CONGLOMERATE MERGER IN INDIA, THE UNITES STATES AND THE EUROPEAN UNION BY - ANISHA MAAN
CONGLOMERATE MERGER
IN INDIA, THE UNITES STATES AND THE EUROPEAN UNION
AUTHORED BY - ANISHA MAAN
Acknowledgement:
Before delving into particulars of this research
paper, I wish to take a moment to thank
the exceptional individuals who have acted as the cornerstone of this project with their
persistent assistance and guidance
since the very beginning. Their commitment, knowledge
and encouragement have been crucial in the process leading up to the projects
completion. I’m extremely grateful for all the guidance.
I would like to express my sincere
gratitude to my mentor, MR. Shekhar, director
anti- trust division,
MR. Anuj verma, deputy director(FA) of the competition Commision of In- dia ,
for their invaluable support and guidance throughout the completion
of this report.
I am grateful for the opportunity to have interned at the cci and to have learned so much
from my mentor and the other members of the division about the nuances of competition law. This experience
has given me a valuable understanding of the working
of CCI and my project which sailed me
through the understanding of conglomerate mergers. I am confident that this experience will be of a great benefit to me in my future
career.
Introduction:
When we say the world combination we automatically think about various
things mingled together
but will they mean the same
legally ? To an extent yes they can be described like this , the simple phrase
in which some things come together for a purpose. In the
competition realm of the world market combina-
tions have been defined differently in every jurisdiction. The basic idea of combinations originated from the mergers aspect, combinations define
various kinds of mergers not only in India but the term is globally used for the same reason.
The competition act of 2002 governs
the competition in the markets of
India which talks about combina- tions
in the sections 5 and 6 of the act respectively. The act has given the section
heading as regulation of combinations.
If we begin to wonder why has it been referred to as regulations to
combinations when combinations at most times benefits the people so why regulate
it? The combinations mentioned here might present an AAEC on the market or
is likely to present if hasn’t done yet. As we always have been hearing prevention is better than cure,
sections 5&6 try to prevent the possible damage that may occur to the market in the form of the merging companies
aftermath. Every country has different
competition acts to regulate the markets in some way or
other. The competition act in India believes in doing ease of busi- ness but without deference to the
competency in the market leading to lack of competition resulting in a statement, dominated market. Hence we will
try to understand combinations with reference to conglomer- ate mergers in specific as they have been
viewed differently by every authority in different jurisdictions. We will mainly focus on the Indian view of
conglomerate mergers with contrast to foreign jurisdictions as well, mainly EU and the US.
What is a combination?
The combinations are regulated under the Indian competition act of 2002
under sections 5&6 respectively. The
act defines combinations as in section 5 :
“The acquisitions of one or more enterprises buy one or more persons
or mergers or amalgamations of enterprises shall be
a combination of such enterprises and persons or enterprises.”
As mentioned by the competition Commision of India combinations are:
“M&A
that meet the asset and turnover prescribed under section 5 of the act are termed as combinations. Thus, only M&A that meet assets and and
turnover prescribed under
section 5 of the act requires notifications to any ap- proval of the commission prior to their consummation.”
The
competition act defines combinations in contrast with certain terms such as
‘asset or turnover value’ threshold. It is identified by the asset value
of the acquirer and acquired, asset value of the company
post merger and control triggers. The control triggers
have been given un- der section 20{3} of the competition act.
The competition act 2002{ herein
referred to as the act} defines “enterprise” in section 2(h). The definition of enterprise includes a
department of the government or a person who is involved in the supply of goods and services. The
essentials to qualify as an enterprise are : i. any person or department has to be engaged or has been engaged
ii. In the activity related
to the production
iii. Storage, distribution, acquisition,or control of articles
iv.
or goods and services which include investment and the business
of acquiring, hold-
ing, underwriting, or dealing, with shares, debentures, or other securities of any other body corpo-
rate.
The
simple inference of the word can be activity of an economic
nature. The institutional aspects have been kept aside focussing more on the functional aspects.
There
have been numerous cases in relation to the subject related to ‘being an
enterprise’ . In the case of reliance big entertainment ltd the cci was
faced with the question whether associations
qualify to be called enterprises.
The cci had observed that the qualification to be an enterprise is, there must be economic
activity as mentioned
in section 2(h).
The terms merger or amalgamations have not been expressly described
in the act. The term merg- er has been used broadly under the act.
The cci is not concerned with all mergers but with only those which meet the prescribed threshold of the transactions prescribed.
Types of combinations:
There
are three types
of combinations:
Horizontal combination :
Horizontal combinations are between groups which work on the same industry
level. They are under taken to expand
in size, diversify
the groups market,
expand in new markets and reduce competition.
Example - coming together of Vodafone and Idea. They both were mega companies
in the same sector yet came
together, integrated with each other who were on the same industry level. The competition has reduced as two significant companies came together
and expanded their markets as they got to leverage
each others customer
data base. The companies without
a doubt have ex- panded in size.
Vertical combination:
Vertical combinations just as the name suggests
is between groups
which are not on the same lev- el in the industry.
They might be up and down the supply chain. These kinds of combination help make the
company less dependent on the other sources. Vertical combinations may help
boost profits. The companies become less vulnerable in some ways.
Example - Huge landlords merge with the
pesticide producing company. Both the companies work on different
levels of the industry.
Conglomerate / complementary combinations :
Conglomerate or complementary combinations are the
kind of combinations where the compa- nies work in completely different industries of the market,
have nothing in common come togeth- er and combine. Both the companies are
significant have common aspiration to Tapp into a new market with the advantage of each other. The companies
combining have many benefits which are
in most cases not a problem for the competition in the market but there are
parameters to judge for the same if there are likely any to appear in the near future.
Conglomerate mergers can be further divided
into two types:
I.
Pure conglomerate
II.
Mixed conglomerate
Nature of the sections:
The competition act does not anywhere define or
mention the different kinds of combinations.
Combinations have only been defined
in the act in section
5 which provides
for what are combi-nations. There have been various
thresholds to identify the combinations put in place with the central
governments and the competition commissions together formulating them subject to noti- fications every two years if necessary.
