court found broad market and no SLC� Approach to “likely” SLC confirmed� Counterfactual issue

Contentious mergers not opposed

� Westpac/St George (2008)� Horizontal acquisition of #5 bank by major� Combined market shares 15-25%� Several remaining competitors� Several remaining competitors� St George not uniquely competitive

� Vodafone/Hutchison (2009)� Horizontal merger of # 3 & 4 in mobile� Vigorous & effective competitors� Network capacity constraints� Scale and investment pro-competitive

Merger authorisation: an important option in the early years

Authorisation� Availability of authorisation was an

important option in the early years of the SLC test

� 1992 amendments: international competition

� Commission encouraged parties to

� Some parties successful:� Comalco/Gladstone Power (1994)� Qantas/BA alliance (1995)� Davids/QIW-CBL (1995 & 1996)� Dupont/Ticor (1996)� Adelaide Brighton/Cockburn (1999)

� Commission encouraged parties to use this avenue where there were significant efficiency claims

� Little Company of Mary Health Care /St Vincent’s Hospital Launceston (2005)

� GrainCorp and AWB (2005)

� Others not:� CSR/Mackay Sugar (1994)� Silver Top/North Suburban (1995)� Wattyl/Taubmans (1996)� Bristol/Pioneeer (1997)� API/Sigma (2002)� Qantas /Air NZ alliance (2003)

Evolution of merger administration

Key processes and early successes� Prior to the SLC test, the TPC had been conducting a

voluntary, informal clearance process for mergers� However, the TPC wanted greater business adoption of the practice of

notifying mergers before they occurred

� The TPC needed an approach that encouraged the � The TPC needed an approach that encouraged the notification of mergers that warranted review� It outlined a series of principles for informal clearance in its early guidelines,

which have stood relatively unchanged for 20 years� Notification encouraged� Confidential mergers reviewable� Non-notified transactions treated differently� Timeframes for decisions� Public register� Anti-competitive mergers restrained

Merger moments: establishing credentials

TPC was not afraid to act decisively

� TPC v Rank Commercial (1994)� Rank (NZ) to acquire FAL and on-sell the

WA wholesaling business to Coles Myer� TPC notified at 11th hour� Ex parte injunction and undertaking� Interim injunction and appeal

� Other proceedings played a continued role in deterring anti-competitive mergers:� Wattyl/Taubmans (1996)

� Interim injunction and appeal

� TPC v Pioneer (1996)� Completed acquisition of the assets of A Class

Blocks & Q Blox (1994)� A Class blocks had driven price reductions� A Class agreed to close and sell the assets to

Pioneer� Prices subsequently rose� Court held acquisition of assets breached s.50

and awarded penalties & costs $5 million

� Boral/Adelaide Brighton (2004)� Toll/Patrick (2007)

Growing criticisms

� Criticisms grew about lack of transparency and consistently applied procedural framework� While principles had been established, processes had not.� Initially no consistent approach to seeking information� Lack of rigour in the coordination of the merger processes� In the early days, decisions of the TPC were not generally published� The ACCC did not have sophisticated technology available to it to

facilitate the management or transparency of its informal process� The Dawson Review

The Dawson Review

� The Dawson Committee’s 2003 report� Considered there were two fundamental weaknesses of the informal

merger review process: limited transparency; lack of review mechanism� Criticisms of the ACCC’s approach to accepting merger undertakings� Development of a parallel formal clearance process� Development of a parallel formal clearance process� Proposal that merger authorisation applicants bypass the ACCC and

have their decisions made by the Tribunal directly

� No merger authorisations since Dawson� Practical option for resolving some anti-competitive mergers appears to

have been lost� Lack of merits review should be of concern

Merger administration post-Dawson

� Dawson – the catalyst for change, but not the key� The Dawson review anticipated minor changes to the

informal process and adoption of a new formal clearance processclearance process� The changes went beyond addressing simply criticisms of

accountability and transparency

� Formal clearance process unused – too formal?� Corporate governance of merger administration

� ‘Merger Commissioner’; ‘Mergers Panel’; ‘Mergers Review Committee’

Merger administration post-Dawson

� Improvements to transparency in the informal process:� Public Competition � Public Competition

Assessments (PCAs )� Statements of Issues

(SOIs)� More sophisticated and

responsive electronic public register

Merger administration post-Dawson

� PCAs intended to ensure greater certainty and understanding of the ACCC’s approach� First PCA issued: ACCC’s decision to reject the Coca-

