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Assessment Of Merger And Acquisition

  Competition is viewed by Fijian Competition and Consumer Commission (FCCC) as a process of rivalry between firms seeking to win business over time by offering consumers a better deal.
30 Jun 2018 10:00
Assessment Of Merger And Acquisition

 

Competition is viewed by Fijian Competition and Consumer Commission (FCCC) as a process of rivalry between firms seeking to win business over time by offering consumers a better deal.

The focus of FCCC’s analysis is on evaluating how the competitive incentives of the merger parties and their competitors might change as a result of the merger or acquisition.

The FCCC takes into consideration the extent of competitive constraint that the merger parties exert on each other pre-merger.

Merger parties are more likely to be close competitors and therefore provide each other with an effective constraint that may be lost post-merger, if they differ from rivals in respect of characteristics such as:

The degree of rivalry between the merger parties’ pre-merger is an important factor in the analysis of mergers in differentiated product markets.

Mergers between firms supplying competing differentiated products may result in unilateral effects when the merger parties are considered close competitors by a sufficient number of customers, which thereby alters the incentives of the merger parties.

Merger parties are likely to have an incentive to increase the price of one or both products, if the sales lost due to the price increase would be recaptured by an increase in sales of the other product.

That is, the greater the number of customers that regard the merger parties as particularly close competitors (for example, their first and second choices), the greater the potential for the merger parties to impose a unilateral increase in price post-merger.

Unilateral effects may arise even where the merger parties are not one another’s ‘closest’ competitor pre-merger or would not be the dominant firm post-merger based on market shares.

Failing firm assessment

The state of competition prevailing at the time of a merger will overstate the future state of competition without the merger in situations where one of the merger parties is likely to exit the market in the foreseeable future (generally within one to two years).

In such situations, the merger party that is likely to exit market is referred to as a ‘failing firm’.

Although the likely state of competition with the merger may be substantially less than the state of competition prevailing at the time of the merger, the relevant test is whether the future state of competition with the merger would be substantially less than the future state of competition without the merger (where the firm fails).

Mere speculation that the target firm will exit in the near future or evidence of a recent decline in profitability is insufficient to establish that an absence of competition between the merger parties is the counterfactual.

In general, to demonstrate that a merger will not substantially lessen competition due to the prospective failure of one of the merger parties, it is necessary that applicants show that:

  1. a) The relevant firm is in imminent danger of failure and is unlikely to be successfully restructured without the merger;
  2. b) In the absence of the merger, the assets associated with the relevant firm, including its brands, will leave the industry;
  3. c) The likely state of competition with the merger would not be substantially less than the likely state of competition after the target has exited and the target’s customers have moved their business to alternative sources of supply.

Countervailing buyer power

assessment

The ability of a merged entity to raise prices may be constrained by the countervailing power of consumers.

There are different ways in which a powerful consumer might be able to discipline supplier pricing:

  1. a) Most commonly, consumers can simply switch, or credibly threaten to switch their demand or a part thereof to another supplier, especially if the consumers are well-informed about alternative sources of supply;
  2. b) Even where consumers have no choice but to purchase the supplier’s products, the consumers may still be able to constrain prices if they are able to impose substantial costs on the supplier, for example, by refusing to buy other products produced by the supplier or by delaying purchases;
  3. c) Consumers may be able to impose costs on the supplier through their own retail practices, for example, by positioning the supplier’s products in less favorable parts of their shops;
  4. d) Consumers might threaten to enter the market themselves, sell own-label products or sponsor market entry by covering the costs of entry, for example, through offering the new entrant a long-term contract; or
  5. e) Consumers can intensify competition among suppliers through establishing a procurement auction or purchasing through a competitive tender.

Overall, the key question is whether consumers will have a sufficiently strong post-merger bargaining position and how much it would change as a result of the merger or acquisition.

To maintain competitive constraints, consumers should have an incentive to exercise their alleged power.

Next Week: Authorisation of Mergers and Acquisitions

For more information/details on the Fijian Competition and Consumer Commission and FCCC Act 2010, visit our website on http://www.fccc.gov.fj.

Feedback: maraia.vula@fijisun.com.fj



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