Conglomerate combinations:
The competition act does not distinguish combinations on name basis rather on the complexity of the said
combination. Conglomerate mergers can also be know as complementary
combinations bases on the circumstances o each case . There is no specific notification regarding the said com- bination. India believes in the ideology
of ease of doing business and does not restrict business joys because they might grow too big. Conglomerate combinations tend to be big in size, there is no specific provision regarding
conglomerate mergers in India. India has not yet used the word conglomerate expressly but has approved and created channels
for their smooth transit. The green channel
created by India introduced by the amendment
in the act deals mainly with such combi- nations. The green channel has been a
speedy tool used by the companies to merger together if they have been in line with all the guidelines and do not violate any.
The term conglomerate does not reflect
on the paper but the practises in the market
do which our market regulators are not very concerned about as conglomerates do not posses
extreme harms or any harms at times.
Conglomerate term might not be defined
or as can be said mentioned in the act, but complemen- tary has been given space in the competition commissions informatory notes to understand.
The provisions which govern the combinations ultimately are section 5&6
of the act:
Section 5 goes as far as only to talk about what are combinations, words in respect
to be used and explained them, it is informative in nature. It defines what will be a combination. Section 6 on the other hand talks about the mandatory
regime of notifying the Commision of transactions which according to section 5 are combinations. Section 6 is mandatory
in nature and cannot be undone with
or neglected as combinations cannot proceed further without informing the
competition Commision.
Conglomerate combinations in india:
As mentioned above conglomerate combinations or as a matter of fact any kind of combination has not been given a definition in the act or the following amendments. The Commision in its or- ders passes
or guidelines has till date not mentioned
the word conglomerate. Conglomerate com- binations can be identified by the circumstances and the types
of companies merging.
In India conglomerate and complementary have a very vague line between them which can easi- ly be overseen
or can be confused by seeming to be same to the person.
The complementary good have been given a outline in the notes to form 1 published
by the com- petition commission as under:
“v. Generally, products / services are considered
complementary when they are related
because they are combined and used together (e.g. printers and ink car- tridges). Further, these products do not
compete with each other, actually or po- tentially,
and are not vertically related. However, in general a complementary product
or service enhance
value of combined
product or service.
vi. Complementary products
/ services require
competition assessment similar
to the assessment required in case of vertically placed products / services and there- fore, the category
of complementary products/services is separated from vertical- ly placed products/service.”
If we look at the above definition given out it looks as if conglomerate goods/services have been defined yet we cannot
call it conglomerate because the word has been been mentioned anywhere.
We must understand here that we cannot
simply call a combination conglomerate or complemen- tary interchangeably but need to
understand the complexes of both. They both might resemble each other and in some other jurisdictions might mean the same but in India they are different and cannot overlap
or intersect each other at any point but run parallel.
Green channel:
The
first question that comes to mind is what is green channel
and why do we have it ?.
The simplest answer put into words can be it is to facilitate easy transaction of businesses and process the coming together
of the companies in a faster and easier manner.
Now the question may be why the green
channel and what type of combinations may qualify? Green channel is a passage
way for conglomerate combinations which
meet all the guidelines and prima facie do not create or show signs that in the near future might create trouble
for the market
in any form. Conglomerates have not been expressly identified in a word
form in India but have been facilitated by the move of creating a green channel. This indicated the stand of the Indian
market regarding the conglomerate combinations, which is a threshold approach
which promotes ease of doing business, facilitating competition and new prospects in the market.
Through the green
channel instant recognition is given to the companies.
The regime followed
in India is mandatory and suspensory. The companies who opt for the green
channel have to be sure of them
not being a risk of any kind or not having any inconsistency which will render
them ineligible.
Green channel provisions :
Green channel was not originally a part of the act but has been introduced by a notification dated august 13, 2019, amended
the competition commission of India regulations,2011 and introduced an automatic system
of approval for combinations through
a green channel.
Under the new regulation
5A of the combinations regulations:
“[5A.
Notice for approval
of combinations under Green Channel.-
(1)
For the category
of combination mentioned in Schedule III, the parties
to such combination may, at their option, give
notice in Form I pursuant to regulation 5 along with the declaration specified in Schedule
IV.
(2)
Upon filing of a notice
under sub-regulation (1) and acknowledgement thereof, the proposed
combination shall be deemed to have been approved by the Commis-
sion under sub-section (1) of section 31 of the Act:
Provided that where the Commission
finds that the combination does not fall un-
der Schedule III and/or the declaration filed pursuant to sub-regulation
(1) is in- correct, the notice given and the approval granted
under this regulation shall be void ab initio
and the Commission shall deal with the combination in accordance with the provisions contained in the Act:
Provided further that the Commission
shall give to the parties to the combination
an opportunity of being heard before arriving at a finding that the
combination does not fall under
Schedule III and/or the declaration filed pursuant to sub-regu- lation
(1) is incorrect.]”
How do we know that the green channel
has been introduced to facilitate the conglomerate type of combinations ? As mentioned by the competition Commision of
India the schedule iii of the regulations
regarding the combinations has laid out categories that can be approached by
green channel.
Schedule iii states
the following:
“Considering all plausible alternative market definitions, the parties to the combination, their re- spective group entities and/or any entity in which they, directly or indirectly, hold shares and/or control:
a. do not produce/provide similar or identical
or substitutable product(s)
or service(s);
b.
are
not engaged in any activity relating to production, supply, distribution,
storage, sale and service or trade
in product(s) or provision of service(s) which are at different stage or level
of production chain; and
c.
are
not engaged in any activity relating to production, supply, distribution,
storage, sale and service or trade in product(s) or provision of service(s) which are complementary to each other.”
From
the above we can infer
that all these
conditions match the conglomerate combina-
tion. We cannot tho find the word conglomerate any where directly.
Green channel is a facilitating channel
created to ease the process
of conglomerate combinations.
The main things to avoid are that there
should be no overlap and AAEC in the present
and the future which might
render the combination to unravel back to original
and penal- ties, which might be suspensory in nature.
Advantages of green channel:
The regulations in the act impose a standstill
obligation on parties, which enables them from giving effect to the combination or any other act in respect of it. Until the order passed under the section
31 or till 210 days from the date of notice provided
to the com- petition Commision of India which ever is earlier {6[2A]}.
