MERGER REMEDIES VERSUS EFFICIENCY DEFENCE Does the current EC merger remedy practice create a disincentive to reveal efficiencies? ACLE Competition & Regulation Meeting on EC Competition Enforcement Data Amsterdam, April 2008 PETER L. ORMOSI ESRC Centre for Competition Policy, University of East Anglia

Introduction Commission approves problematic mergers if companies: a.prove that the efficiency gain is significant enough, so that the competition authority will overlook the market power increase, or b.offer a commitment to eliminate this market power increase, or c.combine (a) and (b) together Technically, the choice is on companies, but the Commission has a strong influence This paper attempts to find evidence for this influence

Review of references Merger remedy guidelines EC (2001), (2008) FTC (1999), DOJ (2004) Academic literature Cosnita et al (2006) Farrel (2003) Röller et al (2006) Lyons et al (2007) Werden et al (2005)

The data EC merger intervention cases (intervention: prohibition or conditional approval) Purposive sampling Data availability problems –Older decisions are more fuzzy –Only English and French texts have been analysied

The data - collection EFF: dummy for efficiency arguments Searched the decision for phrases such as: efficiencies, synergies, savings, (price) reduction, economies. EFF = 1 if these phrases refer to efficiency considerations ED: dummy for efficiency defence ED = 1 if EFF = 1 and the efficiency argument came from the merging parties. EFFother: dummy for efficiency claims in other sources (news archives, industry reports etc.) CS: dummy for cost saving expectations Three major sources (1)Annual reports: for the year when the merger was announced. (2)Company press releases (3)Google news archives At least 3 different news sources to confirm the data YRS: Number of years before savings are realised 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 VAL=PV/PA OVL: Number of total horizontal overlaps (product * geographical markets) OVL2: Number of horizontal overlaps that create a competition concern OVLP = OVL2/OVL CON: Number of consumers living in the area covered by OVL CON2: Number of consumers in the area covered by OVL2 CONP = CON2/CON

The timing of events used as variables START REM0 REM1 LENGTH REMDIFF2 Notification First remedy offer Article 6(1)(c) decision Final remedy offer REM2 TLENGTH PHASE2 REMDIFF Announce ment Final decision Collected from the Commission decisions or from Hearing Officer’s report (where available) Except for START: collected from news archives

The effect of regulatory change

The effect of difference between procedures

Experience reduces the probability of phase II Proportion of phase I cases increases (p(phase II | CNo=1800) = 61%, p(phase II | CNo=4600) = 16%) The Commission and the parties are becoming more experienced What should the merging parties do for shorter procedures? Earlier commitments are expected to result in shorter procedures. The investigation of efficiencies requires phase II (e.g. Korsne / Assidomd Cartonboard (2006) merger) More complicated mergers to take longer (more overlaps, vertical, conglomerate, oligopoly issues)

Earlier commitments and no efficiency defence results in shorter procedures Earlier commitments result in shorter procedures Not revealing efficiencies result in shorter procedures The partial effect of OVLP VERT CONGL and COOR is not significant Once efficiencies are investigated, the effect of the timing of the first commitment becomes very weak

The effect of REM1 and ED on the length of merger procedures

The EC fails to provide the sufficient ‘reward’ for revealing efficiencies Efficiency investigations lead to longer (phase II) procedures (Korsne/Assidomd Cartonboard merger) Remedies are not adjusted to efficiencies. (Areva/Urenco) One strong incentive to reveal efficiencies: Counter-productive remedies can hinder merger-specific efficiencies (Group4/Securicor)

Exogenous circumstances affecting p(ED)? Revealing efficiencies leads to longer procedures.  Urgent mergers: less likely to apply for ED Preparing for an ED cases takes longer.  Early notification is less likely to be followed by ED Experience (both EC and business) should also affect ED p(ED) = VAL + START + YEAR + u

Large saving expectations, later notification, and more experience increase p(ED) z = (-2.75) (2.66) (2.69) (2.74) pseudo r 2 =0.2974

Do cost saving expectations make a difference?

Do more efficient mergers seek faster approval? Four ‘time-related’ variables: 1.REM1: timing of the first commitment 2.REMDIFF: proxy for the scope of the first commitment offer 3.START: timing of the notification 4.p(PHASE): probability of phase II procedure Cost saving expectations realised later if the procedure is delayed. If time matters, experience (CNo) is expected to have a negative effect. Number of overlaps to remedy (OVL2) is also expected to have an effect The size of the parties (TOVER): to measure better litigation skills

The effect of saving expectations and experience on the timing of events

Larger saving expectations and more experience lead to earlier commitments

More overlaps lead to less sufficient, larger saving expectations and experience result in more extensive initial remedy offers

More saving expectations and experience reduce the probability of phase II

Conclusion More savings signalled to public  more urgent integration Earlier and more extensive commitments  shorter procedure Investigating efficiencies  longer procedure More efficient mergers will less likely to reveal efficiencies and will more likely to offer an early and more extensive commitment What is the relevance of these findings? 1.It is capable of hinting that efficiencies are not important for the EC 2.Reluctance to reveal efficiencies: Remedies, where they would not be necessary Remedies can hinder efficiencies

Future work A market-by-market analysis as opposed to case-by-case Improving the data (law firms) Ideas for theoretical work: Welfare effects of an efficiency impeding remedy Opportunistic behaviour to achieve fast integration (including regulatory approval) by all means.