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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 DataAmsterdam, 10-11 April 2008

PETER L. ORMOSIESRC Centre for Competition Policy, University of East Anglia

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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

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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)

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The data

2001-2007 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

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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)

51.1

1

1.01.0

CostSCostSPVYRS

From which the present value now:

YRSYRSPV

PV1.1

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

VARIABLE LABEL OBS MEAN STD. DEV.

MIN MAX

CNo Case number 119 3412 802.156 1853 4844 YEAR Year of the decision 119 2004 2.10 2001 2007 PHASE Dummy for phase II decisions 119 0.34 0.47 0 1 EFF Dummy for efficiency arguments in the decision 119 0.10 0.30 0 1

EFFother Dummy for efficiency claims in other sources 119 0.54 0.50 0 1 ED Dummy for efficiency defence 119 0.06 0.24 0 1 ECMR Dummy for the old (0) and the new (1) ECMR 119 0.50 0.50 0 1 REMTYPE Dummy for divestiture 119 0.80 0.40 0 1 JV Dummy for joint venture 114 0.10 0.30 0 1 COOR Dummy for coordinated effects 114 0.12 0.33 0 1 CONGL Dummy for conglomerate (portfolio) effects 114 0.06 0.24 0 1 VERT Dummy for vertical concerns 114 0.17 0.37 0 1

HOR Dummy for concerned horizontal overlaps 119 0.91 0.29 0 1 LENGTH Length of the procedure (days) 119 96.43 67.64 34 350

START Number of days between announcement of merger and notification 100 95.46 95.86 1 539

REM1 Number of days between notification and first commitment

107 58.96 54.65 0 233

REM2 Number of days between notification and final commitment 106 80.43 64.24 0 293

REMDIFF Number of days between first and final notification 113 26.20 42.50 0 299

REMDIFF2 Number of days between first notification and final decision

110 41.06 49.94 1 392

TLENGTH Number of days between announcement of the merger and final decision 99 197.89 139.17 35 808

PHASE2 Number of days between notification and Article 6(1)(c) decision 32 54.59 32.37 24 172

CS Dummy for cost savings 119 0.45 0.50 0 1

PV Present value of the expected cost savings 119 349.59 997.43 0 8180 PA Price of the acquired company 91 4050 8122 88.21 47910 VAL Relative value of synergies (CS/PA) 119 0.12 0.28 0 2.09 YRS Number of years before savings are realised 53 2.49 0.89 1 6 TOVER Total worldwide turnover of merging companies 60 37677 55038 2503 308875

CON Cumulated number of affected consumers (million) 111 1380 1510 8167 6540

CON2 Cumulated number of consumers where concerned overlap exists (million) 112 434 566 0 2760

OVL Number of overlaps 113 18.24 25.81 0 168

OVL2 Number of concerned overlaps 115 5.04 7.22 0 36 OVLP (OVL2/OVL)*100 112 37.56 28.61 0 100 CONP (CON3/CON2)*100 111 34.81 29.96 0 100

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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

Announcement

Final decision

Collected from the Commission decisions or from Hearing Officer’s report (where available)

Except for START: collected from news archives

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The effect of regulatory change OLD ECMR NEW ECMR

Variable Mean Std. Dev. Mean Std. Dev.

PHASE 0.42** 0.50 0.25** 0.44

ECMR - - - - CS 0.42 0.50 0.48 0.50 EFF 0.08 0.28 0.12 0.32 ED 0.00*** 0.00 0.12*** 0.32 JV 0.13 0.33 0.07 0.26 COOR 0.13 0.33 0.12 0.33 CONGL 0.11** 0.31*** 0.02** 0.13*** VERT 0.18 0.39 0.16 0.37

HOR 0.92 0.28 0.90 0.30 MARKET 0.50 0.50 0.45 0.50 REMTYPE 0.88** 0.33* 0.72** 0.45* LENGTH 103.47 67.02 89.50 68.10 TLENGTH 229.02** 168.02*** 169.75** 100.25*** START 113.48* 115.71*** 78.83* 70.09*** REM1 69.65** 66.34* 49.23** 39.42* REM2 84.88 69.83 76.46 59.17

REMDIFF 26.57 51.63*** 25.86 32.43*** REMDIFF2 42.40 59.44*** 39.86 40.05*** PHASE2 50.15 22.06* 57.63 38.16* PV 335.31 864.49** 363.63 1120.11** PA 3342.88 7556.72 4743.66 8666.71 VAL 0.12 0.26 0.11 0.30 YRS 2.36 0.81 2.61 0.96 OVLP 44.07** 30.25 31.28** 25.66

CONP 0.43** 0.33* 0.29** 0.26* TOVER 43833.94 70330.53*** 29625.50 22374.35***

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The effect of difference between procedures PHASE I PHASE II

Variable Mean Std. Dev. Mean Std. Dev.

