This section first provides an overview of the processes of merger review and authorisation in areas where export facilitation is at issue, and then discusses the processes in detail.
| How does the Trade Practices Act provide for regulation of mergers? |
The Act provides the Commission with two tiers of regulation in relation to mergers and acquisitions:
The Commission has the role of enforcing s. 50 of the Act. This section prohibits acquisitions which would have the effect or likely effect of substantially lessening competition in a substantial market in Australia, in a State or in a Territory. (This section is found in Part IV of the Act, which regulates a variety of restrictive trade practices.) This prohibitory approach is based on the concern that mergers increase the likelihood of a merged firm having greater scope to set prices above competitive levels, or otherwise distorting competitive outcomes, either alone or in coordination with other firms.
A superstructure of provisions in Part VII of the Act enables the Commission to authorise mergers where they would be likely to result in such a benefit to the public that they should be allowed to take place. This authorisation process offers a safeguard (where there are shown to be net public benefits) to the prohibitory approach.
A merger is not prohibited unless it would have the likely effect of substantially lessening competition. In the Commission's experience most mergers do not raise competition concerns and therefore do not raise problems under the Act.
Since the adoption of the substantial lessening of competition test in 1993 the Commission has considered, on average each year, about 160 mergers and acquisitions. Of these an average of eight were challenged by the Commission as anti-competitive. On average a third of the mergers challenged by the Commission were resolved by the parties putting in place alternative arrangements to allow the mergers to proceed. This is illustrated in Figure 1.
Figure 1
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In addition, each year the Commission received an average of three applications for authorisation of mergers that might otherwise have been challenged as anti-competitive. The majority of applications over the years have been successful.
- The vast majority of mergers do not substantially lessen competition and are not challenged by the Commission.
| Can mergers enhance international competitiveness? |
It is well recognised that mergers can yield significant benefits. These might take the traditional form of internal efficiencies such as economies of scale and scope, or transaction cost savings through vertical integration. 4
In a number of cases Australian companies may strive to reach a sufficient scale of operations, or 'critical mass', in order to compete effectively in international markets. In some, mergers and the efficiencies that follow may be the best way of achieving that critical mass. Realising economies of scale and reducing unit costs may be particularly relevant for firms that produce homogeneous, low value-added goods where price is a key determinant in sales. In addition, critical mass might be necessary, for instance, if firms face high international cost pressures and must negotiate with large multinational customers.
The Commission recognises that the purpose of these mergers is not necessarily limited to achieving economies of scale. Indeed, achieving economies of scale does not necessarily equate to being internationally competitive. It may be necessary for firms to merge in order to achieve a consistent and reliable supply of quality products, or because complementary technology will help advance exports, or to achieve international distribution synergies, or for other reasons that may relate to international business relationships. The reasons for mergers will vary across the range of industries and products. The Commission, through its practical experience in speaking to industry in the merger review process, well understands these issues. 5
While mergers and acquisitions can enhance the international competitiveness of an Australian industry they can, at the same time, threaten to reduce domestic competition. When firms merge with the aim, for instance, of enhancing exports, there is the prospect that domestic prices may rise until they reach import parity (if the goods were previously priced below import parity) while exports are at a lower price. A merged entity may use its market power to increase domestic prices and so subsidise its export price. Ultimately, Australian consumers and industry may be forced to pay a higher price in order to underpin the merged entity’s export sales. The concern that the merged entity may have greater scope to set prices above competitive levels is the rationale behind Commission investigations into such matters.
- Mergers can result in significant benefits, such as the enhancement of international competitiveness, but can also reduce domestic competition.
| Generally, how does the ACCC account for international competitiveness issues when looking at mergers? |
The Commission looks at international competitiveness issues at various stages of merger analysis and the authorisation process. While the details will be examined later in these guidelines, the following is an outline of how such issues are examined.
Merger review
The evaluation of proposed mergers must, of course, take place within the context of a defined market. This will include all closely substitutable products, including imports. The dimensions of each market will be determined on a case-by-case basis.
Should the level of concentration in the particular market following the merger be of concern to the Commission, it is required by statute to look at various 'merger factors' to determine whether the merger is likely to substantially lessen competition in that market. The most important of these from an international context is the level of import (and export) competition. Another factor that the Commission considers with relevance to international competitiveness issues is the dynamic nature of the market.
The increased exposure of Australian firms to international competition is pressing them to increase their efficiencies. Since the release of its revised merger guidelines the Commission has placed greater emphasis on the relevance of efficiency considerations in its merger review process. In this respect, efficiency gains are part of the assessment of competition.. Traditionally when firms argued that a merger may lead to greater efficiency, this has been regarded as most relevant to a public benefit analysis carried out in respect of applications for authorisation of mergers under Part VII of the Act. The merger guidelines now expressly recognise that where efficiencies impact on the competitive process and make a merger more likely to be pro-competitive, this may be taken into account when the Commission considers whether or not a merger is likely to breach s. 50.