Under the green channel section 5A of
the combination regulation the companies who
have filled under the channel need not wait to consummate their
combining as it is get- ting a acknowledgement from the commission negating any possible
waiting period.
The channel process is less time
consuming, cost efficient and easy. It saves the re- sources of the Commision to focus on real potential
threats.
There is an option open for all for pre filing consultation so as to not make a mistake
and understand all the nuances
and nitty grities
of the process which makes
the process much
simpler.
How many green channel cases have been
received by the competition Commision of India-
There have been 60 notices in total received as of
on 20th jury 2022 through the green channel route,
which sums up to 25%. The first ever combination received via the route was on 3rd October 2019, under section
6(2) along with section 5 and 5A.
India
till now has not rejected
any combinations under the route but have made the com- bination
go under modifications or changes if it deemed
it right and in the interest of the market.
Competition law review committee report :
In the committee report the green channel has been
discussed in detail, the various dis- cussions and comments have been given
in the report. The report
has outlined the argu- ments by some participants who do not
resonate with the idea of having a developing
economy like India to have a merger control regime. The OECD note states
the impor- tance of having a merger
notification present is to “identify” the transactions which are “suitable” for merger review.
From the year of 2011 till march 31, 2018 the combinations which required
modifica- tions were accounted for at 2.6% and there has been no rejection till date.
The reasons listed
out to incorporate the green channel were:
•
The annual
report of the competition commission of India indicated that majority of combinations notified were passed
without modifications.
•
Transactional
delays and potential cost increase are the outcomes of the merger con- trol, this
way tries to ensure a balance to be struck between the regulatory oversight and the ease of doing
business.
•
There can be self assessment by the parties
based on the criteria set up by the Commi-
sion, the Commision can be consulted for the combination which is
targeted by the pre-filing
consultation which clarifies any doubt in the minds of both the regulatory authority
and the regulated authority.
•
Once the
company has done with the preparations and decide to notify under the green channel the company can consummate without
getting delayed by the automatic
approval.
•
The
companies do not need to wait for the statutory 210 days which have been pre- scribed
in the act.
•
The green
channel is based on the robust pre-filing consultation between the parties and the competition Commision of India.
•
The pre-filing is informal in nature and is not binding.
•
The
purpose to introduce green channel was to less complicate the process and easy for the sake of time and cost efficiency,
any wrong information, purposely omitted information will render the form void an initio from the subsequent approval
also.
•
Wrongly availing
green channel will be penalised
and the form will be void ab initio.
The regulatory oversight of the competition Commision of India: The competition act has provisions which attract penalty:
Section 44 of the act lays down
penalties starting from rupees fifty lakhs extended upto rupees one crore on the concealment of any
information or provider of misinformation. It can be any person to a combination.
Section 20(1) talks about the time period which extends upto one year in which the combination takes effect, cci can asses the AAEC these combinations might
have or are likely to have. After the expiry of one year since the initiation of such combination no enquiry can be conducted.
This
may be stated in the pre-filing state or in the form.
Green channel exempted from the standstill obligations:
The committee discussed- i. 95% of the cases
were cleared by the cci in phrase
I without modifi-
cations, hence the green channel
is a route for combinations which require minimum
intervention from the commissions side.
ii. Pre-filing stage will minimise
the risk of wrong filings
drastically.
Intention of the committee:
The intentions of the committee were i. The combinations which are notifiable must be able to pass through the green channel
ii. To
save costs, time and no not invoke the suspensory regime until totally needed.
iii.
The cci can focus on actual competition threat cases and
not use the resources on the general cases.
iv. So as to avoid undoing a deal.
The act may provide broad principles such as ‘public interest’ while
forming subordinate legisla- tion. The eligibility for availing the green channel
route is determined by the central
government along with the
cci. The notification for the eligibility has to be reviewed and if felt
changed by the central government along with the cci once in two years or may be not if they do not feel the. Need.
The green channel
can be availed by the combinations that are not exempted.
Key advantages of green channel:
•
Automatic route
•
Reduce time
•
Reduced costs
•
Cci can focus on genuine competition threat
•
Gain from economics of scale
•
Compete at global Level
•
Development in country and industry
•
Cci will benefit from ‘signalling’ connotations associated with such notifications
•
Ensure that the business
in India is able to consolidate with minimal regulatory compliance
Deal value threshold for combinations:
S.5 of the act discusses the adequacy of the existing
asset and turnover
based threshold for notifi- cations
of combinations. The cci has no residuary
power to assess
non- notifiable transactions as competition act does not grant such powers. Like India the EU also has no residual power
but the referral system is a gamer changer as
combinations can be reviewed by the EU by the referral mechanism in place for the combinations which do not meet the
threshold. Unlike the EU India has no
backhanded mechanism to review non notifiable combination seven if so they have
anti- competitive effects.
Section 20(1) has also concluded
that there is no residuary
jurisdiction avail- able to the cci to review non notifiable combinations.
Countries such as Brazil, Ireland and USA have
residuary powers have been used to review transactions
not meeting thresholds. In the US merger notifications are based on the size of
the transaction, the competition
authorities have jurisdiction to review transactions that fall below such thresholds. The countries who have
not relied on residuary powers and introduced a deal value threshold for merger notification such as Germany
and Austria have specially incorporated competition legislations as an additional subsidiary threshold for notifications.
Green channel recent first of its kind order dated - 18th August 2023
Combination Registration No. C-2022/12/995OECD:
In re: Proceedings against Platinum Jasmine A 2018
Trust, acting through its trustee Platinum Owl C 2018 RSC Limited, and TPG Upswing
Ltd. under Sections
43A and 44 of the Competition Act, 2002
A notice was received on 20th December 2022 by the
CCI jointly by Platinum trust, acting through
platinum trustee,
and TPG upswing in relation
to the combination comprising acquisition of stake in UPL SAS by platinum
trust and TPG upswing through
the upswing trust.
Notifying parties :
Platinum trust- established under the laws of abu-dhabi
global market, does not directly
carry out any business activities in India.
