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A merger is the combination of two or more economic agents, either because one is integrated into the activity of the other, or because they create an entirely new economic agent.
Although its legal definition differs in each jurisdiction, a distinctive feature of mergers is the loss of independence: once carried out, companies that were previously autonomous from each other now operate as a single economic entity. In addition, the new structure normally takes on a stable and permanent form over time.
For competition law purposes, mergers encompass different types of transactions. In this line, it must be noted that it encompasses not only those that are recognized as such in commercial or corporate law. Many times, acquisitions of assets or shares, takeovers or the creation of a new joint venture company may fall within the concept. For this reason, the broader term “concentrations” is preferred.
There are multiple reasons that lead companies to merge. These range from the simple decision to invest in a new business to more complex motivations. Mergers can be viable alternatives for achieving economies of scale and scope. Once merged, companies may improve their production processes or reduce their costs, something that comes with an improvement on social welfare (an increase in production and innovation and lower prices). Thanks to synergies between assets, production plants or the know-how of their staff, the combination of their customer portfolios or business “cultures”, the parties to the transaction can expand their reach, introduce new products or services in the market, specialize their production or deploy strategies that increase their competitiveness.
For the same reason, mergers generally do not raise concerns or cause harm to competition, and their harmful potential is null or limited. However, depending on the circumstances, they may prove anticompetitive and thereby harm consumers through worse prices, variety or quality of products and services, when compared to the situation prior to the merger.
This ambivalence has led most countries to adopt formal control mechanisms, in order to reconcile the freedom of companies with the authority’s interest in detecting and preventing problematic cases.
Some countries make the completion of mergers conditional to approval by the authority. However, so as not to hinder the agility that business dynamics demand, these control procedures are normally subject to time limits for reviewing the transactions.
In addition, given that many mergers have no effect at all on markets, jurisdictions set thresholds (e.g. based on the parties’ turnover or the value of the transaction) to filter those cases that require closer scrutiny and to ensure that control is focused, as far as possible, on those that may raise greater concerns.
In competition law, mergers are usually categorized according to the relationship that exists between the economic agents that carry them out.
These are concentration operations between actual or potential competitors. For example, it may involve a merger between two pharmaceutical laboratories, or a supermarket buying the premises of another supermarket.
These are concentrations between economic agents that are located at different levels of the same value chain. For example, where the supplier of an input integrates with one of its current or potential customers. Thus, if a company that manufactures cement integrates with a concrete company, or a technology manufacturer with a software developer, this will be a vertical merger.
When the concentration cannot be considered either horizontal or vertical, it is referred to as a conglomerate merger. There is no relationship between the markets in which the parties operate. Thus, for example, if a firm engaged in hotel management acquires a company engaged in the marketing of sportswear, there is – in principle – no relationship between the relevant markets in which they operate.
A merger may entail a significant loss of competition or a deterioration in market structure. Thanks to the concentration, the parties may attain, maintain or strengthen their market power and, consequently, exploit consumers or exclude their competitors.
To measure these anticompetitive effects, jurisdictions generally choose a substantive standard to assess concentrations: the dominance test or the substantial lessening of competition standard (or SLC) are the most common. Hybrid or mixed standards may also be found.
In general, jurisdictions have tended towards the substantial lessening of competition standard, as it focuses on the effects of the merger rather than solely on market structure, and because it is broader in terms of the types of risks it can assess (OECD, 2009). In any case, terms such as “substantial lessening of competition” or “substantial harm to competition” are abstract formulas that development based on concrete cases.
Unlike what happens with other figures studied by competition policy, the analysis of mergers requires the projection of their effects on the competitive landscape (unless it is an ex post evaluation, after the merger has been completed). The integration of two or more actors that previously operated independently will change the structure and incentives in the market, so the assessment of a concentration always involves an analysis of risks or the probability of harm to competition in the future.
Elimination of current competition. Horizontal mergers result in the disappearance of a competitor. This loss of competitive discipline could increase the parties’ ability to unilaterally exercise market power over price, quality, or innovation.
In these cases, reference is made to unilateral risks (or non-coordinated effects), since the new economic agent will see its market power increased as a result of the merger and competition will worsen. The European Commission explains it as follows (2004):
For example, if prior to the merger one of the merging firms had raised its price, it would have lost some sales to the other merging firm. The merger removes this particular constraint. Non-merging firms in the same market can also benefit from the reduction of competitive pressure that results from the merger, since the merging firms’ price increase may switch some demand to the rival firms, which, in turn, may find it profitable to increase their prices. The reduction in these competitive constraints could lead to significant price increases in the relevant market” (European Commission, 2004, para. 24).