PHASE - - - - ECMR 0.57** 0.50 0.38** 0.49 CS 0.53** 0.50 0.30** 0.46 EFF 0.03*** 0.16*** 0.25*** 0.44*** ED 0.03** 0.16*** 0.13** 0.33*** JV 0.05** 0.22 0.18** 0.38 COOR 0.10 0.31 0.16 0.37 CONGL 0.03** 0.16*** 0.14** 0.35*** VERT 0.10*** 0.31*** 0.30*** 0.46*** HOR 0.91 0.29 0.90 0.30 MARKET 0.50 0.50 0.42 0.50 REMTYPE 0.81 0.39 0.78 0.42 LENGTH 52.35*** 11.17*** 183.48*** 43.46*** TLENGTH 137.97*** 97.21** 317.73*** 133.81** START 78.30** 71.84* 130.30** 126.17* REM1 29.79*** 15.60*** 116.50*** 58.54*** REM2 43.24*** 27.83*** 159.21*** 45.31*** REMDIFF 18.69*** 37.53* 42.28*** 48.29* REMDIFF2 30.28*** 46.56 63.22*** 49.94 PHASE2 51.22 24.91** 63.22 47.29** PV 399.33 1107.23*** 251.33 737.09*** PA 4623.51 9069.88*** 2619.61 4890.22*** VAL 0.14 0.32*** 0.07 0.17*** YRS 2.52 0.77** 2.36 1.29** OVLP 31.53*** 23.28*** 49.80*** 34.35*** CONP 0.29*** 0.25*** 0.50*** 0.36*** TOVER 28431.99* 47774.87 57626.61* 65130.96

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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)

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Earlier commitments and no efficiency defence results in shorter procedures

cons*** REM1*** ED*** (ED*REM1)*** OVLP* VERT* CONGL* COOR

LENGTH 17.714 1.048 97.436 -0.804 0.2696 23.345 -28.949 0.114

rob. std.err 5.479 0.086 35.516 0.262 0.150 12.465 15.170 9.483

t (3.23) (12.14) (2.74) (-3.06) (1.8) (1.87) (-1.91) (0.01)

R2 0.7655

• 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

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

0100

200

300

400

Le

ng

th o

f th

e p

roce

du

re (

da

ys)

0 50 100 150 200 250Number of days between notification and first commitment

Length of the procedure Without efficiency defenceWith efficiency defence

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The EC fails to provide the sufficient ‘reward’ for revealing efficiencies

• Efficiency investigations lead to longer (phase II) procedures (Korsne/Assidomd Cartonboard merger)

Phase I Phase II Total

77 30 107 # No efficiency arguments 71.96 28.04 100 %

2 10 12 # Efficiency arguments 16.67 83.33 100 %

79 40 119 # Total 66.39 33.61 100 %

• Remedies are not adjusted to efficiencies. (Areva/Urenco)

One strong incentive to reveal efficiencies:

• Counter-productive remedies can hinder merger-specific efficiencies (Group4/Securicor)

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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

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Large saving expectations, later notification, and more experience increase p(ED)

***8851.0***00501.0***6205.2***273.781 YEARSTARTVALED z = (-2.75) (2.66) (2.69) (2.74)pseudo r2 = 0.2974

0

0.2

0.4

0.6

0.8

1

1.2

0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2

Expected cost savings (VAL)

p(E

D |

VA

L, Y

EA

R, S

TA

RT

)

MERGER A: p(ED | VAL, YEAR=2001, START=60) MERGER B: p(ED | VAL, YEAR=2004, START=60)

MERGER C: p(ED | VAL, YEAR=2007, START=60) MERGER D: p(ED | VAL, YEAR=2007, START=150)

MERGER AMERGER BMERGER CMERGER D

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Do cost saving expectations make a difference?

NO COST SAVING EXPECTATION COST SAVING EXPECTATIONS Variable Mean Std. Dev. Mean Std. Dev.

