(by Bruce Lyons) The UK regime for controlling potentially anticompetitive mergers has a number of idiosyncrasies as compared with most other competition authorities across the globe. For example: the two phases of merger inquiries are carried out by separate institutions; merger notification is voluntary; very small mergers can be caught by the ‘share of supply’ test for jurisdiction; and minority shareholdings can be prohibited on the grounds of ‘material influence’. Some of these are good idiosyncrasies, and other jurisdictions could learn from the UK, but other idiosyncrasies are a handicap, and the UK system would benefit from reform. Which fall into each of these two categories?
- Separate institutions for each phase. I have already discussed this in general. More specifically on merger decisions, the current UK system is unrivalled for avoiding ‘confirmation bias’, which can happen if an investigation team spends the second phase trying to prove its initial hunch was right. In the UK, if the OFT thinks a merger might be harmful, it is referred to the CC for a completely new team to investigate and decide afresh. On the other hand, an increasing number of mergers are settled at the OFT stage (up steadily from a quarter in 2004/5 to two-thirds in 2009/10). This may be because firms are learning to predict the regime after the 2004 reform, but it may reflect firms and the OFT rushing into inaccurate remedy agreements before the competition issues have been properly clarified. Our research on EC settlements in Phase I suggests this can lead to either excessive remedies (Type 1 errors) or, in complex mergers, anticompetitive mergers being allowed (Type 2 errors). Nevertheless, with careful design of an integrated institution, including appropriate separation of decision making in each phase, it should be possible to guard against both confirmation bias and excessively hasty agreements.
- Voluntary notification. A few mergers may slip under the radar of the OFT, but the greater problem is the consequence that half of all interventions in UK mergers have to deal with completed mergers. Mandatory notification could include a requirement that the merger must not be completed until the time necessary for a Phase I decision has passed (extended if there is a referral). This may delay the completion of some mergers, but it speeds first phase decisions for those that would have been picked up late by the OFT. Yes, there would be some increase in paperwork for firms, but this could be minimised by a simplified procedure for mergers without significant market overlaps or market dominance. This has been very successful for the EC. Mandatory notification also has an externality that may be beneficial to shareholders. Half of all mergers fail to add value to the firms, which is less surprising when you think about the pressures and constraints. Managements cannot discuss certain issues prior to completing a merger because this would breach Article 101 (cartels), ‘due diligence’ has limitations, and there may be secrecy due to strategic issues in acquiring shares. A period of reflection to consider market effects and potential efficiencies may lead to a rethink which improves the proportion of successful mergers.
- Share of supply test. Most jurisdictions, including the EC, review mergers only of a certain size. In the UK, this element is captured by the ‘turnover test’ which allows regulatory scrutiny if the acquired firm exceeding £70m turnover. For firms that may be smaller, the UK system also captures mergers that would create or enhance a ‘share of supply’ of at least 25%. The OFT does not have to go through a full market definition exercise to apply this test because it has considerable discretion in defining a provisional and possible quite narrow market. Two-thirds of all UK mergers that require some form of intervention are captured, not by the turnover test, but by the share of supply. One reason for this is that the EC threshold captures most large mergers which are consequently dealt with in Brussels. This raises the question: do small monopolies matter? It is quite possible that the costs of an investigation would deter some beneficial small mergers but there would be serious dangers in the absence of share of supply test. For example, a sequence of local monopolies (e.g. funeral parlours) could develop across the country. If entry is easy, as it may be in many small scale markets, then there would be no need to refer the merger for heavy duty investigation. In fact, the OFT has been successfully prioritising along these lines for some years and there is no need to eliminate the share of supply test. However, if notification is to become mandatory, clear guidance would be needed on provisional market definition.
- Material influence. The UK has the ability to intervene in cases of minority shareholdings that confer a material influence on another firm even though this falls short of full control. This was applied to good effect in the proposed merger of BSkyB and ITV. The EC does not have this power, which has resulted in Ryanair holding a substantial minority stake in Aer Lingus despite a full merger having been prohibited. Commissioner Almunia sees this as ‘probably an enforcement gap’ in Europe and I agree. The EC needs to emulate the UK on this one – not vice versa.
Finally, another idea is floated in the current UK consultation, apparently without much enthusiasm, which is to allow remedy agreements very early in Phase II and without further work on economic effects. That would be a very bad idea. It would encourage firms to try and bluff through an anticompetitive merger in Phase I, in the knowledge that if it was not accepted, it could immediately make a revised offer without incurring further costs of delay or investigation. The discipline of a negotiation timetable, including enforced delay before a revised offer in Phase II, is an important incentive for sensible initial offers.