TPG upswing - part of TPG group
The upswing trust- jointly co-owned by subsidiaries of ADIA& TPG INC.incorporated under
the laws of jersey.
The
notice was given in relation
to the combinations envisaging acquisition of 5%shareholding of UPL SAS, subsequent to the interval reorganisation, by platinum. The notice was provided under
the provisions of the green channel given under section 6(2) of
the act read with regulations 5A of the combination regulations.
The inconsistencies found:
•
Exhibited overlaps within activities,
•
The acquisition did not fall under schedule
III
•
Green channel declarations appeared incorrect and false
in material particulars
•
Notifying parties made statements in the notice,
including notice declarations that are false in material
particulars
The first proviso to regulations 5A(2) combinations
regulations provides for that if the Commi- sion
finds that the combinations does not fall under schedule III and or/
declarations filed pur- suant to
sub-regulations (1) is incorrect the notice given and approval granted under
this regula- tions shall
be void ab initio. Section
43A of the Act provides
that if any person or enterprise fails to give notice to the Commission under Section 6(2) of the Act, the Commission shall impose on such
person or enterprise a penalty which may extend to 1% of the total turnover or
the assets, whichever is higher, of such a combination.
Therefore the UPL SAS acquisition is
not eligible for the benefit of green channel approval for facility, the green channel declarations were incorrect and false in material particulars. Statements were
found to be false in material particulars, hence liable under penalty under
section 44 of the act.
Considering the facts and circumstances of the case, a penalty
was imposed by the Commision of RS. 5,00,000 under
section 43A of the act and of INR 50,00,000under section 44 of the act, on the acquirers. The acquirers shall be jointly
and severally liable to pay the amount
of penalty
OECD - ORAGNISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT - EFFECTS OF CONGLOMERATE MERGERS - ROUND TABLE CONFERENCE
Held
a round table on the effects of the conglomerate mergers in the recent years which
will give a better view of the topic.
OECD is a global organisation with member and non member countries from all over the world, it helps to gain
benefits and face the chal- lenges of a global economy by ways of
using e?cient resources for the promotion of
economic growth leading
to a free market.
The
view of OECD about conglomerate mergers:
“Conglomerate mergers involve firms that are
not product market competitors, and which are not in a supply relationship.”
As further described by the OECD the products
of such firms
can be :
•
Complementary- the products which when used together
are of greater value than when used individually. { shoe and a shoe polish}
•
Weak substitutes: weak substitutes can also be
recognised as “neighbouring goods”. These are those goods
just like the name suggests have a lot of similarities but cannot be considered in the same product market with the original goods. [ example herbal face paints and normal
face
paints]
•
Unrelated products: the goods which are not related
which are neither substitutes nor com- plementary in nature but are offered
in the same brand family.
They might have the same pur- poses.
{baby powder with adult powder
combo}.
Conglomerate mergers are not an effect
of economic efficiency but has various other factors re- sponsible for it. It helps firms in reduction of taxes, public
subsidiaries can be procured, diversi- fying
the business portfolio. It can always be a medium for linking diverse
geographical market with firm activities
The term conglomerate merger expands to include the transactions which are inclusive
of a wide range of
product relationship, which is pursued for a diverse range of businesses. The
competi- tion problems related to conglomerate mergers
analysed in the OECD paper:
• Unilateral
effects - Risks related to
the firms ability to foreclose competition post merger by methods
such as bundling and tying strategies.
• Co-ordinated effects - facilitation of conclusive outcomes; and
• Efficiencies - the effects
that are only going to materialise through
the merger.
Empirical evidence of conglomerate effects
:
How do the competitive authorities know which
conglomerate merger to review and asses and what will be their effects . All this depends on the tests
conducted by the competition authorities. The theories of harm are the determining factors.
The
first set of study regarding conglomerate mergers was set out in the 1960’s - 1970’s in the US which
focused on the then so called ‘third merger wave’. It was contended that there
wasn’t any impact on industry concentration any how. Generally
industry-level concentration is not a factor while considering the effects of a
conglomerate mergers or its competitive pressure
on the mar- ket level.
OECD - conglomerate mergers affecting multiple markets
of the same industry have not shown signs of having affected
the industry structure.
The study in the form of survey was conducted
regarding the merger wave by MULLER , no evi- dence
could be found that suggested towards the increase in profits, diversification
of risks or stock returns of the
conglomerate. Simply stating there was no better performance exhibited by the conglomerate than the rest of the others in the industry. There were no significant impacts
on the competition, no
significant sign that pointed towards the extreme benefits the conglomerate achieved
after merging.
There have been studies conducted in the recent
years which have focused on the impact of cer-
tain specific mergers which might be able to provide certain information
for competition policy framers. One
study accesses whether i. Foreclosure and ii. Leveraging occurs in reference
for weak substitute products.
In the study conducted by Chung and
jeons - It was established that there was indeed leveraging effects
from the said merger of related goods
producing firms. The leveraging only extended let-
ting the conglomerate have entry into the markets which were previously
dominated by a single player.
The result which can be inferred is that the markets can be leveraged across other markets.
Conglomerate theories of harm:
The harm caused
by the conglomerate or by the companies
if they merger
can be seen in terms of unilateral and coordinated effects. Ever
theory differs but has points where they intersect and connect, the elements of consistency in all the theories of harm
involving conglomerate mergers are
1.
The prominence of bundling and tying
2.
Importance of market power
Tying - Tying occurs when any firm requires
its consumers to purchase one or more ”tied” prod-
ucts if they wish to purchase a “tying product”. The tying can be either
‘technical tying’ or through
‘contractual tying’. Full line forcing occurs when a consumer buying one item
is com- pelled to purchase a full set of products.
Bundling - bundling occurs when a firm offers multiple
products together as a single product by the way of pure or mixed bundling.
Bundling and tying are often considered together for practical
reasons. Bundling can be consid-
ered a type of tying itself.
Unilateral effects:
The most common concern is the foreclosure of competition through bundling and tying, fore- closed is the focal point of traditional conglomerate theories of hate.
The likelihood of foreclosure rising
through conglomerates can be asses by the following ways:
1.
The abilities of the merging
firms to implement tying and bundling
strategies,
2.
The incentive of firms to engage in tying and bundling,
3.