PHASE 0.43** 0.50 0.22** 0.42 ECMR 0.48 0.50 0.54 0.50 CS - - - - EFF 0.08 0.27 0.13 0.34 ED 0.02** 0.12*** 0.11** 0.32*** JV 0.15* 0.36*** 0.04* 0.19*** COOR 0.10 0.30 0.15 0.36

CONGL 0.05 0.22 0.08 0.27 VERT 0.21 0.41* 0.12 0.32* MARKET 0.45 0.50 0.50 0.51 REMTYPE 0.71*** 0.46*** 0.91*** 0.29*** LENGTH 108.95** 71.85 81.35** 59.41 TLENGTH 247.10*** 160.72*** 149.66*** 92.94*** START 122.78*** 112.01*** 68.14*** 67.06*** REM1 70.48** 60.82** 46.31** 44.17**

REM2 92.39** 70.65* 67.04** 53.80* REMDIFF 24.93 34.95*** 27.64 50.00*** REMDIFF2 39.60 33.13*** 42.69 64.01*** PHASE2 57.00 29.44 52.95 34.92 PV 0.00 0.00 770.38 1372.84 PA 1391.38*** 2350.39*** 6045.66*** 10140.73*** OVLP 38.57 28.04 36.31 29.54 CONP 0.37 0.29 0.35 0.32

TOVER 30481.45 29000.16*** 43564.18 69442.51***

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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

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

lnREM1 lnREMDIFF2 lnSTART p(PHASE)

VAL -2.967499*** -2.013195*** -3.383268** -9.479821***

(-2.86) (-6.36) (-2.37) (-2.86)

CNo -0.000442*** 0.000015 -0.0004893** -0.001143***

(-3.36) (0.16) (-2.53) (-3.4)

OVL2 0.0246198* 0.0204172** -0.0305721 0.0639965*

(1.83) (2.00) (-1.5) (1.88)

TOVER 0.00000282** -0.0000081***

(2.26) (-3.6)

lnTOVER 0.2910268*** 0.5656739***

(3.17) (2.71)

PA 0.0000356

(1.67)

cons 2.493184** 3.158958*** 6.132607*** -2.2091

(2.61) (9.11) (8.38) (-1.09)

R-squared 0.3241 0.4471 0.3082 0.4168

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Larger saving expectations and more experience lead to earlier commitments

TOVEROVL2CNoVALREM ln291.0*025.0***00044.0***97.2**49.21ln

0

10

20

30

40

50

60

70

80

90

100

0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2

Cost saving expectations (VAL)

Num

ber

of d

ays

(RE

M1) MERGER A: TOVER=2000, OVLP=5,

CNo=1800

MERGER B: TOVER=2000, OVLP=5,CNo=4800

MERGER C: TOVER=2000, OVLP=40,CNo=4800

MERGER D: TOVER=60000, OVLP=40,CNo=4800

MERGER E: TOVER=60000, OVLP=5,CNo=4800

MERGER D

MERGER A

MERGER C

MERGER E

MERGER B

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More overlaps lead to less sufficient, larger saving expectations and experience result in more

extensive initial remedy offers

**000003.0**020.000001.0***013.2***159.32ln TOVEROVL2CNoVALREMDIFF

0

10

20

30

40

50

60

70

80

0 5 10 15 20 25 30 35 40 45 50

Number of concerned overlaps (OVL2)

Num

ber

of d

ays

(RE

MD

IFF

2) MERGER A: TOVER=10000,VAL=0,CNo=1800

MERGER B: TOVER=10000,VAL=0,CNo=4800

MERGER C: TOVER=10000, VAL=0.5,CNo=4800

MERGER D: TOVER=20000, VAL=1,CNo=4800

MERGER E: TOVER=60000,VAL=2,CNo=4800

MERGER B MERGER A

MERGER C

MERGER D

MERGER E

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More saving expectations and experience reduce the probability of phase II

***ln5657.0*064.0***0011.0***480.9209.2 TOVEROVL2CNoVALPHASEIIp

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45 0.5

Cost saving expectations (VAL)

p(P

HA

SE

| V

AL,

CN

o, O

VL2

, TO

VE

R)

MERGER A: CNo=1800,OVL2=5, TOVER=10000

MERGER B: CNo=4800,OVL2=5, TOVER=10000

MERGER C: CNo=4800,OVL2=40, TOVER=10000

MERGER D: CNo=4800,OVL2=40, TOVER=60000

MERGER E: CNo=4800,OVL2=10, TOVER=60000

MERGER A

MERGER B

MERGER C

MERGER D

MERGER E

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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

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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.