Different elements are analyzed to properly assess the likelihood of unilateral effects. Among them are the market shares of the players, the intensity of the competitive constraint the parties exert on each other, customers’ switching costs, the reaction of competitors, and entry and expansion conditions.
Although it is standard to treat this unilateral risk as an increase in the likelihood of prices rising, other competitive variables may also be affected, depending on the case and its context, such as quantity, quality or innovation (OECD, 2018).
Elimination of potential competition. Even if the merger is not between current competitors, another risk that is analysed is the possibility that the merger neutralizes potential competition, that is, that it blocks an alternative or project that constituted a real threat to incumbents (e.g. the entry of a new product or service).
The European guidelines on horizontal mergers state that two basic conditions must be met: “First, the potential competitor must already exert a significant constraining influence or there must be a significant likelihood that it would grow into an effective competitive force. Evidence that a potential competitor has plans to enter a market in a significant way could help the Commission to reach such a conclusion. Second, there must not be a sufficient number of other potential competitors, which could maintain sufficient competitive pressure after the merger” (European Commission, 2004).
Although this is a theory that has long been studied in competition law (e.g. US v. Marine Bancorporation, 1978), these theories of harm have regained importance recently in light of concerns about possible “killer acquisitions” in industries where innovation is the main competitive variable (e.g. pharmaceutical or digital markets).
Coordinated risks or effects refer to the increased likelihood of a collusive outcome following the merger. Under this theory of harm, the reduction in the number of competitors makes it more likely that the players that remain in the market will coordinate explicitly or tacitly, or that, even without an agreement, their interdependence will increase.
In other words, the merger facilitates coordination among the agents that remain in the market. It is often said that this behaviour is more likely in industries with certain characteristics.
Indeed, merger control can be a useful tool to prevent the emergence of collusion or oligopolistic equilibria (Baker and Farrell, 2020).
In general terms, vertical mergers are considered less risky than horizontal mergers. This is because the integration of agents that are located at different levels of the value chain can have a positive effect on welfare, derived from efficiencies of better coordination between two agents that previously operated independently.
However, vertical mergers may also give rise to specific risks, depending on the position of the economic agents in the upstream and downstream markets, and their ability and incentives to engage in certain strategies.
Indeed, concern about vertical mergers has increased in recent years, especially in the technology, media and telecommunications industries (OECD, 2019).
Vertical input foreclosure: under this theory of harm, the merged entity would have control over an input that is relevant for its rivals in the downstream market and, by blocking access to it or making it more expensive, would ultimately harm competition.
Regarding the assessment of this type of risk, see the UK guideline on the subject, UK CMA, 2020.
Vertical customer foreclosure: under this theory of harm, the merged entity has such buyer power that it can channel the sales of its upstream rivals towards its integrated unit, thereby harming its competitors, which in general become less competitive in serving their other customers. The strategy may amount to an outright refusal to purchase or to pressure for lower purchase prices.
With respect to the assessment of this type of risk, see the UK guideline on the subject, UK CMA, 2020.
In addition, depending on the specific circumstances, vertical mergers may also give rise to coordination risks. This will occur, for example, if the merger excessively increases the merged firm’s ability to monitor its rivals or market transparency.
Traditionally, the main risk of conglomerate mergers is that one of the markets in which the merged entity operates will be foreclosed, through tying or bundling strategies. For this to occur, it is necessary for one of the parties to have market power in one of the markets in which it operates.
Recently, with the emergence of digital markets, theories of harm related to conglomerate mergers have also gained new momentum (OECD, 2020).
As already noted, mergers often have beneficial effects on welfare as a whole or on consumer welfare, since they can increase the competitive capacity of the merging agents through specific savings or synergies. For example, if the merger allows economies of scale or scope to be achieved, it will have a positive effect that contrasts with the type of anticompetitive effects described above.
For this reason, merger control is often characterized as an exercise in balancing or weighing risks and efficiencies, in which the authority must determine which effect will prevail.
In general, depending on each jurisdiction, the parties may defend their concentrations based on the efficiencies they will generate. The weight that each system assigns either to total welfare or consumer welfare will also influence the criteria that the authority will take into account when calibrating these efficiencies.
