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Revision of Merger Guideline and Some Case Studies of Merger Review focusing on Market Definition Japan Fair Trade Commission Merger & Acquisition Division.

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Presentation on theme: "Revision of Merger Guideline and Some Case Studies of Merger Review focusing on Market Definition Japan Fair Trade Commission Merger & Acquisition Division."— Presentation transcript:

1 Revision of Merger Guideline and Some Case Studies of Merger Review focusing on Market Definition Japan Fair Trade Commission Merger & Acquisition Division Yuji Kimura

2 Past Efforts to Improve Accountability of Japanese Merger Regulation Annual release of the outlines on the review of some cases of business combinations (1993 ~ ) Issue of “Guidelines to Application of Act concerning Review of Business Combination” ( ) Issue of “ Policies dealing with prior consultation regarding business combination plans ” (2002)

3 Background of Merger Guideline Revision Improved environment for implementing M&A to restructure industries (The Commercial Code Revision, enacted May, 2007) and the globalization of economy made us perceive necessity to revise merger guidelines. JFTC decided the revision to improve predictability of regulation, regulatory transparency, and quickness of merger review more in accordance with the above economic situation.

4 Background of Merger Guideline Revision The Japanese government made “ New Economic Growth Strategy ” and “ Basic Policies for Economic and Fiscal Management and Structural Reform ” in which the JFTC should have reviewed three points in the Merger Guideline last year. Market Definition (to show the possibility to admit the global market as relevant market) Safe Harbor (to fit it to past records of merger review) Framework of Import (to clarify its evaluation method)

5 Background of Merger Guideline Revision In the revision process, the JFTC has communicated with wide range of actors such as business groups (Keidanren, etc.), practitioners (attorney, M&A advisory consultants), academic professors, METI, foreign competition authorities (US, EU). The revised guideline is published at March 28, 2007.

6 Revised Points - Clarification of Market Definition Methodology In the revised merger guideline, the SSNIP (small but significant and non-transitory price increase by a hypothetical monopolist) test is adopted as a basic procedure to define a relevant market. To define the market, demand substitution is mainly considered, but supply substitution should also be considered if it is appropriate.

7 Revised Points - Clarification of Market Definition Methodology 〔 function and efficacy 〕 are similar? To check whether 〔 function and efficacy 〕 are similar or not, the concept of SSNIP can be available as a tool. Substitutability for the users is the main factor to define the relevant market Defining the market is based on the concept of SSNIP 〔 function and efficacy 〕 are part of the evidence to show the substitutability for users. When the price was raised, When the price is raised, BA A B then users are expected to substitute B for A. So A and B should be the same product range. Old GuidelineRevised Version

8 Revised Points - Definition of Geographic Range Suppliers in A area User (PC manufacturer) in all over the world PC manufacturers In Japan ( Ex.Fjitsu ) Suppliers in B area Sony, NEC, and other Suppliers in Japan PC manufacturers In USA ( ExDell ) PC manufacturers In Taiwan In this case, the JFTC has used the geographic range all over the world to analyze the market, but there have been no description on the possibility to define international market as a relevant market in the old Guidelines. In the revised version, we clearly wrote it down that we can define the international range as a relevant market. Integration of Optical Disk Drive Business between Sony and NEC ・ PC manufacturers buy optical disk drives without paying attention to the suppliers’ geographic location. → In this situation, the suppliers of the drive is thought to be competing each other all over the world. → We concluded that this business combination does not substantially restrain competition because of the factors, such as strong competitors, bargaining power of users.

9 Revised Points - Safe-Harbor Safe-Harbor threshold is set as a combination of HHI and the increment of HHI. Using the increment of HHI rather than the share is more consistent with the merger regulation which treats with the structural change of industry. The combination of HHI and the increment of HHI is more consistent with global standard.

10 Revised Points - Safe-Harbor New Safe-Harbor The levels of new safe-harbor are determined by Japanese merger review experience in recent five years. Post-merger share is below 10 %, or below 25% with the HHI below 1000 ① Post-merger HHI below 1,500 ② Post-merger HHI between1,500 and 2,500 with the increment in the HHI below 250 ③ Post-merger HHI above 2,500 with the increment in the HHI below150 ① Post-merger HHI below 1,500 ② Post-merger HHI between1,500 and 2,500 with the increment in the HHI below 250 ③ Post-merger HHI above 2,500 with the increment in the HHI below150  Old unilateral effect safe harbor In the old merger guideline, even if a merger is in range of the unilateral safe harbor, it is reviewed by JFTC, since the coordinated effect is doubted. So, to simplify the safe- harbor application, the safe-harbor for both unilateral effect and coordinated effect is set.