Thus there is scope, within both tiers of merger regulation, for the Commission to assess efficiencies (if strong and credible evidence is provided) that international competition can generate. This makes Australian treatment of efficiencies in mergers among the most progressive in the world. Evidence before the recent Federal Trade Commission hearings on Competition Policy in the New High-Tech, Global Marketplace referred to Australia being more progressive than the United States and the European Union in its treatment of such efficiency considerations. 6
Trade-offs and authorisation
Authorisation should be considered where a merger or acquisition is likely to conflict with s. 50, yet the proposal appears to have redeeming features, such as producing efficiencies that assist an Australian company to compete in overseas markets. For instance, although a merger may result in cost or dynamic efficiency gains, it may also reduce competitive pressures which may cause allocative efficiency to suffer. The authorisation process and its public benefit test provide a mechanism whereby these conflicting claims can be balanced. Put more broadly, the authorisation process allows the various 'trade-offs' that arise in the context of a merger to be determined.
Authorisation is a public process by which the Commission grants immunity, on public benefit grounds, for mergers that might otherwise contravene the Act. In those few cases where the Commission challenges a merger as anti-competitive, Part VII of the Act enables the Commission to authorise mergers where they would be likely to result in such a benefit to the public that the acquisition should be allowed to take place. Parties may choose to apply for authorisation without submitting their proposal for scrutiny under s. 50.
Section 90(9A) of the Act specifically provides that a significant increase in the real value of exports and a significant substitution of domestic products for imported goods must be regarded by the Commission as a public benefit for the purposes of determining applications for authorisation of mergers and acquisitions. Further, all other relevant matters that relate to the international competitiveness of any Australian industry must also be taken into account.
Figure 2 summarises the framework in which international issues are considered by the Commission in merger analysis and the authorisation process. The main elements of this framework that incorporate international competitiveness considerations are then examined in more detail.
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| How does the Commission review mergers? |
The process of review under s. 50
At the administrative level there is a five stage process of review which takes account of the merger factors listed in s. 50(3) of the Trade Practices Act when the Commission makes an assessment of whether a merger or acquisition would, or would be likely to, substantially lessen competition. At each stage, 'safe harbours' indicate mergers and acquisitions that are unlikely to be of concern to the Commission.
- The Commission identifies the relevant market, in its
relevant product, geographic, functional and temporal dimensions.
- The Commission assesses the level of concentration
in the market of the merged firm in order to determine whether
the merger falls below certain thresholds. These thresholds act
as 'bright green lines' below which mergers fall within a 'safe
harbour' and which are unlikely to be of concern to the Commission.
If the threshold is exceeded the Commission proceeds to its next
stage of evaluation.
- The Commission assesses the actual and potential level of
import competition in the market to determine whether it
provides an effective constraint on the merged entity.
- The Commission assesses barriers to entry to determine
whether it is likely that new entrants will establish themselves
in the market on a sufficient scale within a reasonable time to
inhibit the exercise of market power by the merging firm.
- If the acquisition is still under consideration the Commission
will examine a series of other factors including:
- the degree of countervailing power in the market;
- the likelihood that the acquisition would result in the acquirer
being able to significantly and sustainably increase prices or
profit margins;
- the extent to which substitutes are, or are likely to be,
available in the market;
- the dynamic characteristics of the market, including growth,
innovation and product differentiation;
- the likelihood that the acquisition would result in the removal
from the market of a vigorous and effective competitor; and
- the nature and extent of vertical integration in the market.
- the degree of countervailing power in the market;
If the Commission considers that an acquisition contravenes s. 50, and the parties do not agree to modify or abandon the acquisition, it can apply to the Federal Court for an injunction, divestiture or penalties. Other persons can apply for a declaration and divestiture (including setting aside the acquisition in certain cases), but only the Commission can apply for an injunction in relation to merger matters. Any person suffering loss or damage as a result of a merger which breaches s. 50 can apply for damages. Ultimately it is for the court and not the Commission to decide if conduct contravenes the Act.
The relevant market
The first step in a merger analysis is identifying the relevant market. This involves identifying those sellers and buyers which effectively constrain the price and output decisions of the merged firm. The Commission's approach to market definition is detailed in its merger guidelines and reflects the approach developed by the Tribunal and the courts.
A market is the area of close competition between firms and within which there is close substitutability between one product and another, and one source of supply and another. Each market will differ as circumstances of each case differ. It is inappropriate to have a pre-determined view on any dimension of a market, including its geographic scope. What is crucial is that the Commission applies the relevant principles of defining a market consistently. A consistent application of those principles will lead to different conclusions where circumstances differ between industries.
