Wednesday, 11 September 2013

The new Merger and Acquisition Guidelines

Last night we had the latest Law and Economics Association of New Zealand (LEANZ) event in Auckland, where a decent sized crowd came along to hear an explanation of the Commerce Commission's updated Mergers and Acquisitions and Authorisations Guidelines, presented by two of the Commission's senior staff, David Blacktop, Principal Counsel Competition, and Lilla Csorgo, Chief Economist Competition.

In the event the evening focussed very much on the M&A Guidelines. The previous ones came out in 2003, so it was timely for the Commission to have another look. Both the law and the economics have evolved since then, and the Commission has accumulated another decade's worth of practical experience with mergers: it was also an opportunity to take soundings from professional M&A advisers (there had been an earlier consultation round on a draft version of the guidelines).
You can read the Commission's summary here, and here's the link to the full text. If you're already reasonably familiar with the M&A landscape, then the bit of the Guidelines you'll want to focus on is the Chair's Introduction (pp5-6) where the substantive changes and the rationale for them are laid out.

Most of the changes came up one way or another in the presentation or in Q&A and discussion afterwards.

The former "safe harbours" terminology is gone, replaced by "concentration ratios", partly to avoid giving people a false degree of certainty that their merger is "okay" (market shares below the thresholds could still be problematic, market shares above them aren't necessarily the end of the world), and partly to deter gamesplaying, where it is tempting for merger parties to find market share numbers that squeak under the thresholds.

"Counterfactual" is gone, too, as a matter of terminology. Apparently the change was not without internal staff controversy: personally I'm glad to see the back of it. "Without the merger" is now the preferred description - good thing too, simpler and clearer. And the Guidelines now explain the "with the merger" and "without the merger" comparison in the light of The Warehouse cases.

"Barriers to entry" have had a makeover as well, but more substantively. "This change reflects the courts’ own move away from the language of ‘barriers’ to entry and expansion to the term ‘conditions’ – a more expansive concept", says the Chair's Intro, referencing the Air New Zealand/Qantas and NZ Bus cases. So now it's "conditions of entry" when it comes to applying the LET test for entry or expansion post-merger.

I'd add that it's not just the courts moving along, it's economics. I used to lean towards a Stigler approach to barriers to entry, but I had my mind changed for me by Dennis Carlton's paper, "Why Barriers to Entry are Barriers to Understanding".

Same applies to another change, on market definition. "New Zealand courts have reiterated that market definition is a tool to aid in competition analysis, rather than an end in itself. We have adopted this approach in these guidelines. In particular we have moved away from defining markets as a first step in the analysis and recognise that relevant markets need not always be defined precisely", again from the Chair's Intro. I appreciate that for the Commission, what the New Zealand courts say, goes, and in a way it doesn't matter a hoot where overseas regulators or economists have got to with market definition in merger cases, but the reality is that the New Zealand courts are only part of a global evolution in thinking on the matter.

It's been somewhat controversial, all the same. I know, for myself, that when I was involved in these merger decisions, issues only properly started to come into focus when some sort of provisional market definition had been adopted, so my instinct would have been not to stray too far towards a lesser role for market definition early in the piece. I certainly agree it didn't have to be too precise early on, but it gave you a framework to start with. In any event, wherever you might stand on that issue, the reality is that you're still going through the same exercise of identifying the competitive constraints on the merging parties.

There was an interesting question from the audience on whether the Commission will be using the Upward Pricing Pressure test. You may have seen this idea already - AUT's Lydia Cheung gave a paper on it at this year's NZAE conference - but if you haven't come across the idea before, here's a terrific video from MIT's Richard Schmalensee which explains it. The short answer was, no: the test may be a useful screening device to explore whether there are issues with a merger, but in a relatively small, interconnected economy like ours there are probably more direct ways of figuring out how close a substitute one product or company may be for another.

Another very productive evening from LEANZ - well done to David and Lilla, who are excellent speakers, and special thanks to Russell McVeagh, who hosted the event and put on drinks and nibbles afterwards.

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