In the United States, for example, the joint guidelines of the Department of Justice and the Federal Trade Commission (DOJ and FTC, 2010) admit that, in order to be credited in the analysis, efficiencies must be:
The European guidelines, for their part, add that “efficiencies should be substantial and timely, and should, in principle, benefit consumers in those relevant markets where it is otherwise likely that competition concerns would occur.” (European Commission, 2004).
Remedies or mitigation measures are conditions that are incorporated to approve a concentration operation and mitigate the risks identified. These are situations in which the risks are limited, and formal mechanisms can be designed to prevent them.
In Chile, the control of concentration operations was established by the 2016 reform (Law No. 20.945) and represented a significant regulatory advance within the Chilean competition law regime. Its regulation was incorporated into Title IV of Decree Law No. 211.
The reform established an administrative procedure before the Fiscalía Nacional Económica (FNE) that allows communication, exchange and collaboration between those notifying the transaction and the authority, and set specific time limits for the investigative procedure. For prohibition cases, a review procedure also established before the Tribunal de Defensa de la Libre Competencia (TDLC) and, on an exceptional basis, before the Supreme Court.
In 2021, the FNE updated its “Guía para el análisis de operaciones de concentración horizontales” (see “Todo sobre la nueva Guía de operaciones de concentración de la FNE”).
In Chile, concentrations must only be notified when the economic agents exceed the turnover thresholds set by the FNE. The current thresholds are set out in Exempt Resolution No. 157 of 25 March 2019.
The FNE has published various guidelines to help parties understand their notification obligations. In particular, the following are informative:
Likewise, the parties may choose to notify voluntarily, subject to the same procedure.
In addition, as of 2021, the FNE has a pre-notification procedure (see “Instructivo de Pre-Notificación”), which incorporates a formal stage available to the public to resolve substantive and procedural questions regarding future notifications.
The review time limits are set by law and are as follows:
If the authority does not issue a decision within the applicable time limit, the transactions are deemed automatically approved.
Once the investigation has commenced, the possibility of extending these time limits will always depend on the will of the notifying companies. If the companies offer mitigation measures, the time limit is suspended for 10 additional business days if the submission takes place during Phase 1, or for 15 additional business days, if it takes place during Phase 2.
The time limits may also be suspended once in each Phase, by agreement between the notifying parties and the National Economic Prosecutor.
The parties are required to submit, together with the notification, the information that allows the transaction to be identified and possible competition risks to be preliminarily assessed.
In Chile, this information is listed in the 2021 Regulation of the Ministry of Economy issued for this purpose, which seeks to ensure that the authority has as much information as possible from the parties for the analysis of the transaction.
The same Regulation distinguishes between ordinary notification and simplified notification. The latter requires substantially less information than ordinary notification, as it applies to concentrations where there is no overlap in the parties’ supply (neither horizontal nor vertical) or where the entities’ market shares are of little significance.
If the FNE considers that the Regulation has not been complied with, it issues a decision declaring that the notification is incomplete. The notifying companies then have 10 business days to correct their errors and supplement the information submitted. Once the notification has been supplemented, the FNE again has 10 business days to determine whether to initiate the investigation or whether the parties must supplement their notification once more.
If the FNE determines that the notification contains all the required information, it issues a resolution initiating the investigation and only then do the statutory time limits begin to run.
In 2021, the FNE published a new notification form, which specifies in detail the requirements of the Regulation.
Once the FNE’s investigation has been completed, in Phase 1 or Phase 2, the authority may determine that the transaction should be approved purely and simply, or subject to mitigation measures or remedies offered by the parties.
When in Phase 2, the authority may also decide to prohibit the transaction, if it considers that it is capable of substantially lessening competition.
Automatic approval: if the FNE does not take any decision within the applicable period, the transaction is deemed approved.
The only possibility to challenge the FNE’s decision is before the TDLC, and only the notifying parties may do so, through a special review appeal.
This appeal must be filed within 10 days from the notification of the decision prohibiting the concentration operation.
Once it has been filed, the TDLC orders the National Economic Prosecutor to submit the investigation file and summons a public hearing. Within 60 days from this hearing, the TDLC must decide whether to uphold or overturn the FNE’s decision.
If it upholds the prohibition decision, there are no further remedies. If it overturns the decision and the TDLC rules that the transaction should be approved purely and simply, or that it should be subject to the latest remedies offered by the parties, there are also no further remedies. But if the TDLC decides to impose different remedies, then an appeal (recurso de reclamación) may be lodged before the Supreme Court, by the parties or by the National Economic Prosecutor.