A case-by-case approach to merger regulation allows the Commission to take into account all new and emerging factors in an industry. It is not possible to define markets or assess mergers in the abstract and these tasks can be performed only in the context of a specific merger proposal. This is particularly relevant for industries in structural, regulatory or technological change.
An illustration of this is the Commission's approach to bank mergers. Since its 1995 consideration of Westpac/Challenge, where the Commission took the view that there was a 'cluster' of banking type products and services, there have been significant changes in the banking industry, particularly with increased competition from mortgage originators in the housing loan market. This has resulted in considerable 'unbundling' by consumers (so that it is no longer easy for banks to sell a group of products simultaneously where this includes a home loan). This, in turn, led the Commission to a multi-product assessment of the banking markets in relation to its 1997 consideration of Westpac/Bank of Melbourne. 7
- A case-by-case approach to market analysis is necessary as each market will differ with the circumstances of each case.
In some cases the Commission will conclude that a regional market is appropriate, while in others it might find a national market. 8 It is important to note that competition in a market includes competition from imports where they constitute a substitution possibility. That is, a market definition can include imports and potential imports, regardless of the geographical scope of the defined market.
In certain cases the international competitive framework will be a necessary consideration in market analysis. While s. 50 (read with s. 4E) prohibits a merger if it would have the likely effect of substantially lessening competition in a substantial market in Australia, the Commission takes the view that the Act does not require that the relevant market be defined as wholly within Australia, only that at least some part of it be in Australia.
In some circumstances the Commission has found it more practical to define the market as broader than Australia, e.g. trans-Tasman, or even a world market. For instance, in its examination of RGC's 1996 bid for Cudgen RZ the Commission accepted that there was a world market for the supply of feedstock for chloride-route pigment production, and that the acquisition would improve the international competitiveness of the company, particularly given that the target company was a major exporter of the relevant products.
Similarly, in its consideration of a proposed acquisition in 1989 by Paspaley Pearling of Pearls, the two largest producers of south sea pearls in Australia, the Commission took account of claims of an international market for the supply of south sea pearls, particularly in light of evidence that almost all the produce of the Australian pearling industry was exported.
- In some circumstances the Commission may find it more practical to define a market for the purposes of merger analysis as broader than Australia, and even as a world market.
Merger factors -- import and export competition
Firms that claim they are merging in order to enhance their international competitiveness are likely to operate within the trade-exposed sector. In such cases the issue of import competition in the Commission's merger analysis is often a crucial determinant in deciding whether a merger is challenged as substantially lessening competition.
It is widely recognised that, in an increasingly open economy like Australia's, it is important to give special consideration to the role of actual and potential import competition in considering the likely effects of a merger on competition. Pursuant to s. 50(3)(a) of the Act, the actual and potential level of import competition must be taken into account in determining whether an acquisition would be likely to have the effect of substantially lessening competition in a market.
The merger guidelines provide clear guidance on the Commission's assessment of import competition. If import competition, or the potential for import competition, is an effective check on the exercise of market power it is unlikely that the Commission will intervene. In fact, the Commission has not opposed any mergers where comparable and competitive imports have held a sustained market share of 10 per cent or more in the last five years and, as an indicative guideline, is unlikely to do so. 9 In considering the role of imports as a check on market power the Commission will be particularly interested in information that shows that there is, or there is the potential for, a significant, sustained, and competitive level of independent imports.
An illustration of the role played by import competition in the Commission's assessment of competitive effects is provided in Case study 1.
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Case study 1. The plastics industry
An illustration of the Commission's approach to a situation
where internationalisation has put pressure on domestic businesses
to seek cost efficiencies by rationalising.
The Commission has considered three recent initiatives to rationalise
plastics production where enhanced efficiencies were expected
to give rise to real benefits for the Australian economy. In
each case the Commission decided not to intervene on the basis
that there was evidence that imports clearly constrained any exercise
of market power.
The Australian subsidiaries of Dow Chemical and Huntsman Chemical
proposed a joint venture for the production and marketing of polystyrene
in Australia. Both companies were operating at a loss, and sought
to combine in order to restore profitability through efficiencies
that would be gained in a joint venture (through savings such
as lower inventories and rationalising duplicated distribution
infrastructure). Barriers to entry to domestic production were
high. Dow would become the sole producer of general purpose polystyrene,
while Huntsman would become the sole producer of high impact polystyrene.
Marketing would be undertaken jointly.
The Commission noted that polystyrene imports were significant
and had become more competitive since tariffs were reduced to
5 per cent in 1 July 1996. Despite high market concentration,
imports were considered likely to act as a constraint on domestic
pricing.
Kemcor proposed to acquire Hoechst's plastics business, as part
of a wider rationalisation of the Altona chemicals complex in
Victoria. The acquisition would leave Kemcor as the sole local
producer of high density polyethylene. Barriers to entry to domestic
production were high but imports were significant. The facilities
were small by world standards, having been built at a time when
Australia had high plastics tariffs.
