Trend: Efficiency Arguments
The Commission is generally skeptical of efficiency arguments as countervailing factors addressing the potential loss of competition caused by a merger. However, it recognized efficiencies in both the Deutsche Börse/NYSE Euronext and UPS/TNT Express decisions, although the claimed efficiencies were still ultimately insufficient to result in a clearance decision.
Recital 29 of the EU Merger Regulation provides that, when determining the impact of a merger on competition, the Commission should take into account any substantiated and likely efficiencies put forward by the merging parties. Efficiencies must produce a benefit to consumers (that is, they must be substantial, timely, and likely to be passed on); be merger-specific; and be verifiable (Horizontal Merger Guidelines ¶ 78).
In the Deutsche Börse/NYSE Euronext merger, which was blocked by the Commission on February 1, 2012, the parties claimed that a massive $3 billion worth of capital efficiencies would result from the consolidation of the two exchanges. Notably, the Commission conceded that some of the efficiencies claimed by the merging parties were verifiable. However, in this instance, the Commission did not accept that these efficiencies would necessarily be passed on to consumers, in particular because the creation of a near-total monopoly meant that there would be no incentive for the merged parties to pass them on. Deutsche Börse is currently appealing this point to the General Court of the EU.
In UPS/TNT Express, the Commission found concerns regarding competition in the market for international express delivery of small packages in 15 EU member states. The parties relied heavily on efficiencies to justify the planned merger, claiming that €500 million would be saved, counterbalancing any anticompetitive effects arising as a result of the merger. In particular, the parties claimed that a reduction in management and administrative overheads, plus efficiencies gained in the ground transport and air network, would result in the savings claimed.
Notably the Commission accepted that, in respect of air transportation, some efficiencies would be achieved. This case is one of the first merger cases in which the Commission accepted publicly that, at least in some markets, cost efficiencies would be passed on to customers. Previously, the Commission often accepted the existence of efficiencies but rejected them either as insufficient in magnitude or on the ground that they would not be transferred to customers. Thus, the decision in UPS/TNT should be seen as a very positive evolution in merger policy.
The willingness of the Commission to consider efficiencies is an important trend in EU merger control. However, while the Commission recognized in UPS/TNT that the efficiencies would be passed on to consumers, it did not consider them sufficient to outweigh the expected price increases resulting from the loss in competition. In fact, the parties’ own analysis, submitted to the Commission, indicated that prices would rise in a number of jurisdictions as a result of the merger, thus weakening the strength of their efficiency arguments.
These two decisions indicate that, while efficiencies might take the parties some of the way to convincing the Commission’s case team, there is an extremely significant burden on the parties to provide evidence that the anticompetitive effects of a merger will be outweighed. In both UPS/TNT and Deutsche Börse/NYSE Euronext, the parties lost out because, despite partially convincing efficiency arguments, the bar for outweighing the anticompetitive effects was just too high.
If efficiencies are to be used effectively, a discernible and tangible effect must be identified in the post-merger market. For example, efficiency arguments put forward in the Ryanair/Aer Lingus case were mere assertions and, as such, were never likely to succeed. Moving from the theoretical into the real world is the real challenge facing practitioners and economists in this area.
Chance: Failing Firm Defense
The recent clearance by the Commission of the previously prohibited Olympic/Aegean Airline merger on October 9, 2013, and of the Nynas/Shell Harburg merger on September 2, 2013, have once again thrown into the spotlight the viability of the failing firm defense.
The failing firm defense requires that the merging parties demonstrate that the structure of the market would deteriorate at least to the same extent absent the merger (Horizontal Merger Guidelines ¶ 89). This requires, in particular, showing that: (1) the failing firm would in the near future be forced out of the market if it were not taken over; (2) there is no less anticompetitive alternative to the proposed merger; and (3) in the absence of the merger, the assets of the failing firm would exit the market.
In Nynas/Shell Harburg, the Commission was concerned that the merged entity would have very high market shares in the European Economic Area (EEA) in a number of markets and that there would be substantial competition from only one competitor, a U.S. company that had only entered the EEA market in 2008. Despite these concerns, the merger was cleared by the Commission on the basis of the failing firm defense and on efficiencies. Shell’s refinery at Harburg would inevitably have closed absent the transaction, as the existing setup of the refinery was economically unsustainable.
Nymas will use a different business model and invest a significant amount into the refinery. The closure of the refinery would have left production below the level of EEA demand, and the remaining demand would then have had to have been met by imports, resulting in higher prices for consumers because of import costs. There were no alternative buyers and, in addition, the parties argued that the acquisition would produce positive effects on competition because the merged entity could achieve significant cost savings (which were likely to be passed on to consumers).
In the re-notified Olympic Air/Aegean Airlines merger, the parties had overlaps on seven routes, of which Aegean was the only competitor on five domestic routes. The merger results in a monopoly on these routes; however, the Commission cleared the transaction on the basis of the failing firm defense.
The key issue in this case was whether there was a less anticompetitive alternative to the proposed merger. The Commission market-tested on this point and concluded that Olympic would be forced to exit the market in the near future because of financial difficulties, which would result in Aegean being the only significant domestic service provider. Aegean would therefore capture Olympic’s current market shares. In addition, entry in the immediate future by other airlines is unlikely on any of the affected routes because of various factors, including profitable opportunities elsewhere, high cost of entry, and the dire economic situation in Greece. As such, the Commission concluded that the merger would cause no harm to competition that would not have occurred anyway.
It should be noted that the Olympic Air/Aegean Airlines merger is the first merger to have been cleared by the Commission following an earlier decision prohibiting the merger.
Despite the successful adoption of the failing firm defense in these two mergers, it is probably premature to identify a trend. Each decision is ultimately case-specific and requires individual in-depth analysis. However, the role that efficiencies also had in the eventual clearance of the Nynas/Shell Harburg merger is noteworthy. Although efficiency arguments alone would not have been sufficient, when they were used in combination with the failing firm defense, the transaction was cleared.
Trend: Sectoral Issues
Two of the four recent prohibition decisions taken by the Commission involve airline mergers (Olympic/Aegean Airlines and Ryanair/Aer Lingus). The decisions demonstrate that, taking a route-based market definition, the ability for such mergers to give rise to competition issues is almost presumed. Following the renotification and clearance of the Olympic/Aegean Airlines merger, it will be interesting to see whether problematic airline consolidations will get a new lease on life on the basis, in part, of the failing firm defense.
These cases highlight the ongoing movement over the last decade by the Commission away from an overly structural approach and a fixation on market shares. In practice, the Commission will continue to examine problematic cases in detail with a focus on the effect the proposed transaction will have on the market and the likely impact on competition and consumers.
Although both cases ultimately resulted in prohibitions, the UPS/TNT Express and Deutsche Börse/NYSE Euronext decisions indicate helpfully that the Commission is willing to take a serious look at the role of efficiencies in outweighing the anticompetitive effects of mergers. The Nynas/Shell Harburg decision, although cleared on the basis of the failing firm defense, also shows the Commission actively looking to efficiencies to justify a clearance decision. It is likely that the practical application of efficiency considerations in these cases will help to guide future decisions.
The airline sector has traditionally proved a tricky area for the Commission, with mergers either requiring significant remedies or, as in the original Olympic Air/Aegean Airlines and the Ryanair/Aer Lingus notifications, requiring prohibitions. However, the failing firm defense, which has been successful in two cases in as many months, may prove fruitful for proponents of mergers in this sector or others undergoing economic difficulties, particularly if wider political and economic considerations are taken into account by the Commission, as may have been the case with respect to the clearance decision in the Olympic Air/Aegean Airlines merger.