NZIER submission on proposed new Mergers and Acquisitions Guidelines

Transcription

1 NZIER submission on proposed new Mergers and Acquisitions Guidelines To the Commerce Commission, 9 April 2013 In March 2013, the Commission released draft Mergers and Acquisitions Guidelines ( MAG ) for consultation. As you may know, the New Zealand Institute of Economic Research (NZIER) is more than a leading economic consultancy; it is an Incorporated Society which has among its aims the public good purpose of seeking to advance the study and understanding of economic matters directly or indirectly affecting New Zealand In undertaking such endeavours from time to time, we use our economic skills to contribute to public policy. In this role, NZIER has reviewed the Commission s consultation draft and found that, while much of the content is sound, or an improvement on the existing practice, there are portions that call for our comment. In putting our views forward, we are aware that there will be other submissions on the draft so confine our remarks to those we believe we are most qualified to discuss. This communication deals with five of these. They are, in no particular order of importance: 1. Safe harbours 2. Guiding applicants 3. Steps in the process 4. Use of quantitative material 5. Shifting stringency. The rest of this memorandum contains an introduction that sets out the basis of our approach, and then separate comments on each of the items set out above. NZIER submission on proposed new Mergers and Acquisitions Guidelines 1

2 1. Approach All regulation curtails the choices and actions of citizens and therefore creates some tension. The task of regulation design and implementation is to strike a balance between the social benefits of achieving the aim of the regulation s objectives, and the social costs of achieving these benefits. Over time, it is also required to be able to respond to shifts in society s attitudes and available technology. In so doing, a key issue is to ensure the change in transaction costs driven by the regulation, that is, the increases in the resources it takes for citizens to go about their daily business, satisfy a twostage test: 1. Worthwhileness: The social costs are outweighed by the social benefits from the interventions proposed 2. Best option: the costs are as low as possible relative to the benefits being achieved. For the new interventions included in the MAG proposal, we have been unable to locate a cost benefit analysis of the proposals, so our comments are entirely qualitative Safe Harbours Where s the safe delegation point - where those wanting to merge believe they are able to judge for themselves whether they satisfy the rules? Much public administration and particularly regulation in a modern society is structured to be self-administered : knowledgeable citizens and firms decide to steer their courses to avoid unnecessary costs. This includes a form of delegation of the question about whether to interact with the authorities. The safe harbours approach allows entities to choose to conform to social ideals without having to incur the costs of a full investigation. Many mergers are both malleable and small beer as they have relatively little wider impact. Their participants can structure the deal to avoid fuss and cost as long as they are confident the effort is worth the candle so that resources expended in the expansion are rewarded. This is an application of the general principle that all social decision institutions seek to minimise transactions costs by being sufficiently open and predictable in their dealings. This allows as many people as possible to make secure choices without needing to engage in full (expensive and risky) hearings. The trade-off between a rule and discretionary aptness 1 (with situational justice) is secured by having clear rules with enquiries as a relatively rare occurrence perhaps a default option to be sought at the cost of having to make a special case. As we read the current MAG proposal, firms are not offered the choice of a safe harbour. Instead, what is put forward is a design feature of indeterminate surety: indicators of the market structure that is unlikely to cause action by the Commission. These are better than not having any pointers. But they lack the relative riskless nature of the safe harbours once a feature of the Commission s guidelines. 1 Aptness revolves around the fitness for purpose and ability to respond to change. The more appropriate the regulation the more likely it will be durable, since it is able to match its action to the workings of the chosen regulated area and anticipate change. This specifically includes the capacity to take account of different cases and changing circumstances. NZIER submission on proposed new Mergers and Acquisitions Guidelines 2