The Commission considered that the rationalisation would enable
more efficient production with increased output and lower costs
of production (e.g. by rationalising distribution, product support
and reduced down-time through longer runs). This would enable
the Australian product not only to maintain market share but even
displace imports. Imports were considered by the Commission to
be a competitive constraint on domestic pricing by Kemcor ' imports
were readily available and their quality was satisfactory. Further,
the price of the local product appeared to follow that of the
Asian product.
ICI Australia and Auseon proposed to establish a joint venture
for the manufacture of PVC. The proposal would result in a single
Australian producer. Barriers to entry were high. Imports were
said to be significant and increasing, given a decline in tariff
rates.
By sharing technology, longer production runs and better leverage
in purchasing inputs for PVC production, the parties hoped to
improve efficiency, increase output and realise some import replacement.
The Commission recognised that, together with the other rationalisation
initiatives in Australia's plastics industry, world scale production
was possible without a loss of competition. The Commission noted
that the proposal would put the parties' operations on a more
even footing with much larger competitors overseas, and that imports
would provide a strong discipline on the exercise of market power
by the parties to the joint venture.
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Where a merger raises competition concerns on the demand side of a market, exports can play a role in constraining market power of buyers similar to that played by imports in constraining the market power of suppliers. If the merged firm buys goods or services from producers in an export industry it will not be able to depress domestic purchase prices below competitive levels if this would result in supply switching to export markets.
Thus the Commission is open to arguments that, where there are sustained and significant exports (or the potential for such exports), a merger would be unlikely to substantially lessen competition in the market for the purchase of the goods or services. For example, the Commission did not object to the acquisition of Affinity Metals by Simsmetal, both major acquirers of domestic aluminium scrap, because there are also export markets.
- Where there is sustained and significant independent import (export) competition, or the potential for such imports (exports), a merger will be unlikely to substantially lessen competition in the market for the supply (purchase) of the relevant goods or services.
When undertaking its merger review process the Commission will consider, amongst other things, the dynamic characteristics of a market (pursuant to s. 50(3)(g)), including growth and innovation.
A merger might involve combining technologies, or research and development, and this can in turn affect the dynamics of the market by enhancing the ability of a firm to compete internationally. Efficiencies may be gained from product innovation that have the effect of creating a competitive constraint on the unilateral conduct of a firm in a market, or of undermining the conditions for coordinated conduct.
Exposure to international competition can have significant implications for the dynamics of a market. For instance, regulatory changes such as tariff reductions or the removal of import quotas can enhance the competitive constraint that imports provide in a market.
- Exposure to international competition can have significant implications for the dynamic nature of the market and the Commission will consider this in its analysis of a merger.
| Does the Commission's approach to mergers in the traded sector differ to its approach to mergers in the non-traded sector? |
The focus of merger analysis
Exposure of firms in the traded sector of the economy to the disciplines
of international competition has reduced Commission concerns with
mergers in that sector. The Commission's focus has therefore
switched to mergers in the non-traded sector. The competitiveness
of the trade-exposed sector depends not only on the competitiveness
of other trade-exposed firms, but also on the competitiveness
of the non-traded sector that supplies it with inputs. Regulation
of mergers in the non-traded sector, particularly in service and
infrastructure industries, is critically important to ensure firms
in the traded sector have competitive input markets so as to be
better placed to compete internationally.
Manufacturing industries are generally substantial users of infrastructure-based
services: for example, the costs associated with water, power,
freight (air, rail, road and sea) and other services constitute
between 15 and 25 per cent of the total costs of business within
the agri-food industry.
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By prioritising the promotion of competition
in infrastructure industries the Commission can ensure, as far
as possible, that input costs to exporters are minimised.
The Commission's priorities remain with mergers that have arisen
through privatisation and in deregulating infrastructure industries,
and expects this work to continue in the future. This is particularly
so in light of the reforms, restructuring and reviews in areas
such as the energy sector (particularly gas and electricity),
primary industry (including dairy, eggs and sugar), the transport
sector (including airports, ports and rail), the communication
sector (including post, broadcasting and telecommunications) and
the financial services sector.
The Commission's focus is now on encouraging the development of
an environment in which firms in the trade-exposed sector are
able to enhance their international competitiveness.
Micro-economic reform and international competitiveness
Of course, merger regulation alone will not ensure competitive
input markets for the trade-exposed sector. The continued implementation
of micro-economic reforms is also important.