The effects of such conduct
The two ingredients in particular shape this assessment are:
The relationship between the products -
Simplest form of bundling and tying happens when
products in question are complementary, when
consumed together benefit the consumers. A complement can be either consumable
( re- peatedly purchased) or durable
( an infrequent purchase). When a consumable product is tied to the purchase of a durable
complement the restrictions can be referred
to as a dynamic tie.
The structure of the market:
The common factor amongst all the conglomerate
theories of harm require the existence of a Dominant
position, or at least have significant market power in at least one market
prior to the merger. To simply state a dominant
position may be required for a firm to have the ability
to en- gage in potential anticompetitive conduct. The likelihood of a
non dominant or strong firm to structure the market in such a way which influences the outcomes of tying and bundling can also be possible. The economic literate mostly
focuses on situations in which these markets exhibit either barriers to entry or strong economics of scale. Tying and
bundling in such situations as an exclusionary
strategy could be profitable and feasible. The economic theory suggests that
where perfect competition in the market exists
there may be little to gain from bundling or tying.
Efficiencies associated with conglomerate effects:
The economic literate
recognises the efficiencies attached along with conglomerate mergers,
they can be substantial and the harms
are very dependent on the specific
circumstances of the market. Commonly cited efficiencies of mergers
between firms producing complements is what is re- ferred to as the cornot
effect. When firms decide to produce complementary products they tend to overlook the impact on the producers
of their products complements. The rise of efficiencies on the demand
side can also be a result of conglomerate mergers.
Search costs can be lowered
by way of bundling, also convenient as a one stop shopping.
Economies of scale
and scope can be seen by the way of management skills,
internal experiences from “learning by doing”
and more effective
utilisation of assets
already in use.
Guidelines on the assessment of non- horizontal mergers- EU
The European Union does not have specific
guidelines for conglomerate mergers but distinguish- es it from horizontal. The guidelines for conglomerate merger are common
with those of vertical mergers.
The EU recognises two types of non horizontal mergers:
• Vertical and
• Conglomerate mergers.
The EU describes
conglomerate mergers as -
“Conglomerate mergers are between firms that are in a relationship which is neither
horizontal or vertical.”
In practise the focus of
the guidelines of the Commison are on the mergers between those com- panies which are active in closely
related markets. Distinction between the horizontal and con- glomerate mergers can be subtle. Example
when a conglomerate merger is involved with prod- ucts that are weak substitutes for each other the same
distinction is upheld while distinguishing between
vertical mergers and conglomerate mergers for instance products may be supplied
by some companies with the inputs
already integrated (vertical relationship ) on the other hand the customers
are left to select and assemble the inputs themselves ( conglomerate relationship).
The EU believes that unlike the
horizontal mergers, vertical or conglomerate mergers do not en- tail the loss of direct competition between
the merging firms in the same relevant
market. In ver- tical or conglomerate mergers
the main source
of anti- competitive effect absent which
are found in horizontal
mergers. Substantial scope of efficiencies are provided through vertical and
con- glomerate mergers, a
characteristic of some of these
mergers are that the activities &/or the
products of the companies involved
are complementary to each other.
The two main ways through which non
horizontal mergers may significantly impede effective competition :
I.
Non-coordinated effect &
II.
Coordinated effects.
Conglomerate mergers :
The EU has acknowledged the fact that conglomerate mergers in majority won’t lead to any competition problems but it depends from
merger to merger. In its assessment the Commision considers both i. Pre- competitive effects, ii. Anti-competitive
and possibly pro-competitive ef- fects.
A. Non-coordinated effects:
foreclosure
The main concern
in the context of conglomerate mergers is that of foreclosure. Combinations of products
in related Market
may confer on the conglomerate ability to leverage,
building a strong
market position by means of tying and bundling or other exclusionary
practise in the other de- sired
market. These practices are common, most cost-efficient ways, better offers,
products. Many times these practices
may lead to reduction in action or potential rivals ability to compete. The competition pressure
may be reduced on the merged entity
hence they increase
the price.
There is no received
definition of ‘leveraging ’but in neutral sense, able to increase sales of a product
in one market by virtue of the strong market position of the product
to which it is tied or bundled.
The Commision examines
the following:
1.
The ability of the merged
firms to foreclose its rivals
2.
Whether economic incentives are present in doing so
3.
Whether there will be any significant determination effect on competition through the fore- closure strategy,
thus causing harm to consumers
These factors get examined together
as they are closely intertwined.
Ability
to foreclose:
The way in which merged entities may use their
Markey power in another market to foreclose competitors in another market
is by conditioning sales in a way that links
the products in the sep- arate market,
this may be done directly
either by tying or bundling.
“Bundling”
is the process in which the
products are offered and priced by the merged entity. A distinction can be made between the pure and mixed bundling. In
the process of bundling prod- ucts are sold jointly
in fixed proportion, mixed bundling products
can also be available separately but the sum of the stand-alone prices
may be higher than the bundled price.
“Tying” refers to the process where the consumers purchasing one good are required
to also pur-
chase another good from the same producers, such tying can take place
on a technical or contrac-
tual basis.
For
the foreclose the new entity
must have a significant degree
of market power,
which might not result
into dominance in the concerned markets. The threat of foreclosure to be
potential there must be a case where there
is a large common pool of customers for the individual products con- cerned.
The foreclosure effects
of the process of tying and bundling
are more likely
to be ore se- vere in industries where there are
economics of scale and the demand pattern at any given point in time has dynamic implications for the
conditions of supply in the market in the future. The scope of foreclosure is lesser where the merging firms cannot
commit to making their tying or bundling strategy
a lasting one, example - through the technical tying process or bundling which is costly
to reverse.
Co-ordinated effects:
Conglomerate mergers may in some circumstances facilitate anti-competition coordination in the market, even in the absence of any agreement
or a concerned practise within the meaning
of Arti- cle 81
of the treaty. The framework set in the section iv of the notice regarding the
horizontal mergers also applies in
this context. In particular, co-ordinated and where such coordination is sustainable. One of the ways in which a coordinated outcome
is given in a market
is by reducing the number
of effective competitors to such an extent that tacit coordinated becomes a real possi- bility. A conglomerate merger might
increase the extent and importance of a multi-market com- petition. Competitive interaction on several markets
may increase the scope and effectiveness of disciplinary mechanisms in ensuring that the terms of co-ordinated are being adhered
to.
