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Part 2: Mergers and Acquisitions

In this article, we will look at competition assessment and concerns under any proposed Merger and Acquisition. Mergers & Acquisitions (M&A) can bring many benefits to the economy by making
26 Sep 2016 11:48
Part 2: Mergers and Acquisitions
Mergers & Acquisitions

In this article, we will look at competition assessment and concerns under any proposed Merger and Acquisition.

Mergers & Acquisitions (M&A) can bring many benefits to the economy by making it possible for businesses to be more efficient and innovative.

But some M&A’s can harm competition by giving the merged businesses market power, which can result in higher prices and reduced choice or quality for consumers.

 

M&A under Commerce Commission Decree 2010 [CCD2010]

The Commerce Commission has both an enforcement and adjudication role in relation to M&A’s under Section 72 & 73 of the CCD 2010.

  • prohibits M&A’s that substantially lessen competition;
  • allows the Commission to grant a clearance for acquisitions where it is satisfied that the proposed acquisition is unlikely to substantially lessen competition in a market;
  • allows the Commission to grant an authorisation for acquisitions that would result in a substantial lessening of competition, if the public benefits resulting from the acquisition are found to outweigh the detriments.

The M&A parties may also require seeking clearance from the regulatory agencies such as Reserve Bank of Fiji, South Pacific Stock Exchange and others.

 

Competition Concerns for Proposed M&A

When considering a proposed merger, the Commission will decide whether the competition that is lost in a market when two businesses merge is substantial or not.

The Commission assesses each merger on its merits according to the specific nature of the transaction, the industry and the particular competitive impact likely to result in each case.

Competition is a state of ongoing rivalry between firms rivalry in terms of price, service, technology and quality.

The greater the degree of competition in a market, the less market power each market participant will possess.

Mergers can alter the level of competition in a market.

Some mergers enable the merged firm to meet customer demand in a way that facilitates more intense competition.

Many mergers do not affect the level of competition at all because there are sufficient substitution possibilities to effectively constrain the merged firm.

Other mergers, however, lessen competition by reducing the competitive constraints or reducing the incentives for competitive rivalry. This can be detrimental to consumers because they may lead to an increase in price, or deterioration in some other aspect of the service offering.

The level of market power will be dependent on whether alternative actual or potential supply options are available post-merger to effectively constrain the merged firm. Further, mergers that increase market power may decrease economic efficiency (because transactions at the margin are deterred) thereby reducing gains from trade and total welfare.

 

Factors to consider for Competition Assessment

 

When undertaking competition analysis, the appropriate market needs to be defined and includes products or services that are seen as close substitutes.

Market definition establishes the relevant ‘field of inquiry’ for merger analysis, identifying those sellers and buyers that may potentially constrain the commercial decisions of the merger parties and the merged firm, and those participants, particularly customers, that may be affected if the merger lessens competition.

 

Impact Analysis for Competition

The following key issues will need to be determined and analyzed by the Commission when conducting a proposed merger study.

 

1.High combined market share

If the merging businesses have a high combined market share, this might reduce competition in the market. To assess whether market share is a concern, the Commission look at the market share of the combined entity. The Commission also looks at what the market share of the largest businesses would be if the proposed merger went ahead.

 

2.Entering the market is difficult

If competitors cannot easily expand their operations, or new businesses cannot easily enter the market, then the merger may reduce competition.

To assess the degree to which competition is reduced, the Commission looks at the conditions of entry, including how much it would cost and how long it is likely to take a new business to enter the market after the combined entity is merged.

 

3.Buyers have limited power

Large customers can sometimes prevent merging businesses from raising prices or reducing quality following a merger.

This might be because of the customer’s large size and importance to the merged business.

It might be because the customer has the ability to import a similar product directly from overseas.

The Commission will be concerned if the merged entity is able to charge higher prices than they could in a competitive environment – unless buyers have the power to stop this from happening.

 

4.Increased potential for coordinated behavior

Following a merger, it may be easier for competitors in a market to coordinate their behavior.

This may be because there are fewer businesses in the market or a vigorous competitor has been eliminated through the merger.

Price fixing is an example of coordinated behavior and is illegal under the CCD2010.

nNext Week: Referral Selling.

nThis is a weekly column compiled by the Fiji Commerce Commission in the hopes of raising awareness on what the FCC does so people can benefit from developing a better understanding,

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