Micro-economic reform aims to increase the efficiency and international
competitiveness of Australian industry by exposing trade-sheltered
public utility and infrastructure industries to the discipline
of effective competition and/or efficient regulation. Effective
reform of the public utility and infrastructure industries, which
lowers the cost of inputs to the trade-exposed sector, will make
a substantial contribution to improving the international competitiveness
of Australian firms. A loss of direction in implementing the
micro-economic reform agenda would result in a failure to fully
realise the potential benefits of the reforms. This would impact
adversely on the ability of Australian firms to compete internationally.
The Commission supports continuing micro-economic reform at all
levels, particularly in respect of the public utility and infrastructure
industries. Facilitating export enhancement requires a combination
of micro-economic reform and effective merger regulation of the
non-trade exposed sectors.
Case study 2 illustrates the Commission's focus on merger regulation in the non-traded sector.
An illustration of the Commission's approach to an acquisition
in a non-trade exposed industry with export facilitation considerations.
Facts
John Swire & Sons Pty Ltd proposed to acquire a 50 year headlease
of the Export Park Cold Store Facility by tender sale from the
South Australian Asset Management Corporation (SAAMC). Export
Park was located within the boundaries of Adelaide Airport and
had direct tarmac access to the runway. Export Park was a public
cold store facility providing general cold storage services and
specialised export cold storage services. It was estimated that
approximately 30 per cent of Export Park's throughput was export
air freight, with the remainder being local cold storage.
Swire owned a number of cold store facilities in Adelaide and
held the largest market share in terms of public cold storage
capacity in Adelaide. Export Park, operated by Safrate International,
was Swire's major competitor in Adelaide.
Analysis
Part of the relevant market related to export cold storage. Of
the five cold store facilities registered for export meat storage
in Adelaide, three were owned by Swire, and one was owned by Export
Park. There were two cold store facilities registered for export
fish storage: one was owned by Swire, and one by Export Park.
If the proposed acquisition of Export Park were allowed to proceed,
Swire would own four out of the five export meat cold store facilities
and both of the export fish cold store facilities.
Import competition was not relevant in relation to the provision
of cold store services and barriers to entry were considered significant.
The Commission considered that the ability of Swire, post acquisition,
to increase profits and prices in the export cold storage sub-market
may be considerable, particularly in relation to export meat and
export fish. The Commission was concerned that any such increase
in prices would add to the costs of export and impede the ability
of Australian firms to compete effectively in overseas markets.
The Commission recognised that a competitive export facility
for produce in Adelaide was essential if South Australian farmers
were to compete in Asian markets.
The Commission decided that the acquisition was likely to substantially
lessen competition in the market for the supply of cold store
services in Adelaide. The Commission advised SAAMC of its decision,
resulting in the tender for the sale of the headlease being awarded
to Safrate International.
It is important to note, however, that the outcome may have been
different if access arrangements had been available.
Efficiencies
The Commission recognises that increased exposure to global markets
is placing pressure on domestic firms to reduce costs, improve
quality and service and innovate in order to become more competitive
in overseas markets. Mergers can play an important role in achieving
such efficiencies. The growing internationalisation of trade
and commerce is of dual relevance to mergers in trade-exposed
sectors of the economy. First, it creates pressure on firms to
seek enhanced efficiencies in order to compete. Second, it reduces
concern at the level of domestic concentration in trade-exposed
sectors, given the presence of overseas sources of competition.
There are various aspects to efficiency, including production
or technical efficiency (achieving the maximum output from a given
quantity of inputs); allocative efficiency (allocating resources
between uses based on consumer valuation of the resultant products);
and dynamic efficiency (responsiveness to changing market conditions
such as new technology and new products). Support for this definition
comes from the Australian Competition Tribunal. In the 1994 Newsagents
decision, the Trade Practices Tribunal (as it was then known)
stated:
Where a merger enhances the efficiency of the merged firm, for
example by achieving economies of scale or effectively combining
research and development facilities, it may have the effect of
creating a new or enhanced competitive constraint on the unilateral
conduct of other firms in the market or it may undermine the conditions
for collusive conduct. That is, an acquisition which increases
the competitiveness of the merged firm may also increase (or not
substantially lessen) competition in the market.
While efficiencies generally arise as a question of public benefit,
which falls for consideration under the authorisation process,
they will also be relevant in a s. 50 context to the extent
that they impact on the competitiveness of markets. In the absence
of other impediments, if such efficiencies are likely to result
in lower (or not significantly higher) prices, increased output
and/or higher quality goods or services, the merger will be unlikely
to substantially lessen competition. As noted in the Revised
U.S. Horizontal Merger Guidelines.
In addition, the following factors will also be relevant to the
Commission's consideration of efficiency claims under s. 50:
It is important to recognise that assessing efficiencies in the
context of review of mergers under s. 50 is different to
assessing efficiencies (and other public benefits) under the authorisation
process. The difference between them is as follows.
Only those efficiency gains that contribute to improved competition
can be considered at the stage of determining whether or not a
merger is likely to substantially lessen competition under s. 50.
