Competition & Market Regulation Express 4 March 2010

Coordinated effects – a new trend?
Partial and minority interests and the TPA merger provisions

Coordinated effects – a new trend?

A number of commentators have claimed recently that a focus by the Australian Competition and Consumer Commission on coordinated effects represents a new trend in merger analysis. However, recent merger decisions identifying concerns with coordinated effects do not herald the application of a new theory of harm by the ACCC or an obvious tightening of the application of the merger guidelines. Nevertheless, a review of recent merger decisions does reveal a move by the ACCC to articulate more clearly the basis on which coordinated effects are said to arise.

A primer on coordinated effects

The Trade Practices Act’s merger provisions prohibit any acquisition of shares of a corporation or of assets of a person that has or is likely to have the effect of substantially lessening competition in a market in Australia. The assessment of the competitive effects is based on theories of competitive harm—for example, unilateral and coordinated effects.

Frequently, the focus of merger analysis is on the potential for unilateral effects. Mergers have unilateral effects when they remove or weaken competitive constraints in such a way that the merged firm’s unilateral market power is increased. However, the analysis does not end there.

Mergers involving rival firms in concentrated markets may increase the potential for coordinated conduct, sometimes called tacit collusion or parallel conduct. The possibility of a merger leading to, or increasing, coordinated conduct has been recognised in merger guidelines for decades, at least since the 1960s in the United States and the 1990s in Australia.

The assessment of whether a merger is likely to give rise to coordinated effects looks at whether the remaining firms would have the incentives and ability to compete less vigorously. Increasingly, however, the modern economic theory of coordinated effects is focused on identifying:

• the parameters of possible coordination between the remaining firms, including in relation to price, quality or market allocation
• whether the market is sufficiently simple and transparent for coordination to be reached and sustained, and
• how the merger would create or enhance the ability of those firms to reach and sustain a tacit understanding.

Application of the theory of coordinated effects

The ACCC identified the implications of co-ordinated conduct in its 1999 merger Guidelines, noting that if ‘a merger increases the likelihood of coordination it is likely to substantially lessen competition’ in contravention of the Trade Practices Act. The current merger Guidelines issued in November 2008 similarly recognise that ‘mergers can lessen competition through coordinated effects’.

The issue of coordinated effects has found application in merger reviews under both the 1999 Guidelines and the 2008 Guidelines—it has not been confined to the dustbin of theoretical analysis. As the following table shows, a risk of coordinated conduct has been raised by the ACCC regularly over the past six years, either as an issue for further investigation or a material reason that would support the refusal of clearance.

Importantly, the issue of coordinated effects has been a factor in ACCC opposition to a merger in only two instances since 2005—Caltex and Mobil, and Barloworld and Wattyl. In a number of other instances, ACCC concerns with coordinated effects were resolved through the use of section 87B undertakings where the mergers were cleared on that basis.

Recent issues and implications for merger analysis

As the analysis above shows, the fact that co-ordinated effects have been raised in a number of merger reviews recently—namely, Caltex and Mobil, Cargill and Goodman Fielder, NAB and AXA Asia Pacific, and Link and Newreg—does not itself signal a change in approach from the ACCC. Of course, only time will tell and we will be watching future mergers closely to see whether a greater reliance on coordinated effects is discernible.

Nevertheless, the material published by the ACCC recently does mark one important change from past years. Increasingly, the ACCC is articulating how the structural changes brought about by the merger would make co-ordinated conduct more likely—creating or strengthening the ability of the remaining firms to reach and sustain a tacit understanding. For example:

• in its Statement of Issues in relation to the proposed acquisition of Newreg by Link (2010), the ACCC identified potential issues as a result of enhanced market symmetry
• in opposing the proposed acquisition of Mobil by Caltex, the ACCC stated in its Public Competition Assessment (2010) that the acquisition would result in greater stability in the retail petrol price cycle, and
• in relation to the acquisition of Blockbuster by VideoEzy (2007), the ACCC accepted a section 87B undertaking to address concerns with an increased risk of price coordination among franchisees.

