- Mega-mergers can lead to worse outcomes for consumers due to concentrated market power that allows higher prices.
- Regulators have changed how they assess the impact of potential mergers to take a more holistic approach.
- In practice, local competition regulators rely heavily on industry evidence, so business advisers should share their views with them.
“Disney”, a New York Times headline proclaimed recently, “moves from behemoth to colossus with closing of Fox deal”. Disney’s US$71.3 billion acquisition of most of 21st Century Fox’s media assets, announced in late March, creates “an entertainment colossus the size of which the world has never seen,” the newspaper declared.
And it’s only one of many mega-mergers. Bristol-Myers’ current plan to buy fellow drugmaker Celgene is worth some US$74 billion and, according to Bloomberg, “if it is approved... the cash-and-stock deal would rank as the largest pharmaceutical-company acquisition ever.” Last year’s US$84 billion merger of AT&T and Time Warner was even bigger.
The question is, are these humongous companies getting out of hand? Are they now in positions of market power where they can charge more and give less? Increasingly, politicians are saying yes.
“Are these humongous companies getting out of hand? Are they now in positions of market power where they can charge more and give less?”
The argument is that these new giants can charge excessive prices, which is bad in itself, but they also generate hyperprofits for their owners and senior executives, which worsens already lopsided income inequality. And arguably, the already dysfunctional US healthcare market has been made worse again by a tolerance for over-concentrated markets.
There’s also the real risk that cash-rich incumbents are buying out the potentially disruptive ‘next big thing’ before it becomes a competitive threat. While it’s almost impossible to police – who really knows if some tiny start-up will morph into the next Google? – it’s another reason for increasing political pushback.
“There’s also the real risk that cash-rich incumbents are buying out the potentially disruptive ‘next big thing’ before it becomes a competitive threat.”
Regulators awake to competitor wipeouts
US Senator Elizabeth Warren is one of the front runners on this, unhappy that Amazon and Facebook were allowed to make an important series of acquisitions. She wants to bring in tougher merger enforcement, break up overmighty tech giants and regulate them like utilities.
Local competition authorities are alive to the issue. In New Zealand, the Commerce Commission last year stopped online marketplace Trade Me from buying Motorcentral (Limelight Software Limited), which made software that challengers could use to build a rival online platform.
But before implying that all big mergers are bad, it is worth acknowledging that some mergers can be good for the market.
If a dozy player gets taken over by a more ambitious go-getter, consumers may well win. And allowing the number two and number three players in an industry to merge into something substantial may create a competitor better able to rein in a dominant number one incumbent.
But equally, we all know what we’d face if the only airfares available were from Qantas and Air New Zealand, or what the shopping bill would look like if our supermarket duopolies got together.
Paint-by-numbers regulation or a holistic view
But the latest merger outbreak does raise questions. Why are these mergers happening? How have these mega-mergers slipped through the US competition authorities, and the courts when challenged? And could it happen in Australia and New Zealand?
Some of it is cyclical. Companies are flush with cash and can afford deals that ordinarily might be beyond them. Some of it is down to the overt politicisation of competition policy that occurs in the US. Senior American decision-makers are political appointees and can (and do) swing from business-suspicious to business-cosy with every change of administration. And some of it is down to the recurrent bug to foster big ‘national champions’. But there’s another factor. Competition authorities everywhere have shifted in the type of assessment frameworks they are using.
Traditionally, competition regulators used a paint-by-numbers approach focused on questions such as ‘How many competitors would be left post merger?’ and ‘What percentage market share would the merged entity have?’
Now, they prefer to take a more holistic view with questions such as ‘Will the market still be workably competitive, even if it’s down to only two or three players? Or even one?’ The economic concept is ‘contestability’, where a solo incumbent may be disciplined to play nice and not jack up prices by the mere threat of someone’s ability to enter the market.
Mostly the holistic approach is entirely reasonable, but it’s easy to see how it could go too far. We need look no farther than our regional petrol markets.
In 2017, the Australian Competition and Consumer Commission (ACCC) found that Brisbane had a wide variety of petrol players: both major supermarkets (Coles and Woolworths), two of the oil majors, five discounters and a swathe of smaller operations. You’d think that would be enough competition for motorists to get a good deal. But it wasn’t.
Brisbane prices (the ACCC found) were 3.3 cents a litre higher than in Sydney, costing Brisbane drivers an extra A$50 million a year. But with hindsight, were the changes that occurred in Brisbane (two independents merging, 7-Eleven buying Mobil’s stations) a good idea?
In 2016, the New Zealand Commerce Commission allowed Z Energy (formerly Shell) to buy Chevron (the Caltex stations). But the commissioners were split 3-1, with the dissident arguing at the time, “I am not satisfied that in the future without the merger, there is not a real chance that Chevron’s assets could be used to disrupt retail coordination and increase competition. With the merger, any real chance is permanently removed.” Was she right?
Share your views on mergers
There’s a role for businesses and their professional advisers in deciding whether a merger is anti-competitive or not. The ACCC or ComCom may come calling. While in principle they can run fancy economic models of mergers, in practice they rely heavily on industry evidence – but if they don’t, go knock on their door. They need to know.
And if you’re in the merger game yourself, mind your back. If you’ve got any presentiment that your merger might have iffy competition implications, get it sussed by running it past the authorities.
The regulators have never liked marginal mergers bypassing them in the first place, but in today’s more merger-sceptical climate, they are loaded with buckshot and are hunting for bear. You don’t want to be on the receiving end of the blast.