For instance, cost or dynamic efficiency gains achieved through
a merger (e.g. by combining technology or R & D) may enhance
the competitiveness of the market by enhancing the incentive of
the merged firm to lower the price of its products.
The relevant question under s. 50 is the effect, or likely
effect, of the merger on competition, where any effect flowing
from efficiencies would be taken into account in assessing the
firms' abilities and incentives to compete in the relevant market.
Analysing efficiencies in the context of s. 50 is integrated
within the framework of competition analysis, rather than being
considered as a 'trade-off' with competition effects, as might
be done in an authorisation context.
The merged firm may be unable to show that such efficiencies are
likely to be achieved or affect incentives in ways likely to increase
(or not substantially lessen) competition in the relevant market.
However, that firm may be able to show that broader social efficiencies
are likely to be achieved. For instance, resource savings (e.g.
from increased cost efficiency) may be likely to result from the
merger, a greater rate of research and development may be possible,
or employment prospects may be enhanced.
These efficiencies are considered in the context of an application
for authorisation. The authorisation process allows for
the broader consideration of all efficiencies -- those that result
in a better use of resources as well as the subset of efficiencies
that affect competition (and thus which might have been considered
under the Commission's merger review process under s. 50).
The process of authorisation
Case study 2. Swire Group/Export Park
(August 1994)
How does the Commission take account of efficiencies
when analysing mergers?
Plainly the assessment of efficiency and progress
must be from the perspective of society as a whole: the best use
of society's resources. We bear in mind that (in the language
of economics today) efficiency is a concept that is usually taken
to encompass 'progress'; and that commonly efficiency is said
to encompass allocative efficiency, production efficiency and
dynamic efficiency.
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This broad approach to efficiencies is important in the context
of viewing mergers that are claimed to enhance international competitiveness.
Achieving economies of scale may not be enough to compete in
the international marketplace, in which the long term survival
of a firm may depend upon developing new and improved products
and processes, i.e. dynamic efficiency.
In a coordinated interaction context ... marginal
cost reductions may make coordination less likely or effective
by enhancing the incentive of a maverick to lower price or by
creating a new maverick firm. In a unilateral effects context
... marginal cost reductions may reduce the firm's incentive to
elevate price.
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Of course, while recognising that precise quantification of such
efficiencies is not generally possible, in its consideration of
efficiency claims, the Commission will require strong and credible
evidence of the following:
Merger review
Authorisation
How does the authorisation process work?
The authorisation process has an important role to play in recognising
international competitiveness factors.
The authorisation provisions are contained in Part VII of the
Act and provide a mechanism for the Commission, or the Tribunal
on review, to exempt mergers and acquisitions from the application
of Part IV where they would result, or be likely to result, in
such a benefit to the public that they should be allowed to take
place. The Tribunal has the power to review determinations made
by the Commission when an application for review is made by an
interested party.
Once authorisation is granted in relation to a merger or acquisition
neither the Commission, the Minister, nor third parties can take
action under the Act to overturn the acquisition. The immunity
runs only, however, once authorisation is granted and for the
period for which authorisation is granted. The Commission cannot
initiate the process. The acquirer must lodge the application.
While the Commission may suggest an authorisation application
should be lodged, the decision on whether or not to do so lies
ultimately with the parties. The Commission will use its resources
to facilitate speedy consideration of such applications.
The authorisation process is a public process in which any interested
party may make a submission. Submissions are open for inspection
on a public register, and there may be provision for a conference
of interested parties. There is, however, provision for maintaining
confidentiality of commercially sensitive information or otherwise
where it appears desirable to the Commission to grant confidentiality.
In making its evaluation the Commission adopts the approach set
out by the Tribunal of comparing the position that would apply
in the future were the proposed acquisition not given effect,
with the position in the future which would arise if the proposed
acquisition were given effect.
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This requires an integrated analysis
of both public benefit and public detriment.
Public benefit is not defined by the Act, although the Tribunal
has suggested in the QCMA decision that the term should be given
its widest possible meaning:
Pecuniary savings which merely result in a transfer of wealth,
rather than any real resource savings for the community, may not
be considered by the Commission to constitute substantial public
benefits in themselves. The interests of the public as purchasers,
consumers or users are relevant.
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Lower prices for consumers and
lower input costs for business, with potential ramifications for
international competitiveness, are considered by the Commission
to constitute public benefits.
The Commission recognises that developments in information technology
can play an important role in facilitating exports and the public
benefit that comes from the development of exports.
There is a specific requirement in s. 90(9A) of the Act that
significant increases in exports or import replacement be considered
as public benefits and that the Commission take account of all
relevant matters relating to international competitiveness. The
Commission has granted authorisations in a number of merger or
joint venture cases where international competitiveness was a
determinative factor.