3 In fact, research has shown that, in practice, they have the same outcomes as safe harbours (Pickford and Yang, 2013). But the formal risks remain for citizens, as the Commission retains the power to investigate, so they are not as secure as the real thing. We note that here may be some instances when the safe harbours are satisfied but anticompetitive behaviour emerges. But such behaviour is still subject to the overall control of the provisions of the Commerce Act, and, thus able to be acted against. Further, the instance can be used as an example to review the requirements for future safe harbour criteria. We see significant social advantages in creating hard rules for those who are able to make an appropriate adjustment to their plans, and limited downside Guiding applicants We also suggest that in other areas within the proposed regulations that are important for decisions there is relatively little guidance as to the way decisions will be analysed. There is a contrast between the well-documented but straightforward issues relating to market definition and competition (noting the extensive discussion about measures of concentration), and the limited structuring around crucial issues like, measuring the ease of market entry, and ways to be used to assess countervailing power. New concepts (diversion ratio and the value of diverted sale) that are proposed for introduction in the MAG give rise to similar issues and are discussed below in more detail. To us, each of these unspecified concepts is a critical factor in assisting prior estimates of the chances of Commission approval by possible commercial actors. Lacking a secure framework makes the judgement of these risks more difficult and increases the chances of less consistent and less predictable outcomes. Increased insight into the decision-making process would help those considering undertaking a merger to make decisions. In other words, the framework to be adopted in assessment, and the full set of proposed rules of the game, should be set out openly and clearly for the commercial interested parties to access and interpret Steps in the process Under the proposed new guidelines, the merger review process is more like a two-step process than at present: (i) looking at the existing competition within the market, unilateral and coordinated effect analysis; and then (ii) evaluating the impact of potential competition, countervailing power, and efficiency. Under the existing (old) guidelines, a merger review first looked at (within market effects), identifying existing competition, potential competition, countervailing powers, efficiency, etc., and then analysed the unilateral effect and the coordinated effect. This is in line with the process adopted in the United States, European Union, United Kingdom, and more recently Canada, who have an explicit two-step merger review process. The non-contentious cases are investigated and approved quickly on the basis of limited information, with only the more difficult cases passing on to a detailed investigation at the second step, called Phase II in the European Commission, and the second request in the United States. Given that the vast majority of notified transactions do not raise material competitive concerns, merger review systems could be designed to permit such transactions to proceed expeditiously and NZIER submission on proposed new Mergers and Acquisitions Guidelines 3

4 only subject transactions that raise material competitive concerns to more extended review processes. The New Zealand merger review system is formally a one-step process, yet actually comprises two steps. A quick assessment of all markets is made in step-one. Those for which existing competition would clearly be sufficient to constrain the merged entity are cleared, and the remainder, which raise competition concerns that cannot quickly be resolved, are subjected to a detailed examination at step-two. As the proposed MAG has paved the way for a two-step process, it would seem logical for the review process to be explicitly set out and implemented as two steps. This would send a clear signal of the Commission s review process to the merging parties and will be cost effective for both the Commission and the parties Quantitative material Should more quantitative analysis be used in competition analysis, as well as in the analysis of new entry and countervailing power? We think it should, because it provides at least in concept, a better evidence base for Commission decision-making. It is also potentially easier and cheaper for followers to replicate as they seek to evaluate their own possible mergers. But, as suggested above, potential merger candidates would have lower transaction costs if they had sufficient information about the approaches to reasonably accurately estimate their own risks. Diversion ratio and the value of diverted sale: The proposed MAG has proposed explicitly using one type of quantitative analysis, diversion ratio and value of diverted sale, to assess the substitutability between merging firms products and the merged firm s incentive to unilaterally increase prices. This is a significant improvement to the 2003 MAG, where it does not find a place, and reflects the increasing use of quantitative analysis in the Commission (Law, Yang, and Pickford, 2010) and competition agencies around the world (Baker and Rubinfeld, 1999; Davis and Garcés, 2009). Diversion ratio in its simplest form, as defined in Shapiro (1995), is based on strong assumptions that substitution from any good in the market to all the others in the market is proportional to their relative market shares. Consequently, the diversion ratio calculated on this basis would simply reflect the relative market shares. These two new concepts are, however, only indicators of the merged firm s incentive to unilaterally increase prices rather than the extent of possible price increases. The diversion ratio and the value of diverted sale, to some extent, are the outputs of a partial or simplified, merger simulation. Accurately calculating the diversion ratio and the value of diverted sales requires the estimation of cross-price elasticity and own-price elasticity. Using the same information, a fully-fledged merger simulation can be conducted. The requirements to calculate these correctly are the same as the requirements for a fully-fledged merger simulation. Obvious questions thus arise about this proposal. Why not propose that the standard be the full merger simulation? Furthermore, the diversion ratio is just one of many different types of quantitative competition analysis, and like the others has its own advantages and disadvantages (See Shapiro, 1995; Carlton, 2010, for details). NZIER submission on proposed new Mergers and Acquisitions Guidelines 4

