Competition Law and Policy in the United States (and Ukraine). Part 2. Mergers and Acquisitions
When two independent firms “merge” to become one combined firm, the economist assumes that they do so in the expectation that their joint profits will increase as a result
When two independent firms “merge” to become one combined firm, the economist assumes that they do so in the expectation that their joint profits will increase as a result. Since profits are a component of economic welfare, as that term is used by economists, the presumption may be that mergers are usually good for the economy. Still mergers are a subject of antitrust and regulation.
Why mergers attract attention of antitrust authorities?
When two independent firms “merge” to become one combined firm, the economist assumes that they do so in the expectation that their joint profits will increase as a result. Since profits are a component of economic welfare, as that term is used by economists, the presumption may be that mergers are usually good for the economy. And in fact, most mergers probably are good for the economy. (We use the word “merger” here in its common antitrust meaning as any combination of the assets of two independent firms into one, whether through legal merger, takeover, asset purchase, or other means.)
The reason that mergers are a subject of antitrust and regulation, however, is that a merger may in general increase the joint profits of the combined firm in two broad ways:
- it may result in some kind of costs savings – sometimes termed “efficiencies” – which in turn will release resources to perform other productive uses in the economy, or
- it may reduce competition in some market, and allow the combined firm profitably to raise its price.
The first effect is to be welcomed; the second is not. (Of course, a merger may also do both of these things, as we will discuss below.) Antitrust laws and industry regulations usually subject mergers to legal and economic analysis to insure that economic welfare is not harmed by this possible loss of competition.
In particular, antitrust laws typically have used one of two classes of statutory language regarding the possible harmful effects of mergers. Under the US-style standard, and following the language of Section 7 of the Clayton Act, a merger is prohibited “where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” This “substantial lessening of competition” test, or SLC, is used in merger enforcement also in Canada and Australia.
On the other hand, many countries follow a European-style standard, where the European Union’s Merger Control Regulation for many years prohibited mergers that would “create or strengthen a dominant position” in a market. (In 2010 this language was changed, and now mergers are prohibited that would “significantly impede effective competition, in the internal market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position”.)
The application of these two standards will usually lead to the same result.
Article 25 of the Ukrainian Law on the Protection of Economic Competition directs the Antimonopoly Committee to authorize a merger “if it does not result in the monopolization of the whole market or its significant part or in the substantial restriction of competition on the whole market or in its significant part.”
Merger enforcement is different from other aspects of antitrust enforcement (discussed in the part 1 of this article) in at least two important ways. First, merger enforcement is the only area of antitrust enforcement where the focus is squarely on industry structure rather than on the conduct of one or a number of firms. As noted in part 1 of this paper, even a monopolization or abuse-of-dominance case requires not only the presence of market power but also the abuse of that power: anticompetitive conduct.
Second, the other areas of antitrust enforcement focus mostly on the past – on actions that have been taken and their consequences. Merger enforcement inherently is more strongly focused on the future – what is likely to be the competitive result of combining these two firms into one? Thus in merger enforcement there is inherently a degree of speculation involved, and certainty cannot be expected.
Mergers that are considered potentially harmful under antitrust laws generally fit into one of two categories: horizontal mergers, that is, mergers among firms that are actual or potential competitors to each other, operating at the same level of the “chain of production”, and vertical mergers, that is, mergers among firms that have an actual or potential buying and selling relationship with each other, firms that operate at different (often adjacent) levels of the chain of production.
Mergers that do not fit into either of these categories are grouped in the catch-all category of conglomerate mergers. Conglomerate mergers were the subject of some scholarly and enforcement concern in the 1960’s and 1970’s, but they are today generally considered benign, except in circumstances where they may concentrate ownership to such an extent in the overall national economy that they raise concerns regarding the transfer of economic power into political power.
In the next parts of these articles we will consider in detail how antitrust authorities deal with different types of mergers.
 The views expressed do not purport to represent the views of the U.S. Department of Justice.
The first part of this article on agreements among firms and abuse of dominance can be found here
The author doesn`t work for, consult to, own shares in or receive funding from any company or organization that would benefit from this article, and have no relevant affiliations