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For instance, the Commission authorised
a joint services agreement between Qantas and British Airways,
where there were advantages in a global alliance.
In authorising the DuPont/Ticor sodium cyanide joint venture the
Commission recognised the importance of international business
relationships in giving Ticor access to the substantial technology
and process experience of DuPont. This joint venture provides
a good example of the Commission's approach to assessing public
benefits in an authorisation application involving international
issues, and is illustrated in Case study 3.
An illustration of the Commission's approach to international
issues in an authorisation application.
Facts
DuPont and Ticor applied for authorisation, inter alia,
of a joint venture between their subsidiaries to take over and
expand Ticor's sodium cyanide manufacturing plant. Sodium cyanide
is a chemical agent that is essential for the extraction of gold
from its ore.
The industry has a high concentration internationally, with only
three major international producers of sodium cyanide, two of
whom had significant shares of the Australian market. The market
for its production was growing substantially but was highly concentrated
and appeared to be approaching full capacity.
The Australian market was close to self sufficient, with about
90 per cent of domestic demand satisfied by domestic production.
DuPont was the major importer of sodium cyanide into the Australian
market.
Analysis
The Commission considered that there was potential for anti-competitive
conduct, stemming mainly from the entrenchment of the existing
market structure and the limited role imports were likely to play
in imposing a competitive constraint on domestic prices. With
DuPont, which previously was the major importer of the product,
removed as a potential entrant in its own right the joint venture
would reduce the effectiveness of imports as a competitive constraint.
The Commission considered that the undifferentiated nature of
the product, combined with the oligopolistic nature of the industry,
had the potential to lead to cooperative arrangements between
the major players at the expense of competition.
In its determination of public benefits the Commission accepted
that increased production would satisfy increased demand otherwise
likely to be satisfied by imports, thereby assisting Australia's
external trade account over the medium to long term. While it
was questionable whether significant export of the product would
be forthcoming (due to the increase in domestic demand expected),
this did not detract from the import substitution benefits. The
authorisation was granted.
Joint ventures
The evaluation of public benefit/detriment
... anything of value to the community generally,
any contribution to the aims pursued by society including as one
of its principle elements ... the achievement of the economic
goals of efficiency and progress.
14
However, as emphasised by the Tribunal, public benefits in the
form of increased efficiency and better resource usage, resulting
in lower unit costs, are most important in considering applications
for the authorisation of mergers. Efficiencies may take many
forms, e.g. economies of scale and scope, better integration of
production facilities, lower transportation costs, more efficient
technology resulting in reduced input and/or energy costs, or
the combining of complementary research and development facilities.
Case study 3. DuPont/Ticor (May 1996)
Some firms can achieve the necessary economies of scale to enhance
international competitiveness by combining only certain functional
areas of their business, e.g. research and development. The efficiencies
to be gained in combining other areas of their operations (e.g.
production or distribution) may not be sufficiently large to warrant
a full merger or acquisition. Arrangements like joint ventures
may be more appropriate in these sorts of cases. Joint ventures
are a common arrangement for firms that are collaborating in order
to enhance their international competitive position, and may fall
for consideration under the merger and authorisation provisions
of the Act.
Joint ventures can be horizontally or vertically related to their
parents. They can cover a variety of different forms of cooperation
which may range from contractual cooperation to creation of a
new enterprise that may perform a chain of functions as an autonomous
entity.
Like any arrangement between competitors they can have anti-competitive
consequences. That is, while a joint venture may aim to facilitate
exports, it may also establish a platform for the joint venture
parties to engage in conduct that may substantially lessen competition
in a domestic market.
Joint ventures are prohibited under the Act if they substantially
lessen competition. A joint venture may be examined by the Commission
under either s. 50 or s. 45, depending upon how it is
structured. Section 45 prohibits contracts, arrangements or understandings
that restrict dealings or have the purpose, or would have or be
likely to have the effect, of substantially lessening competition.
17
If the contract, arrangement or understanding that is the vehicle
for the joint venture involves the acquisition of shares in the
capital of the joint venture partner corporation, or assets of
a person to the joint venture, s. 50 will apply. On the
other hand, where a contract, arrangement or understanding relating
to a joint venture does not provide for such an acquisition, s. 45
will be the relevant provision. Where a joint venture falls within
both ss 45 and 50, s. 50 is applicable.
18
In assessing the likely competitive effect of a joint venture
the Commission will refer to the same factors considered under
merger analysis (concentration, import competition, barriers to
entry etc) ' the Commission's approach to which is discussed in
detail in its merger guidelines. While in the case of a merger,
competition concerns need to be addressed in the relevant market(s)
in which the merged firm will operate, in the case of a joint
venture (as with partial share acquisitions) the Commission will
consider competition effects in all markets where the parties
to the joint venture will compete.
