mergers milano 28 february 2019 - concorrenze.eu

fusions

BarcelonaGraduate School of Economics

We are always too soft with mergers

Massimo Motta

ICREA-Universitat Pompeu Fabra Barcelona Graduate School of Economics

Milano, 28 February 2019


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Increasingconcentrationandprofitability

•  Firms’profitabilityhasincreasedanditsdistributionismoreunequal(andbigbusinessisgettingbigger?)

•  Sectoralconcentrationhasincreased

•  Mark-upshavebeenrisingconsiderablyinthelastdecades

•  Commonownershipmayhavereducedtheincentivesforrivalfirmstocompeteaggressively

-  CouncilofEconomicAdvisors(2016),McKinsey,TheEconomist,McKinseyGlobalInstituteCompetitionReport(2015)

-  DeLoeckerandEeckhout(WP,2017),Traina(WP,2017)-  Azar,Schmalz,&Tecu(J.Finance2017)...


DeLoecker&Eeckhout(2017):Theriseofmarketpower

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Evolution of Weighted Average Markups, US, 1950 - 2014. Compustat (publicly traded firms, firm-level balance sheet data), US

BarcelonaGraduate School of EconomicsDeLoecker&Eeckhout2018:Globalmark-ups

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BarcelonaGraduate School of Economics Whyshouldwecare?

•  Profitabilityisnotbadperse:theexpectationofprofits(i.e.,appropriability)isoneofthefactorswhichpushesfirmstoinvestandinnovate

•  Butcompetition(i.e.contestability)islikelythesinglemostimportantfactorinproductivitygrowth,and..

•  …higherconcentrationandincreasedprofitabilitymaysignalthatfirmsarenotcompetingasfiercelyastheyshould…

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TheEconomist,Nov.16,2017

“Businessislesscut-throatthanit

usedtobe.”


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Risingconcentrationandprofitability:whatreasons?

–  Globalisation:successfulfirmsgainmore

–  Technologicalprogress:IPRsandnetworkeffectsmattermoreèconcentrationrises

–  Fiscalpolicy:firmshavebenefitedoflowercorporatetaxes,andmultinationalsoffiscaladvantages

–  Tooweakcompetitionenforcement?

•  Hasmergercontrolbeentoolenient?

•  RareabuseofdominanceenforcementintheEU(completelynon-existentintheUS)


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Someempiricalevidence

–  Kwoka(2012):“meta-study”ofUSmergerretrospectives.76%anti-competitive;remedieswereinadequate.

–  FTC:4outof5hospitalmergerspriceincreases:evennon-profitorganisationsraiseprices.

–  Evenexpostassessmentofsomemergers(e.g.S-PVC,mobile)byECandNationalAgenciespointstopricerises…

(!)Notrepresentativesamples!

-  Eventstudies:Dusoetal.(2013)findunconditionalapprovalofanti-competitivemergersin2/3ofthesample(anditmaybeanunder-estimation,seealsoKwokaandGu,2015)

Takewithpinchofsalt,butstillpictureofunder-enforcement…11


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Whatdoweknowfromtheory?

•  Verticalandconglomeratemergersareperhapslesslikelytoharmcompetition,but…

•  Horizontalmergershaveadetrimentaleffectonprices,exceptifefficiencygainsarelargeenough(andthehigherthemergingparties’marketpowerthelargerthecostsavingsneedednottohaveanticompetitiveeffects)–  Doweexpecthighefficiencygainsforthemergersthatcompetitionagenciestypicallyworryabout?

•  Yet,itisCompetitionAgencieswhichhavetoshowamerger“substantiallylessenscompetition”,anditisoftenexpectedthatmergersbeprohibitedonlyrarely

BarcelonaGraduate School of Economics Mergerunder-enforcement,I

•  ECandNCAsareunder-staffed•  StronginterestsatstakeàhugepressuresonCAs•  Prohibitionperceivedasexceptional,andlast-resort…

àincreasinglycomplexremedies(seebelow)•  CAsneedtoproveanticompetitiveeffects:

-Theoriesofharmneedtobesubstantiatedandstandardofproofmaybeveryhigh(seebelow)-Theydependonparties’data/information/internaldocuments-whichmayoftenbe‘strategic’aboutit

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BarcelonaGraduate School of Economics Mergerunder-enforcement,II

•  Over-relianceonentryasamechanismwhichwillredresscompetition

•  Theremaybeareasonwhypotentialentrantshavenotenteredtheindustryyet

•  Evenifbarrierstoentryarelow,entrantsknowthatpost-entrytheincumbentswilldecreaseprices

•  Someanecdotalevidence(expostdonebytheCMA;someECcases)

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Mergerunder-enforcement,III

•  Concernsevenifparties’marketsharesbarelyoverlap:–  Potentialcompetition:iffirmswanttogrow,likelytheywillentereachothermarket.Butneedforinternaldocuments…Mayeconomicshelpestablishthecounter-factual?

–  Technology:alargefirmswallowslotsofminnowswithgoodideabutlittlemoney/production/marketingcapacity:synergiesorgettingridofapossiblyfuturerival?

–  [Cunninghametal.(2018):“Killeracquisitions”]–  Innovationmarkets:sometimesbylookingatthefinalmarketwegetthewrongpicture.E.g.,pharma:FirmsA,BdoR&Dinmarkets1,2,3,4.FirmAsuccessfulin1,2;Bin3,4.ByallowingamergerbetweenAandB,lesscompetitionininnovation(andinthefuturealsointheproductmarket)

BarcelonaGraduate School of Economics Mergerunder-enforcement,IV

•  RarecoordinatedeffectscasesintheEUaftertheAirtoursjudgment(à“Overshooting”bytheEC)

•  Recently,almostexclusivelycaseswheretherewaspasthistoryofattemptedorsuccessfulcollusionintheindustry

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•  "Complex interventions”: "creative" solutions, e.g. carve-outs within

assets (or staff, contracts) of parties (e.g. multi product plants);

access remedies.

•  Need to assess not only scope (full overlap 60% of cases,

2011-13), but also viability/competitiveness of purchaser;

innovation and product portfolio matter; also, parties have incentive

to select a weak buyer.

•  CAs redesign industries with remedies: But, are they good at it?

•  More generally, why should competition (and consumers) bear the

risk that remedies are insufficient?

Under-enforcement,V:remedies


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•  Inmostcases,AAsandcourtsdonotreasonintermsofexpectedvalues

•  SupposethemergerremedywouldleaveuswithΔCS=0,but the remedyworks with probability 51%. If it doesnot work, then ΔCS=-10%. In expected terms,E(ΔCS)=-5%,butapreponderanceofevidencestandardwouldleadtheAA/judgetoallowthemerger

•  Similar reasoning for the impact of potentialcompetition,likelyentryetc..

Under-enforcement,VI:expectedvalues


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Summary,andimplications

Theory:horizontalmergersunlikelytobepro-competitiveEmpiricalevidenceconsistentwithmergerunder-

enforcementAmoresensibleapproachwouldbe:

-deminimisruleformergersinvolvingsmallfirms-Reversalofburdenofproofforanyotherhorizontalmerger(includingcaseswheremarketsharesbarelyoverlapbutpartiesareabovecertainthresholds)-Moreworkisneededonverticalandconglomeratemergers

mergers milano 28 february 2019 - concorrenze.eu

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