11 Revised Points - Clarification on How to Evaluate Import Pressure In the revised guideline, how to evaluate import pressure is described with more detailed explanation. The approximate time to evaluate import pressure is set as forthcoming 2 years.

12 Revised Points - Clarification on How to Evaluate Import Pressure Only 8 items to evaluate import pressure are drawn simply. There is no detailed explanation on each item. All 4 items should be checked Import pressure ① Degree of institutional barriers ② Degree of import-related- transportation cost and the existence of problems in distribution ③ Degree of substitutability between the imported product and the company group ’ s ④ Possibility of supply from overseas

13 Revised Points - Clarification on How to Evaluate Efficiency In the revised merger guideline, efficiency consideration is changed to describe from abstract to more concrete explanation. And standards are shown on how to evaluate efficiency.

14 Revised Points - Clarification on How to Evaluate Efficiency Efficiency is evaluated from the following aspects: (1) Efficiency is specific to the business combination. (2) Efficiency should be feasible. (3) Efficiency contributes to increase consumers’ welfare. However, if it removed almost all competition even the business combination has some efficiency, it would be considered to substantially restrain competition. Efficiency is evaluated from the following aspects: (1) Efficiency is specific to the business combination. (2) Efficiency should be feasible. (3) Efficiency contributes to increase consumers’ welfare. However, if it removed almost all competition even the business combination has some efficiency, it would be considered to substantially restrain competition.

15 Revised Points - Revised Description on Remedy In revised guideline, if industrial structure has changed to make the remedy for business combination unnecessary and the parties apply to JFTC on that, the remedy could be changed or removed. The description of typical remedies is added to the guideline.

16 Revised Points - Other Points Safe-Harbor on vertical or conglomerate merger: The description of failing company consideration amended. The description on buying power from users are made more detailed. Post-merger share is below 10 %, or below 25% with the HHI below Post-merger share is below 10 %, or below 25% with the HHI below 2,500.

17 Case Studies Focusing on the merger review cases in which the market is analyzed by global market. ① Establishment of Optical Disk Drive Joint Company by Sony and NEC (2005FY) ② Stock Acquisition of Komatsu Electronic Metals Co., Ltd. by SUMCO (2006FY) ③ Stock Acquisition of Maxtor Corp. by the subsidiary of Seagate Technology (2006FY)

18 Case Studies - ① Sony-NEC on optical disc drive business Story Parties Sony Corporation NEC Corporation Establishing their Joint Company of optical Disk Drives Market Optical Disk Drives

19 Case Studies - ① Sony-NEC on optical disc drive business Particular Field of Trade (Relevant Market) Divided by products for major PC manufacturers and distributors Products Range: The following products are different on the disk used in each drive and their functions. CD-ROM CD-R/RW DVD-ROM COMBO DVD±RW

20 Case Studies - ① Sony-NEC on optical disc drive business Particular Field of Trade (Relevant Market) Geographic Range: The analyzed market on products for major PC manufacturers is global market, so the market share of each parties are calculated on the global market. The reason of this analysis is that the headquarters of major PC manufacturers purchase the devices in all parts of the world in bulk, the product price set by optical disk drive manufacturers is set uniformly throughout the world, and the manufacturers request estimates from leading optical disk drive suppliers in all parts of the world and select the supplier with the estimates.

21 Case Studies - ① Sony-NEC on optical disc drive business Market Share The market share of the parties on the products except CD-R/RW drive and DVD±RW are lower than 10%, so the establishment of joint company does not substantially restrain competition on the products. ・ CD-R/RW drive ・ DVD±RW drive Sony app.10% NEC app.0~5% sum app.10% Sony app.30% NEC app.5% sum app.35%

22 Case Studies - ① Sony-NEC on optical disc drive business Results (Horizontal Aspect) On CD-R/RW drive and DVD±RW drive, the establishment of the joint company would not substantially restrain competition. Increase of share by the establishment is low Existence of Strong Competitors Strong Buying Power of Users

23 Case Studies - ② SUMCO-Komatsu on Silicon Wafer business Story Parties SUMCO Komatsu Electronic Metals Co., Ltd. Stock Acquisition of Komatsu Electronic Metals Co., Ltd. by SUMCO Market Silicon Wafer

24 Case Studies - ② SUMCO-Komatsu on Silicon Wafer business Particular Field of Trade (Relevant Market) Product Range 300mm silicon wafer All size silicon wafer Geographic Range: The analyzed market on silicon wafer is global, so the market share of each parties are calculated on the global market.

