Have you ever wondered if mergers are actually good for competition? Does the government regulate mergers? Read on to find the answer to both these questions. To recap, a merger is when two companies agree to combine to become one new company. In the past, we covered the 5 questions to ask when hiring a mergers and acquisitions lawyer. However, in this article, we will cover whether mergers are anti-competitive.
What the law says
Section 50 of the Competition and Consumer Act (Cth) (CCA) governs mergers in Australia. Generally, mergers are allowed, as long as their effect does not substantially lessen competition (SLC). If a merger does SLC, then the Court can fine both merging companies, prevent the merger taking place and even disqualify one or both directors.
Substantially lessening Competition
Section 50(3) of the CCA does not directly define SLC in relation to mergers. However, it does list the potential factors that may cause it. These include, but are not limited to:
- Market barriers to entry,
- The level of existing competition,
- Merger’s power to increase prices substantially,
- Following the merger, the likelihood of an existing competitor being.
The Courts have taken the approach of applying the counterfactual scenario. This means the Court will consider the future impact to the merger’s market, with and then without, the merger taking place. The factors listed above direct the Court in determining whether this will impact SLC. If it is more likely than not, then the merger will not go ahead.
Example
Metcash (wholesale distributor of groceries) proposes to merge with Franklins (retailer of groceries). The Court defines the market as grocery wholesaling and retail in NSW and the ACT. Woolworths and Coles share 80% of this market, which will not change, with or without the merger. Also, Franklins is in dire straits and will most likely fail if left alone. To determine whether the merger between Metcash and Franklins will cause SLC, the future impact of Metcash’s merger to the grocery wholesale and retail market needs considering.
Franklins is likely to merge with either Coles or Woolworths if Metcash cannot. If either Coles or Woolworths merges with Franklins, then this will result in SLC, as their combined market share would rise above 80%. This increase in market share would cause smaller competitors to drop out. Furthermore, if Metcash did proceed with its merger, this would likely increase competition in the market. This is because Metcash would become an actual threat to Coles and Woolworths, thus limiting monopolist action by these two companies. This would benefit the consumer, as greater competition usually means lower prices.
If the merger goes ahead, it will likely increase competition. If it does not go ahead, Franklins will likely merge with either Coles or Woolworths, which will cause SLC. Therefore, the merger does not result in SLC.
Authorisation
Section 88 of the CCA allows companies wanting to merge to apply to the ACCC for authorisation. If the ACCC does not believe the merger will result in SLC, then it will authorise it. However, if the ACCC believes it will result in SLC, it must then consider whether the public benefit of the merger outweighs the SLC. If the ACCC authorises a merger, then the merging companies have immunity from section 50 of the CCA and can merge without concern. Although the ACCC can later remove the authorisation, it, rather than the companies, bear the responsibility for proving the public benefit no longer outweighs the SLC.
If you are a company thinking of merging, are a competitor worrying about the market consequences of a potential merger or just want to know more about mergers, then you should seek legal advice.