The details of a joint venture will affect the incentives for
competition and coordination between the parties, and even between
the parties and the rest of the market. The issue of efficiencies
will be relevant in considering whether a joint venture is likely
to substantially lessen competition, where those efficiencies
impact on the competitive processes and are likely to affect the
joint venture's abilities and incentives in ways that are likely
to be pro-competitive. This is consistent with the Commission's
approach to efficiencies in the context of merger analysis.
A joint venture that risks breaching s. 50 may be authorised
pursuant to the authorisation process that applies in respect
of mergers. A joint venture that risks breaching s. 45 may
also be authorised, although under a slightly different test.
The difference is not significant and both tests essentially
involve the same elements.
For s. 50 matters, s. 90(9) provides that the Commission
shall grant authorisation only if it is satisfied, in all the
circumstances, that the proposed acquisition would result, or
be likely to result, in such a benefit to the public that the
acquisition should be allowed to take place. As mentioned, s. 90(9A)
requires that the Commission regard export enhancement and import
substitution as public benefits, as well as to take account of
all other relevant matters that relate to the international competitiveness
of Australian industry.
For s. 45 matters, s. 90(6) provides that the Commission
shall grant authorisation only if it is satisfied, in all the
circumstances, that the conduct would result, or be likely to
result, in a benefit to the public that would outweigh the detriment
to the public constituted by any lessening of competition resulting
from the joint venture arrangement. Export enhancement, import
replacement and other relevant matters relating to international
competitiveness will be regarded as public benefits.
An example of the Commission's assessment of the competitive effects
of a joint venture, with a particular emphasis on the role of
import competition, is provided in Case study 4.
An illustration of the Commission's approach to the role of
import competition and international issues in respect of a joint
venture.
Facts
In 1997 CSR Limited and Mackay Refined Sugars Pty Limited (MRS)
proposed to enter into a joint venture encompassing their combined
sugar refining, distribution and marketing assets in Australia
and New Zealand. The joint venture would effectively reduce the
number of Australian sugar refiners from four to three, with a
joining of the two largest refiners in terms of capacity.
In an earlier proposed joint venture between CSR and MRS that
the Commission considered in 1993 the Commission refused to grant
authorisation because it was not satisfied that the joint venture
would result in a public benefit substantial enough to outweigh
its anti-competitive effect. At that time refined sugar imports
were not considered to be an effective competitive constraint
on domestic refiners. A tariff of $55 per tonne on raw and refined
sugar imports, together with high freight costs, placed imports
at a substantial competitive disadvantage.
Analysis
In relation to the 1997 proposal the Commission identified a number
of changes which had occurred in the sugar refining industry since
1993, leading to a significant increase in the effectiveness of
imports as a competitive constraint on domestic refiners. One
of the primary factors identified by the Commission was the elimination
of the $55 per tonne sugar tariff in 1 July 1997. Together with
a substantial reduction in freight rates, the removal of the tariff
reduced the import parity price of refined sugar thereby increasing
the competitiveness of imports.
In response to Commission concerns in relation to the competitive
effects of certain aspects of the joint venture, particularly
in regard to Western Australia, the parties offered to provide
an undertaking under s. 87B of the Trade Practices Act.
The undertaking provides that the joint venture parties will make
their import facilities in Western Australia available to any
person wishing to import sugar into Western Australia.
In light of the proposed undertaking, and taking into account
the increased effectiveness of imports as a competitive constraint,
the Commission concluded that the proposed joint venture was unlikely
to substantially lessen competition in the relevant market for
the supply of refined sugar.
How are joint ventures treated under the Trade
Practices Act?
Case study 4. CSR/Mackay Refined Sugar (July 1997)
The Commission also took account of the significant increase in
world and regional refining capacity, particularly in Asia and
the Middle East. This was considered likely to result in an increased
threat of imports into Australia.
Section 2 Mergers can also play an important part in the overall 'Market for corporate control', in which outsiders who believe they are able to improve the efficiency of a firm are prepared to bid above market values. back
For example, the Commission recognised BHP's aspirations to gain international steel distribution synergies through its acquisition of Tubemakers. The Commission is also well aware of international pressures to improve standards and innovation in particular industries, such as in the packaging industry where this issue was raised with the Commission in its review of the Alcoa/Comalco acquisition. back Griffin J. and Sharp L., 'Efficiency Issues in Competition Analysis in Australia, the European Union, and the United States', 64 (1996) Antitrust Law Journal, at 651, 672, referring to 'Anticipating the 21st Century: Competition Policy in the New High-Tech, Global Marketplace' Volume 1, A Report by the Federal Trade Commission Staff, Antitrust & Trade Regulation Report, Vol. 70 No. 1765, Special Supplement, 6 June 1996, at S -36. back Such an approach is consistent with the findings of the Financial System Inquiry Final Report, AGPS, March 1997. back