25 Case Studies - ② SUMCO-Komatsu on Silicon Wafer business Particular Field of Trade (Relevant Market) The reason to analyze global market Products have no difference made by any national makers and transportation cost does not affect the choice of procurement place, so the users purchase the products from all over the world. The product price set by silicon wafer maker is set uniformly throughout the world.

26 Case Studies - ② SUMCO-Komatsu on Silicon Wafer business Market Share 300mm silicon wafer SUMCO app.30% NEC app.5% sum app.35%

27 Case Studies - ② SUMCO-Komatsu on Silicon Wafer business Market Share All size silicon wafer 6 Dapp. 5% 7 E Othersapp. 5% (1) Sum of SUMCO and Komatsu app. 35% Total100% RankCompanyMarket Share 1 Aapp. 30% 2 SUMCOapp. 25% 3 Bapp. 10% 4 C 5 Komatsuapp. 10%

28 Case Studies - ② SUMCO-Komatsu on Silicon Wafer business Results: On 300mm silicon wafer and all size silicon wafer, the stock acquisition does not substantially restrain competition. Reason: Unilateral effect aspect Easiness to change supplier by users Existence of strong competitors Existence of excess supply capacity of competitors Strong buying power of users

29 Case Studies - ② SUMCO-Komatsu on Silicon Wafer business Reason: Coordinated effect aspect The situation in which lower price tends to attract demand Difficulty to expect competitors ’ behavior because of drastic innovation of silicon wafer

30 Case Studies - ③ Seagate-Maxtor on HDD business Story Parties Seagate Technology Maxtor Corporation Stock acquisition of Maxtor Corporation by the subsidiary of Seagate Technology Market HDD (Hard Disc Drive)

31 Case Studies - ③ Seagate-Maxtor on HDD business Particular Field of Trade (Relevant Market) Product Range (Horizontal aspect) HDD for enterprise usage HDD for desktop PC HDD for laptop PC (not treated by Maxtor)

32 Case Studies - ③ Seagate-Maxtor on HDD business Particular Field of Trade (Relevant Market) Geographic Range: The analyzed market on HDD wafer is global, so the market share of each parties are calculated on the global market. The reason to analyze global market Products have no difference made by any national makers and transportation cost does not affect the choice of procurement place, so the users purchase the products from all over the world. The product prices set by HDD makers are set uniformly throughout the world.

33 Case Studies - ③ Seagate-Maxtor on HDD business Market Share and HHI HDD for enterprise usage HHI is approximately 4600~4700, and the increment of HHI is approximately 1400~1500. RankCompanies ’ name Market Share 1Seagate45~50% 2A15~20% 3Maxtor10~15% 4 B 10~20% 5 C 0~5% (1) Sum of Seagate and Maxtor 60~65% Total100%

34 Case Studies - ③ Seagate-Maxtor on HDD business Market Share and HHI HDD for enterprise usage HHI is approximately 3600~3700, and the increment of HHI is approximately 1300~1400. Rank Companies ’ name Market Share 1Seagate30~35% 2A25~30% 3Maxtor20~25% 4B10~15% 5C5~10% 6D0~5% (1) Sum of Seagate and Maxtor 50~55% Total100%

35 Case Studies - ③ Seagate-Maxtor on HDD business Results (Horizontal Aspect): On HDD for both enterprise usage and desktop PC, the stock acquisition does not substantially restrain competition. Reason: Unilateral effect aspect Easiness to change supplier by users Existence of strong competitors Existence of excess supply capacity of competitors Strong buying power of users

36 Case Studies - ③ Seagate-Maxtor on HDD business Reason: Coordinated effect aspect The situation in which lower price tends to attract demand Difficulty to expect competitors ’ behavior Frequent innovation and short product life cycle tend to cause product price decrease


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