Merger Control

The most obvious way to stop firms gaining too much market power is is to prohibit mergers which seem likely to result in a substantial lessening of competition. This leads to the most common piece of competition jargon:- 'the SLC test' as in "did they find an SLC?".

All competition regimes exempt smaller mergers from scrutiny, although the test of size varies from country to country. In the UK, mergers are exempt from scrutiny if the turnover of the firm being taken over is £70m or less and the combined firms will have no more than 25% market share.

And all competition regimes operate a two phase review process for larger mergers, in which they endeavour to sift out (and so approve) those mergers which do not appear problematic, reserving detailed scrutiny for the minority which might lead to SLCs. Most countries allow the phase 1 sift and the phase 2 detailed scrutiny to be carried out by the same authority. But there is an inevitable suspicion that - having identified a potential problem - the same authority will want to prove that its initial suspicions were justified, especially as an understandable response to the companies likely complaint that the phase 1 decision was totally incompetent and unjustified. In the UK, however, the phase 1 authority (the Office of Fair Trading - OFT) is quite separate from the phase 2 authority (the Competition Commission - the CC). The OFT typically carries out a phase 1 review of around 200 mergers a year, but only refers 10 or 15 or so to the CC who in turn clear a good few of them. Overall, therefore, the UK regime manages to be both professional and unobtrusive.

The CC follows a fairly standard process for all merger investigations, which usually need to be completed within 24 weeks of the date of the reference by the OFT:

1. The CC identifies possible theories of harm - i.e. ways in which the merger might lead to a harmful outcome. It then identifies what evidence would be needed to demonstrate (in the case of each theory) that harm would indeed be the most likely result. This helps to focus the inquiry because the CC can look for particular evidence, rather than ask every question that comes to mind. Then, if the evidence is found, remedial action can be taken - or, if the evidence is not found, the merger can be cleared.

2. The CC then issues an issues statement which summarises the possible theories of harm and other issues that it intends to consider during the inquiry. The statement doubles as an invitation to third parties (any interested companies, organisations or individuals other than the merging companies) to comment on the merger and submit evidence to the CC. The main parties to the inquiry (the merging companies) and third parties may also comment on the issues statement if they wish - especially if they think that the CC may have missed a possible theory of harm, or identified any issues which are in practice not likely to be relevant.

3. The CC seeks submissions from the main parties. It also requests the submission - from any person - of any evidence and information which it thinks might be helpful.

4. The above steps generally take 5 or 6 weeks, following which the CC analyses all the submissions and evidence in considerable detail and sends a number of working papers to the main parties. These papers summarise the CC's thinking on key issues, so that the main parties can if necessary challenge the thinking before the CC's views become too firm.

5. About 13 to 16 weeks into the inquiry, the CC issues its Provisional Findings - a lengthy and detailed document which summarises the evidence and analysis which has persuaded the Commission to reach a provisional view that there is, or is not, likely to be an SLC. If there is no SLC then that is the end of the matter, although the CC will in due course a publish a more polished Final Report

6. But if there is an SLC then the inquiry in principle proceeds along two parallel tracks:
   • The main parties sometimes - but not always - try to persuade the CC to change its mind either by submitting crucial new evidence or by persuading the CC that its analysis was misguided. The former has happened - most recently in the case of the 2009/10 Ticketmaster/Live Nation inquiry. The latter has yet to happen since that CC was given decision making powers (as distinct from previously giving advice to Ministers) in 2002.
   • The inquiry enters its remedies phase as the CC and the parties discuss how the SLC problem might be remedied. The obvious remedy is to prohibit (or reverse) the merger. But the merger can sometimes be allowed to proceed subject to conditions.

7. The inquiry is then formally concluded by the publication of the CC's Final Report which confirms (or otherwise) the existence of an SLC and summarises the remedy which the CC intends to impose on the parties to the merger.

8. It is sometimes necessary to discuss and finalise a detailed remedies package, especially if the merger is being allowed to proceed subject to conditions. This can take some time but, if agreement cannot be reached, the CC will impose a detailed remedy by issuing a formal Order, which has the force of law.

Evaluations

The following reports contain useful summaries of some interesting UK merger cases, and give a good feel for the issues which need to be considered by competition authorities when deciding whether or not to allow certain mergers to proceed. Both reports are on the CC's website.

• PricewaterhouseCoopers evaluated 10 CC merger cases and their report was published in March 2005.
• Deloittes reviewed 10 post-Enterprise Act merger cases and their report was published in March 2009.

Carlton-Granada: ITV: Contract Rights Renewal (CRR) System

One prominent merger which was allowed to proceed subject to conditions was that of the Carlton and Granada TV stations who merged to form ITV in 2003. The main condition was the the prices paid by advertisers would be subject to a complex price control known as the CRR. ITV subsequently lost market share and sought to have the CRR amended or abolished, presumably so that it could raise its prices and so lose further market share: a typically monopolistic reaction to adversity. The Competition Commission, to whom the matter was referred by the OFT, was predictably unsympathetic when it reported in 2010. Diana Guy, Deputy Chairman of the Commission, said the power of the company's flagship channel remained undimmed. "ITV1 remains a 'must have' for certain advertisers and certain types of campaign," she said. "So the essential reason for the CRR undertakings remains: to protect advertisers and other commercial broadcasters from the enhanced market position created by the merger of Carlton and Granada."

It was therefore rather surprising to read in the Financial Times on 13 January 2011 that "ITV can look forward to relief from its most onerous regulation after Jeremy Hunt, the culture secretary, said changes in government responsibility gave him power to reform or abolish it. Moments after telling a London audience on Wednesday night that he was unsympathetic to contract rights renewal - a limit on how much ITV can charge advertisers for its airtime - Mr Hunt said it was himself, not the business secretary, who had power to legislate it." (This transfer of responsibility to the Culture Secretary followed an admission by Business Secretary Vince Cable that he had 'declared war' on the Murdoch media empire.) Mr Hunt went on to say that the timetable for change would be linked to the planned Communications Act, which he hoped to have enacted by the end of 2012.