Any move by the ACCC to improve the transparency of the merger review process is welcome. The additional step applying the theory to the facts should help merger parties (and other interested parties) to understand and engage with the ACCC on the merits of the case, resulting in better decision making and reducing the risk of false positives and false negatives.

This article was written by James Neumann, Senior Associate and Sarah Chubb, Solicitor, Sydney.

Partial and minority interests and the TPA merger provisions

The merger provisions of the Trade Practices Act are not limited to mergers and acquisitions that result in a change in control of another corporation, unlike many other jurisdictions. In particular, the Australian Competition and Consumer Commission has examined acquisitions of:

• partial or minority shareholdings that do not result in any change in control of the target corporation, and
• assets such as freehold or leasehold land for development as a supermarket and licences to sell takeaway packaged liquor.

In this article we discuss acquisitions of partial and minority shareholdings. We shall discuss acquisitions of assets in a subsequent article.

The TPA’s merger provisions prohibit any acquisition of shares of a corporation or of assets of a person that has or is likely to have the effect of substantially lessening competition in a market in Australia.

There is no compulsory pre-merger or pre-acquisition notification to the ACCC, but all acquisitions are liable to examination by the ACCC and regulatory intervention if the ACCC considers that the merger provision will be or has been contravened.

There is no transaction value or turnover threshold, unlike many other jurisdictions. The only filter is that the market affected must be a ‘substantial’ market in Australia or in a state or territory or region of Australia (and there are proposals to remove even this filter). There is also an exception for acquisitions of assets ‘in the ordinary course of business’ (eg a purchase of trading stock).

In practice, most mergers and acquisitions of shares or assets that may raise competition concerns are notified in advance to the ACCC under its informal merger clearance process. However, the ACCC will sometimes publicly monitor or investigate a rumoured merger or acquisition before it has been formally announced to the market, and it often examines mergers and acquisitions that have been completed without prior notification.

The ACCC’s Merger Guidelines (November 2008) give some guidance about the matters the ACCC will consider in relation to the acquisition of a partial or minority interest. They include the extent to which:

• the acquisition of an interest in a competitor would mute competition or lead to coordinated conduct
• the acquisition of an interest in an upstream or downstream entity would increase the acquirer’s incentive to foreclose or ‘squeeze’ rivals
• the acquisition would provide access to commercially sensitive information about competitors, and
• the acquisition would block potentially pro-competitive mergers and industry rationalisation.

The acquisition by electricity retailer AGL of a 35% interest in Victoria’s Loy Yang A power station in 2004 was the subject of Federal Court litigation after the ACCC declined to give informal merger clearance.

In 2005, the proposed acquisition by National Australia Bank of a 25% interest in the Cash Services Australia joint venture between Australian banks was informally cleared by the ACCC subject to Court enforceable undertakings to address concerns about, among other issues, the protection of sensitive competitor information.

The ACCC is currently reviewing two acquisitions of minority shareholdings:

• Queensland Sugar’s 9.75% interest in Tully Sugar, and
• Sumitomo’s proposed 20% interest in Nufarm.

The ACCC is conducting public inquiries in relation to the Queensland Sugar acquisition post completion (the acquisition was on 7 January 2010 and the ACCC commenced a public review on 12 February 2010). The ACCC’s market inquiries letter indicates that it is investigating the acquisition following media reports that the acquisition may be used to block a competitor of Queensland Sugar (Maryborough Sugar) from acquiring the target, Tully Sugar, which would have enabled the competitor to compete more effectively with Queensland Sugar.

This article was written by Matthew Bull, Senior Associate, and Andrew Honigman, Solicitor, Melbourne.

More information

For information regarding possible implications for your business, contact a member of the Competition & Market Regulation team.