Broadcome/ brocade-
The main concerns of the commission were that of
potential degradation of interoperability be-
tween the merged
entities switch chips
and interface cards,
which could possibly
lead to leakages and misuse
by the merged entity of confidential information related to competition interface card suppliers.
The
concert of the Commision were remedied by Broadcom committing to cooperate closely
and in a timely manner
with competing interface card suppliers to achieve for them the same level
of interoperability enjoyed
by its own interface cards.
Essilor/Luxottica-
The concert of the Commision with the merging
entities was the use of Luxotticas powerful brands by the merged entities would force opticians
to buy. Essilor’s lenses by means of bundling or tying, and thus exclude
other suppliers.
The Commision under took extensive
market testing reaching out to 10,000 opticians and re- ceived 4,000third parties
and the transaction was cleared with no remedies.
Microsoft/ Linkedin -
The concern of the Commision was that of Microsoft
pre-installing Linkedin on all windows PC’s
integrators, Linkedin into offices by combining the users database and shut out
Linkdein’s competitors by not
providing them with the technical information that they need to interoperate with Microsoft products
.
The Microsoft was advised to undertake remedies
inter alia, not to force PC manufacturers and
distributors to pre- instal LINKEDIN on windows PC’s and to allow users
to remove it, should the manufacturer or distributor decide to pre-instal.
Conglomerate effects of mergers - Note by the united
states
OECD- organisation for economic cooperation and development
Legal frame work:
In the US mergers
are reviewed under section 7 of the Clayton Act. In applying section 7 all mergers
are “ tested by the same standard, whether they are classified as horizontal, vertical, con- glomerate or
others”. The congress in the year 1950 even redrafted section 7 in part , to put it simply section 7 would apply to not only mergers between actual
competitors, but also to verti- cal
and conglomerate mergers whose effects may tend to lessen competition in any
line of com- merce in any section
of the country. The courts in the united states apply a three fold or rather a three phrase burden shifting framework
while analysing mergers under section 7 of the act. The burden lies in the plaintiff
to prima facie establish a case regarding
the anti-competitive effects
of. Merger in the relevant
market. The section
7 requires the court to “arrest anti-competitive tenden- cies in their incipiency.” The same framework
will apply regardless of the type of merger is being reviewed,
a presumption of harm from horizontal mergers has been establishes by the
courts which is not applied for
vertical or conglomerate mergers. In vertical and conglomerate mergers there is no presumption of an increase
in market concentration while in horizontal mergers the harm to competition is presumed from “undue concentration in the
market for a particular prod- uct in a particular geographic area.”
The evolved approach
of the United States:
The approach of the Unites States has changed over
the years now reaching a state where they committed to the core values of the antitrust
laws protect competition, efficiencies, and consumer
welfare. There was a decade long period from 1965-1975 where the
agencies would challenge several
mergers of unrelated products. The doctrine know as “entrenchment” in
particular was vary of mergers which
strengthened an already dominant firm through greater efficiencies, or might give the acquired form access to a
broader line of products or greater efficiencies this would make the life of the rival firms harder which were
significantly smaller. However as time as
changed this approach is no longer valid under the U.S. law or the economic
theory. This ap- proach of the entrenchment can be seen in the case of FTC v. Procter & Gamble Co.
Phillip Areeda and Donald Turner in their antitrust
law treaties showed that to condone the con-
glomerate merger just because they might allow
the merged firm to capture
cost savings and oth- er efficiencies, thus getting a
competitive advantage over the other players is contrary to sound antitrust
policy because cost savings are socially desirable.
The shift in the approach of the U.S. can be seen
in the case of GE/Honeywell, in the
year 2001 the DOJ’s decision
to clear the merger with minimal conditions. The EU’s DG competition on the other hand blocked the merger despite the
DOJ determining there was no direct overlap as
GE worked in business focused
on jet engines for large commercial aircrafts whereas Honeywell fo- cused
on engines for the small regional jets, avoids and non-avionic aircrafts. The
merger was blocked on the basis of GE strengthening Markey power and honeywell to gain a dominant posi- tion. The same concern
were not shared
by both the authorities.
The U.S agencies
have as recently as in march 2020 challenged mergers
of complements on ver- tical theories. The DOJ had the companies divest assets to address vertical
concerns arising from the proposed
merger of United Technologies Corporation (UTC) and Raytheon.
Halliburton/ Baker Hughes:
The DOJ sued to block Halliburton in April 2016,
being one of the largest oilfield service provider
company in the U.S., was to acquire its closest rival Baker Hughes. Along with
one more company named Schlumberger
these were know as the “big three” . The DOJ observed “the elimination of competition between Halliburton and Baker
Hughes would have more pro- found anticompetitive effects than market shares and HHI measures
alone would indicate.”
The Halliburton proposed billions of
dollars worth of divestitures to address the overlap in the market. As determined by the DOJ the
remedy was considered inadequate and the merger was sued to block.
Ultimately the plans of merging
by both the companies were abandoned.
Bayer/ monsanto:
In may 2018, the proposed
acquisition of Monsanto
valued at $66 billion was cleared by the divi- sion
subjected to a comprehensive divestiture of assets to a third party, BASF. Both
the compa- nies Bayer and Monsanto
were two of the largest agricultural companies in the world. It was al- leged
in the complaint that the acquisition would result in the loss of current
and future competi-
tion in a number of important seeds and traits in a number of important
crops( cotton, soybean, canola) etc. The DOJ’s complaint was regarding the concerns of the mergers
would harm innova-
tion particularly innovation in the “bundle” of traits and herbicides,
price harm was one of the main concerns
of the DOJ. Competition concert
were resolved by the way of divestiture suggest- ed by the DOJ to Bayer which consisted assets worth $9billion to be divested
to BASF. The busi-
ness of bayer which was directly related in
competition with Monsanto was included in the di- vestiture as well was structural divestitures to remedy
vertical concerns. The divestiture of intel- lectual property and research
capabilities including “pipeline” R&D projects. Additional com- plementary assets were to be divested
to ensure that BASF had the same innovation incentives, capabilities and scale that Bayer would have as an independent
competition including most no- tably, Bayers
nascent “digital agricultural” business.
