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THE CHOICE OF MERGER REMEDY A preliminary econometric analysis of EC merger remedies CLEEN Workshop, June 2008, Norwich PETER L. ORMOSI ESRC Centre for Competition Policy, University of East Anglia
Previous works showed that companies regard efficiency defence and remedies as substitutes Merging parties can choose between remedies and ED Commissions practice strengthens preference for remedy Is there a pattern for the choice of the remedy?
Taxonomy of remedies from the 2005 EC Merger Remedy Study Transfer a market position (stand alone business) Transfer a market position (carve-out) Transfer a market position (mix-and-match) Long term exclusive licenses given to a competitor To give up joint control over a business by transferring it to a suitable purchaser To provide other market participants with access to key assets and thus reduce barriers to entry Various other behavioural interventions DIVESTITURE LICENSES EXIT JV ACCESS OTHER
Distribution of remedies in two examined period Source: EC Merger Remedies Study (2005)
It is the merging parties that primarily control the choice of remedies Earlier choice models: the Commission makes the remedy choice: e.g. Bougette et al (2005) The Commission cannot directly influence the content of a remedy if it is accepted in phase I. Use of different endogenous (such as the cost of delay) variables 1.Show how the characteristics of a merger effects the choice of remedy 2.Show how factors endogenous to companies effect the same choice
Discreet choice model for remedy choice Utility from choosing remedy j in merger i x – vector of covariates, e.g. firm characteristics β – respective coefficient vector Parties offer remedy to maximise U i,j Probability of choosing remedy j: Calculate the betas to maximise the log-likelihood function
Less reliance on divestitures in the case of vertical mergers Reference category for the equation is DIVETITURE remedies. Standard errors in parentheses. * p <.100 ** p <.050 *** p <.010
Do industries make a difference? The remedy is offered by the merging parties: the Commission can strongly influence this offer The Commissions preference is based on balancing the cost of type I and type II errors. Divestiture where not needed: type I error No divestiture where it would be needed: type II error
In the period divestitures dominate the manufacturing industry
Less reliance on structural intervention in innovation intensive industries
Will parties choose a remedy which causes less delay? Different remedies result in investigations of different length Initial hypothesis: mergers where a delay is more costly will have increased preference for a remedy that results in earlier relief.
Cases, where the Commission has to test access remedies or other behavioural remedies, take longer
Access remedies take longer to offer but once theyre offered they behave like other remedies
Do saving expectations influence the choice? Earlier research showed that the more savings the parties communicate to shareholders the larger the initial offer, and the earlier it is offered. Does the same saving expectation affect the choice of remedy? Access and other behavioural remedies take longer so higher cost saving expectations are expected to reduce their probability
The VAL variable is calculated as a present value of saving expectations YRS: Number of years before savings are realised CostS: Cost saving expectations as indicated to public pre- merger PV: This is an annuity to be realised in YRS years (assumed that this annuity would last for 5 years) From which the present value now: PA: Price of the acquired business used as deflator VAL = PV/PA
Probability of ED, EXIT_JV and OTHER behavioural remedies increases with saving expectations Reference category for the equation is DIVETITURE remedies.
Are divestitures preferred when cost of type II is higher?
More reliance on behavioural solutions in R&D intensive sectors
More reliance on behavioural solutions in the electricity sector
Conclusion Preferred remedies can vary across different industries There is some evidence that parties choose faster remedies when delay is more costly Divestiture is relatively less preferred where cost of type I error is higher BUT: the length of the case depends more on WHEN the remedy is offered than WHAT is offered