Wednesday, 27 April 2016

An insider's view of mergers

Last night's LEANZ seminar, 'An Insider's Reflections on Merger Clearances', was a cracker. David Blacktop, the Commerce Commission's Principal Counsel, Competition, has seen merger proposals from both sides of the fence (he was at Bell Gully previously), and there's not a lot he doesn't know about the principles and the process.

First, David gave us some data. Currently the overall 'decline' rate from the Commission is about 10%, though if an applicant gets to the knotty 'letter of unresolved issues' stage (and 11 out of 54 applications ended up in that particular 'this is a really hard one' basket), the odds of a decline are about 50:50 (6 cleared, 5 declined), which is what you'd expect. Whether this is too low, too high, or just right is anyone's guess, but as there have been some people arguing that merger clearances (at least in the US) may have got too lax (as I discussed here and here) I asked him what you need to do, as a merger regulator, to guard against inbuilt biasses. His sensible answer was, ensure there's a robust mix of viewpoints represented around the decision table.

David also gave us some good data on timeliness. The time to process a decision has been rising - David joked that it coincided with his arrival, and I joked that it timed with my departure - but as David said, the simple 'average' across all applications of somewhere in the low 60s in working days (12 or 13 calendar weeks) doesn't really give you the proper flavour. Relatively straightforward ones get done in 43 working days (8-9 calendar weeks). 'Letter of issues' ones have the letter issued on working day 38, and get put to bed in a total of 71 working days (about 14 calendar weeks). The knottiest 'Letter of unresolved issues' ones have their letter issued on day 72, and take 107 days to a clearance and 108 days to a decline (with the extra day to get the reasons for the decline written up right), or some 21-22 calendar weeks.

There may be some internal resourcing issues - the regulation side of the Commission has been taking up a fair chunk of availability - but the most likely explanation (in my view) is that the longer time to a decision is largely the result of recent ones being both more complex and more borderline in their competition effects. The biggie currently inhouse - Z Energy/Chevron - rings both bells, and (assuming it comes out tomorrow as indicated a while back) it will have taken ten months from start to finish.

David also highlighted a somewhat unusual feature of some recent merger declines. Two of them were very similar - specialised businesses built up in provincial towns, with the owner looking to retire and sell the business in a trade sale. Trouble is, in many of these situations, the only trade buyer is highly likely to have a local monopoly. And the legal costs of getting to a decline will be disproportionate to the value of the business and the size of the local market.

So, what do you do? Should we have some minimum dollar threshold, below which the merger regulator will simply not be bothered - even if this leaves some provincial town paying over the odds in some (probably small, probably specialised) markets? Instinctively you think, that's not very equitable, but realistically you also realise that the costs of the full process are completely OTT for these situations. My own feeling, having been involved in some of these decisions, is that it's often going to be the case that over the longer haul there's only room (in a minimum efficient scale sense) for one provider in many of these towns, and that what looks like a merger of two to one is effectively bringing forward what was going to happen in any event. If an applicant supplies evidence showing that, across New Zealand, there's typically only one specialist provider in towns of that size, the merger regulator should be more ready to press the green button.

David raised a number of other interesting ideas. For example, do we have a sufficient range of potential remedies to cope with potential merger detriments, given that divestment is a blunt instrument? And where are we in terms of transparency and confidentiality? We ran out of time to get into that issue properly, but for what it's worth I think we could, without prejudicing commercial confidence, expose a bit more of the process, particularly around letters of outstanding and unresolved issues.

Another excellent LEANZ evening - and it makes me think (again) that the NZ Association of Economists could usefully have an equivalent series of seminars on other topics. Well done to all involved, and special thanks to James Mellsop and Will Taylor* at NERA for hosting the event. Let me know when you're opening some more Akarua Rua Pinot Noir.

*11/05/16 An earlier version got Will's name wrong. Apologies.

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