In the 1960’s and 1970’s a wave of conglomerate
mergers in the US raised concerns
regarding the effects of them on the competition in the market.
They were divested
at the very moment and conglomerate mergers
are rare in these times.
In such cases companies valued
together are much more than if value separately. The equation 2+2=5
is an adequate representation of conglomerate mergers.
Types of conglomerate mergers:
Conglomerate mergers are branched into 2 types- pure and mixed
conglomerate mergers.
Pure:
A
pure conglomerate merger is When the coming together companies are not in the
same product market, they work in completely different industries or geographic location
. There is no overlap-
ping over operations and strategies.pure conglomerate mergers have been considered on the riski-
er type of deal, it presents many challenges. The merging firms have
many differences, in the face of the
shareholders not agreeing to the merging of the companies, the management and
de- velopment can pose as a challenge.
These kinds of mergers bring along with
it benefits which come in the shape of entering new markets, the finances of the merged companies are boosted
prompting more investors to take an interest
in them. A diversified consumer base is create. The loyal consumer base of each
of the companies will invest in the companies
products thus expanding the market of the companies.
Mixed:
A mixed conglomerate merger occurs when different
companies from different industries that have something in common come together.they may have something common in the downstream chain,
common data base. The ultimate
goal of these merging companies is to expand
their prod- ucts or enter new markets with the help
of such conglomerate mergers which gives then an ad- vantageous position in the markets
of one another.
The most relevant example of mixed conglomerate merger is Walt Disney acquiring an American based broadcasting company. This kind of merger is
quite rare but presents the strengths of a conglomerate
merger which display the rapid growth and fast success. The various challenges posed by such mergers are in the form of different corporate cultures, product lines,
business op- erations
financial planning etc. the process
is quite compelling and complexed for the companies
in question. The main draw back is the much more needed
financial resources.
Advantages of conglomerate mergers:
Diversification:
There are numerous
advantages in a conglomerate merger one being diversification. When a con- glomerate
merger takes places the industries in
which the companies work diversify, opening horizons
to new market industries. The performance of the company
does not only depend on one single
industry rather the risk of the companies can be distributed across multiple industries. The companies
diversify their business portfolio combining with various industries across the
mar- kets. The performance of the conglomerate does not only depend on one single
industry. There is elimination of industrie specific
challenges and impact
of economic downturns.
Market access:
The conglomerates are exposed to a wider market gaining
access through the diversification and coming in touch with a larger
and new customers base. The conglomerates through merging gain access to the markets
they have not yet tapped
into by combining they reach the desired
markets and introduce
themselves in the new industries they desired access to. This specific move in- creases the sale and revenue of the
conglomerates by having a diverse Market range. The most specific of the gains of a conglomerate merger is the
conglomerates can now engage in different industries, leveraging the existing customer
base of the merger company.
Creating Synergies:
The most common or obvious result of conglomerate
merger is the combining of the diverse companies. The conglomerate now have shared
resources, cross selling
and use the complemen- tary capabilities to Create a synergy. By
putting these synergies to use company
can gain a leverage. The most frequent outcomes can be the
improving operational efficiencies, leading to
increase in its market competitiveness hence resulting in increased revenues. The conglomerates can even be additional save money.
Reduction in vulnerability:
The risks of the companies failing in one specific market
is always high because the markets are risky by the way of conglomerate mergers the company
diversify there working
market industries and no longer rely on one single market
outcome hence they are less vulnerable. Companies working in one specific market are in a way secured from the
market specific risks as they have backup
Market to supply the revenue support in the times of downtime in a specific
market. Companies expand working in industries to ensure lower risk exposer by
operating in different industries. The conglomerate can leverage the data of the merged
company to gain an advantage.
Disadvantages of conglomerate mergers:
Complexity and integration challenges:
Conglomerates mergers possess a significant
disadvantage because of them being complex and
challenging to integrate. The success of any conglomerate demands on how well the planning has been
done, the coordination and allotment of resources owing to their dynamics,
regulatory re- quirements and operational considerations that are specific
to every industry.
The work culture
in every company
is different and balancing that post the merger os the compa-
nies is a crucial element
which might result into culture
clashes, inefficiency resulting
into fallout in many aspects
of the companies which have just united posing a threat at the management level.
Lack of industry-specific knowledge:
Conglomerate mergers are mostly among different market sector industries hence unrelated com- panies
which have different operations undertake, after the merger the conglomerate
faces prob- lems related
to expert knowledge in the unrelated field, knowledge to efficiently manage
the con- glomerate is not enough. This is why
mainly experts from a certain industry are hired to set the problem
aside. The companies must have a broad understanding of the industry
they plan on set- ting foot in with the merged company
but to have proper management experts are hired.
This lack of knowledge may result in various
sectorial difficulties. The conglomerates are seen relying highly on external
consultants.
Limited synergy potential:
When two completely unrelated companies merge there
is a high possibility of the synergy ex- pected
might not always pan out the way the companies had initially collaborated upon,
due to absence of complementary or overlapping elements.
This is a huge disadvantage for the conglomerates as they do not attain
the desired result of the merger.
Regulatory scrutiny:
Conglomerate mergers come under the radar of the
authorities when they possibly can have an antitrust
element and raise competition concerns per se. Competition authorities
scrutinise the merger from every angle to determine if the merger
has any anti competitive element
and if they might be a
deterrent to the competition. The main concern which is looked into is the
welfare of the consumer
and the competition in the market which is closely
examined by the authorities. Not all
mergers are scrutinised with the same intensity but the ones which have meet
the certain guidelines prescribed.
The potential concerns:
- Reduction in competition
- Monopolistic market practises
- Increased market
power
These reasons result in scrutinisation by the regulatory authorities.
Resources allocation challenges:
The main stone to turn is the allocation of resources to each diverse
sector of the company. Every sector
has different needs, sources and requirements. The different capital
requirements the type of investment
which will benefit the sector cannot be common but ranges through the needs of the sector individually which results in the growth
prospect. Every decision
has to be sector spe- cific and the person
making them should
be well versed
with the working
of the sector.
