Competition law can be broken when companies merge even if they do not compete. The European Commission today released new guidelines for assessing these so-called non-horizontal mergers. An expert said these will give some dealmakers greater confidence.
Non-horizontal mergers come in two varieties: vertical and conglomerate. A vertical merger is a merger between two companies at different levels of the supply chain, such as the acquisition of a supplier by a customer, e.g. a steel maker buying a supplier of iron ore. A conglomerate merger is between two companies in different but related markets, such as a company producing razors buying a company producing shaving foam.
There are already Commission guidelines on horizontal mergers, addressing deals between companies who compete on the same markets. The new guidelines are intended to complement these and help companies understand how the Commission will analyse the impact of non-horizontal mergers on competition.
The competition risk of a horizontal merger is usually obvious: it leads to a loss of direct competition between the merging firms by removing a competitor from that market. By contrast, vertical and conglomerate mergers do not immediately change the number of competitors active in any given market, so they are less likely to raise concerns.
But a vertical merger could, for example, deny a competing company access to an important supplier – i.e. the merged entity – or present it with increased prices. That can lead to higher prices for consumers.
Last year the Commission intervened in the acquisition of Pfizer's Consumer Healthcare division by Johnson & Johnson. Without the divestiture remedies imposed by the Commission, the transaction would have given Johnson & Johnson control over key inputs for nicotine patches produced by its main competitor, GlaxoSmithKline. The Commission's concern was that consumers attempting to quit smoking otherwise could have suffered higher prices and less innovative products.
Competition Commissioner Neelie Kroes said: "These Guidelines show once more the Commission's commitment to providing clear and predictable guidance for businesses."
"The majority of vertical and conglomerate mergers do not raise problems, and they can bring about efficiency gains that benefit both businesses and consumers," said Kroes. "However, the Commission will act decisively to prevent transactions that ignore the clear indications in the Guidelines of the types of mergers that can harm competition and consumers."
The Guidelines provide examples of where vertical and conglomerate mergers may significantly impede effective competition in the markets concerned. They also indicate levels of market share and concentration below which the Commission is unlikely to identify competition concerns, so-called 'safe harbours'.
Christopher Gibson, a competition law specialist at Pinsent Masons, the law firm behind OUT-LAW.COM, welcomed the guidelines.
"The most innovative aspect of these guidelines is the introduction of a safe harbour," he said. "It basically says that the Commission is unlikely to have concerns with vertical and conglomerate mergers where the post-merger market share falls below 30% in any of the affected markets and where the level of market concentration is below a certain, clearly defined level. That's going to give some dealmakers much more confidence about the likelihood of regulatory interference."
Gibson says the Commission has recently been wary of blocking mergers on the basis of vertical and conglomerate effects.
"Vertical mergers rarely present a problem unless they create significant foreclosure effects in the upstream or downstream markets, and the Commission appears to recognise this," he said. "The theory of conglomerate mergers has long been a controversial issue since the European courts in the GE / Honeywell case were very critical of the Commission's approach to conglomerate mergers."
In that case, the Commission blocked General Electric's planned acquisition of Honeywell. The European Court of First Instance found that the Commission made a number of errors in its assessment of the impact of the conglomerate effects of the merger and had failed to prove that the harm foreseen by the Commission would arise.
"As a consequence of that case, the evidential burden that the Commission has to meet in order to warrant prohibition of the merger or its clearance subject to conditions is clearly a high one," said Gibson.
"Hopefully these Guidelines will provide the clear and predicable guidance to the business and legal community in respect of the Commission's approach to vertical and conglomerate mergers that they purport to do," he said.