Cola/Berri merger in 2003125 PCAs since then� 125 PCAs since then

� SOIs intended to provide greater understanding of the ACCC’s concerns before a final decision is made� Recently supplemented by ‘transparency letters’ � First SOI was issued in 2005 in the Pacific Dunlop/Joyce merger,

which was ultimately opposed � Disquiet by merger parties who want more access to the submissions

of third parties

Merger administration post-Dawson

� Electronic public register� Identification of the stage of the matter, various links, contact points

within the ACCC, indicative timeline� Boral/Adelaide Brighton review

Review of internal structures � Review of internal structures Mergers group

Mergers Investigations

branch

Mergers Coordination and Strategy branch

‘Pre-assessment’ of

matters

Merger Undertaking Compliance

Intelligence Gathering

Development in ACCC investigative methods� Trend of using more sophisticated economic analysis

and data requests in latter decade� Review of Woolworths acquisition of 22 Foodland stores in 2005

� Section155 Notices� Section155 Notices� Used on third parties and merger parties

� International coordination on reviews of mergers� International Competition Network established in 2001� Coordination agreements and established working relationships� ACCC Commissioner part of decision making process with NZCC

Commission on merger matters with an Australian dimension, and vice versa

Total mergers considered and opposed

Evolution of remedies and use of s.87B

Merger undertakings

� TPA amended to provide for the ability of the TPC to enforce undertakings� Around 100 merger undertakings accepted

� Structural undertakings were preferred� Structural undertakings were preferred� But the ACCC would be flexible as circumstances required – 1996

Mergers Guidelines and early annual reports� Behavioural undertaking is directed towards reducing the ability of a

merged firm to exercise market power� Structural undertaking addresses the structure of the market, rather

than the conduct� Quasi-structural undertakings (e.g. access undertakings) are

conduct undertakings that affect market structure, particularly entry

Merger undertakings

Merger undertakings – key moments• Davids/IHL1994

• Ampol/Caltex undertakings1996

• Simultaneous divestiture - Frito Lay/Smiths• Behavioural merger remedy –Caroma/Fowler merger• Behavioural and quasi-structural - Westpac/Bank of Melbourne

1997

• Commonwealth/Colonial merger 2000

• Sell down of Franklins2001

• Divestiture undertaking - Ramsay/Affinity merger2005

• Toll/Patrick2006

• Behavioural remedies – Smorgon/Onesteel2007

• International coordination - Pfizer/Wyeth; Agilent/Varian2009/10

• Quasi-structural remedies –Foxtel/Austar; Nestle/Pfizer2012

Merger undertakings

� Administrative boundaries for the ACCC� Ampol/Caltex matter in 1997

� Federal Court made clear a refusal to vary an undertaking was a reviewable decision under the ADJR Act

� In 2005, a third party sought review of a decision to vary an � In 2005, a third party sought review of a decision to vary an undertaking by Ramsay involving the divestiture of a number of hospitals

� Federal Court clarified that the ACCC was under no obligation to afford procedural fairness to third parties in respect of decisions it makes under s87B

� 1997 House of Representatives Standing Committee recommendation

� Some early lack of rigour in enforcing compliance

Merger undertakings

� Significant changes through practical experience

� Toll/Patrick merger in 2006 � Institution of proceedings � Acceptable undertaking, which divested the

share of Pacific National being acquired� Subsequent Toll/Asciano de-merger� In 2008, Toll instituted proceedings in

relation to aspects of its undertaking –dismissed by Federal Court in 2009

� Issues arising from the negotiation of undertakings

Merger undertakings

� Changes to the way the ACCC did things� Template provisions for future undertakings � Undertakings Compliance Unit

� The ACCC began detecting instances of failure to � The ACCC began detecting instances of failure to comply, and took action as needed� In August 2007, the ACCC settled

proceedings with Alinta in relation to a failure to comply with a whole separate undertaking

� In 2008, the ACCC instituted proceedings against ABC Learning Centres for a failure to divest under a s87B

Merger undertakings

� Merger undertakings became increasingly sophisticated � Development of boilerplate provisions� Foxtel/Austar� NAB/AXA

� Increased coordination by international agencies of merger undertakings to resolve trans-national competition problems� Pfizer/Wyeth; Agilent/Varian

� Continued innovation in remedies � Nestle/Pfizer

Concluding remarks

Concluding remarks

� SLC now accepted in Australia and ROW� Main theories of harm established early � Evolution vs revolution of Guidelines/analysis

Increasingly forensic and sophisticated analysis� Increasingly forensic and sophisticated analysis� ACCC not afraid to act decisively� Constancy of principles� Refinement of processes� Acceptance of informal merger review process