5 Quantitative analysis can be applied at every stage of the merger review process (Law, Yang and Pickford, 2010). For example, critical loss analysis is widely used in market definition and is explicitly mentioned and discussed extensively in the US Horizontal Merger Guideline. So, why single out the diversion ratio in the proposed guideline? We support the efforts to increase the use of quantitative analysis in the Commission s processes. Quantitative analysis is based on the use of economic models or theories, and provides information on a logical basis to assist decision making. It helps to make specific assumptions apparent and allows variations in these to be explored. Empirical evidence for predictive and counterfactual analysis: Competition analysis, typically involves analysing the future event (what might happen with and without the merger), and is thus, inevitably, to an extent, speculative. The consequences of past mergers can be taken as possible pointers to the effect of a proposed merger. But the way this is carried out can vary. It would reduce costs if the preferred methods were indicated perhaps via a guideline (similar to those already issued by the Commission to structure the preparation of cost benefit analysis.) The guideline should emphasize the importance of empirical evidence in analysing the impact of competition in constraining the post-merger price increase. In particular, the guideline could pull together empirical evidence of the effects of past mergers on prices, quality and innovation, etc. The Commission s past decisions have put significant weights on the assessment of the probability and power of new entrants and of countervailing power (Yang and Pickford, 2013), the effects of which are even more speculative. These may need more support from quantitative analysis or other examinations of empirical evidence, such as post-merger reviews of past decisions. Drawing together empirical evidence from past mergers about whether the new entrants and the countervailing power from big buyers, (which the Commission has previously relied on for its decisions) have, in fact, effectively constrained post-merger price increases, would be valuable. It could demonstrate the importance of these factors in preserving post-merger competition or even possibly, suggest the conditions under which it was successful in achieving such ends. Empirical evidence could also provide support to an analysis of whether the Commission s merger review regime is lenient and the direct results of this lenient review regime. And then provide a context for an informed discussion as to whether the regime should be made more stringent Shifting stringency? We have noticed that in the proposed MAG, the threshold for a small but significant non transitory increase in price (SSNIP) test has changed from the previous 5-10% price increase band to a point: 5%. This will lead to more narrowly defined markets, with (ceteris paribus) less competition in each. (This on its own has various potential effects on the market analysis.) At the same time, under the new MAG, significant lessening of competition (SLC) could be found in a section of the market rather than across the whole market. The consequence of these two changes could mean a more stringent review regime (that is that SLC is more likely under the new MAG). We think there needs to be an open discussion of changes like these. We are not aware of any arguments or empirical evidence that establish advantages in moving to a more stringent regime that outweigh the costs. NZIER submission on proposed new Mergers and Acquisitions Guidelines 5

6 Pickford and Yang (2013) found that the merger review regime in New Zealand is more lenient than that in the United States and European Union. However, there is no empirical evidence of the costs or benefits associated with this more lenient regime. If the more lenient regime does no harm, then the proposed MAG could be too stringent. Empirical evidence, such as would emerge from a post-merger review, could provide evidence relevant to these questions. References Baker, J. B. and D. L. Rubinfeld (1999). "Empirical Methods in Antitrust Litigation: Review and Critique." American Law and Economics Review 1(1-2): Carlton, D. W. (2010). "Revising the horizontal merger guidelines." Journal of Competition and Economics 6(3): Davis, P. and E. Garcés (2009). Quantitative techniques for competition and antitrust analysis. Princeton and Oxford, Princeton University Press. Law, D., Q. G. Yang, M. Pickford (2010). "Quantitative Methods in Competition Cases: A New Zealand Perspective." Competition and Consumer Law Journal 17: Pickford, M. and Q. G. Yang (2013). "Comparing Merger Enforcement Across Jurisdictions - New Zealand Versus The European Union And The United States." New Zealand Economic Papers. Shapiro, C. (1995). "Mergers with differentiated products." Antitrust 10: Yang, Q. G. and M. Pickford (2013), The Merger Clearance Decision Process in New Zealand Application of a New Two-Stage Probit Model, revised version under review by a US journal, available on request. NZIER submission on proposed new Mergers and Acquisitions Guidelines 6