Conglomerate mergers have advantages and disadvantages depending upon the kind of company
it is merging with. The advantages and disadvantages might change based
on the kind of sectors the companies
are tapping into.
Conglomerate merger guidelines for companies:
For any conglomerate merger to be a potential success there are some parameters to be looked
at while deciding
to merge which plays a very crucial
role in determining the outcome
of the merg- er.
Strategic alliance:
The very first parameter being strategic alliance
the companies must have some common goals which they decide
to approach together
through the merger,
the future aspirations must be similar,
the values must in some manner be similar other wise it might not aline in the future.
Companies deciding to merge must examine the contrasting nature
of the business which lead to maximising the value enhancing market position which is a determining
factor in generation of revenue in new stream.
Due diligence:
A due diligence must be
conducted on the target company which presents a clear picture, it eases the
companies to under the financial and legal aspects of the target. Due diligence
helps identify the liabilities, potential risks the target has acquired, the regulatory compliances, its contacts, as- sets
and intellectual property rights in detail. This helps in analysing potential
risks and chal- lenges
the conglomerate might face after the merger.
Cultural alignment:
It is very important to analyse the cultural compatibility of the companies merging. Ever compa-
ny has a different structure, the management style varies from company to company leading
to a difference in different culture. The way the management
approaches its workers, the leadership the
employee expectations are all very different. To create a working environment
which is har- monious for the
employees it is very important to understand the workings of a company in en- tirety and address
cultural differences.
Integration planning:
Before merging companies
a rough plan must be in place which helps things move swiftly, a for- mal outline must be prepared
. Timelines should
be created for integration of tasks specific
steps must be taken for
finances, marketing, human resource and supply chain management post the merger for the success of the conglomerate
Communication and stake holder meeting:
For a smooth merger it is important to have a
transparent Flow of communication with the man- agement and the shareholders which creates a clear picture for
them to analyse and understand the process
which leads to a positive
outlook.
Post merger evaluation:
The process of easing into the new environment
should be made easy for the employees. There
must be a post merger evaluation to undertake the difficulties arising
in the work environment and culture.
To evaluate the function of the departments which are newly integrated.
Conclusion:
The approach India has towards
conglomerate combinations is not very rigid and believe in easy of doing business. The regime followed in India is mandatory and suspensory in nature .
Section 5 talks about the threshold which classifies which combination is notifiable and how, while section 6 talks about the mandatory regime followed. The word
conglomerate has not been defined in the act, not ben mentioned in any of the orders or guidelines.
Conglomerate mergers exist only practically and there is no theoretical mention of them in india. In India to
facilitate the conglomerate mergers green channel has been intro- duces as a facilitation mode. The green channel is introduced by the amendment
guidelines in section 5A
OF THE ACT. There have been various other guidelines integrated
in the act. India has as of now not re- jected
or blocked any green change merger which shows Indias stance which is not very cautious
of the conglomerate mergers. There have been speed and cost efficient
mergers through the green channel
route. India does not have any residuary
or referral power unlike other jurisdictions. The cci can only review the transactions which meet the threshold even if the transactions which have a anti-competitive effect but do not meet the threshold
cannot be reviewed
anyhow. The power cci has not been given enough power to review
such transactions as also mentioned in
section 20
(1)
of the act.
The EU on the other hand is rigid
towards the conglomerate combinations reviewing and blocking it heav- ily. The EU also review mergers which do
not fall under the threshold or jurisdiction by way of the referral system prevalent within the Commision. The
EU has blocked conglomerate mergers such as of GE/Hon- eywell which were passed by the U.S and 11 other districts just
on the basis of being too large and might grow
dominant which was seen as unnecessary by other jurisdictions. The EU is more
towards blocking conglomerate mergers
and not in favour of such mergers.
The UNITED STATES on the other hand
was in the early 1960’s and 1970’s towards prevention of con- glomerate mergers or were not very
welcoming of such mergers. In the recent years they have disregarded and evolved from the old economy theories
of harm and are more towards facilitation of such mergers.
The DOJ and the FTA are the bodies that in the U.S. review mergers broadly. The section 7 of the Clayton Act governs mergers in the U.S.
We can say in
the recent years conglomerate mergers have not been seen as a potential threat
once they have been throughly
examined and any possible change of an AAEC or anti-competitive practise has
been negated through modifications
suggested by the authorities. Gone are the times when too large a company is considered a threat to the market.
Companies indue in such mergers to expand, tap into markets they have not yet explored, to diversify their markets and diversify risks
related to a single market.
Recommendations:
The guidelines in INDIA need to be
updated and include more inclusivity. India is very limited when it comes to reviewing the transactions in the
markets. The thresholds are the determining point whether a transactions will be reviewable or not,
this approach has to change. The act needs to include reviews of those mergers which are a potential threat
to the competitionrefernces but
still cannot be reviewed by the commission
due to not meeting the threshold.
Unlike the EU and other jurisdictions India does not have the residuary or referral system hence
India has a limited reach. This reach
has to be expanded. There should be conglomerate combinations specific guidelines as India facilitates such mergers through
the green channel but does
not use the word theoretically.
References:
Conglomerate merger guidelines by the United States -OECD https://www.ftc.gov/system/files/attach- ments/us-submissions-oecd-2010-present-other-international-competition-fora/oecd-conglomer- ate_mergers_us_submission.pdf
FEDERAL TRADE COMMISSION https://www.ftc.gov/sites/default/files/documents/public_state-
ments/terra-incognita-vertical-and-conglomerate-merger-and-interlocking-directorate-law-en- forcement-united/090911roschspeechunivhongkong.pdf
Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of concentrations between undertakings. https://ec.europa.eu/competition/mergers/legislation/nonhorizontalguidelines.pdf
COMPETITION COMMISION OF INDIA
INVESTOPEDIA RELATING TO CONGLOMERATE MERGERS
CONGLOMERATE MERGER CONTROL.
EU’s approach towards
conglomerate effects-
PROCEEDINGS against platinum jasmine a, 2018 trust -