competition law 68% (needs bibliography)
Drawing on relevant case law, critically evaluate the EU treatment of conglomerate mergers.
The purpose of this essay is to describe and assess the approach to the treatment of conglomerate mergers in European Union mainly by applying relevant cases. The essay is divided into two parts. The first one is describing the EU approach to conglomerate mergers from existing regulatory point of view; in the second part specific cases on conglomerate mergers are drawn on to evaluate EU treatment of this kind of mergers by Commission as well as by courts.
The EU Competition Authority, i.e. the European Commission, refers to mergers as to companies concentrations or combining forces and activities and determines among the positive effects of their implementation the expansion of markets and different benefits to the economy, for instance, the higher efficiency of the development of new products or the reduction of the production or distribution costs. This usually leads to more competitive markets and different consumers benefits, for example from products of better quality and lower prices. However, some combinations can impede competition through the creating or strengthening of dominant player or in other way. The Commission examines mergers with the purpose to prevent harmful effects on competition. [1]
Three kinds of mergers are generally distinguished: horizontal, vertical and conglomerate. Conglomerate mergers are usually described by the method of exclusion of any merger that is a horizontal or vertical merger. [2]
In November 2007 the long-expected Guidelines on the assessment of non-horizontal mergers (hereafter - Non-horizontal guidelines) [3] was released. In this document the European Commission calls the concentrations, where the undertakings concerned are active on different relevant markets, as “non-horizontal mergers” and two broad types fall to this category: vertical mergers and conglomerate mergers [4].
After this classification the Commission determines conglomerate mergers as “mergers between firms that are in a relationship which is neither purely horizontal (as competitors in the same relevant market) nor vertical (as supplier and customer). In practice, the focus is on mergers between companies that are active in closely related markets (e.g. mergers involving suppliers of complementary products or of products which belong to a range of products that is generally purchased by the same set of customers for the same end use).” [5]
Generally vertical and conglomerate mergers are considered to cause less competition issues than horizontal mergers, mainly because they do not reduce direct competition between the merging companies, and also because they usually provide substantial scope for efficiencies. [6]
However sometimes non-horizontal mergers can impede effective competition provoking changes in the ability and incentive of merging companies and their competitors to compete and it can cause harm to consumers. [7]
According to the norms of the Non-horizontal guidelines, conglomerate mergers may lead to coordinated as well as non-coordinated effects in the form of foreclosure. A foreclosure of competitors can be done by means of bundling or tying practices by the merged company. [8]
However, there is an opinion that “the Commission's Non-horizontal Guidelines are a little disappointing. Even though they have to be commended for summarising the Commission's approach to foreclosure concerns in case of vertical and conglomerate mergers, they largely correspond to the Commission's already well-known enforcement practice and thus do not bring about many changes.” [9]
Thereby the main evaluation of the EU approach has to be made through the examining of some most characteristic cases concerning conglomerate mergers.
Prior to the implementation of Non-horizontal guidelines the Commission considered a number of conglomerate cases in compliance with the EU Merger Control Regulation [10]. Before 2001 the Commission mainly treated conglomerate cases from the point of view of influence of so-called “portfolio effects”, that is when through the merger the company widens a range of products to that extent which can influence the choice of customers to buy more entities from this range. The widening usually provides desired distribution efficiencies, but can sometimes create or strengthen a dominant position. [11] The most characteristic cases where the portfolio effect was examined were Coca-Cola/Carlsberg case and Guinness/Grand Metropolitan case.
In Coca Cola/Carlsberg case [12] the Commission focused on the breadth of the merged company’s portfolio of beers, carbonated soft drinks and packaged waters and concluded that such combined beverage portfolio might give “each of the brands in the portfolio greater market power than if they were sold on a “stand-alone” basis”, which was a desirable (perhaps even target) efficiency for companies. But, taking into account the existing dominant position and with the intention to prevent its strengthening, the Commission endorsed remedies and declared a concentration compatible with the common market, thus approved merger, but modified by the divestiture package concerning merged company’s shareholding in the Danish carbonate soft drink bottling company and in the Jolly Cola brand.
In Guinness/Grand Metropolitan case [13] the Commission examined the combination of the activities of the two largest spirit suppliers in the world and therefore the creation of a wide and deep merged company’s portfolio composed of diverse leading spirit brands in different countries.
In this decision the Commission pointed to some advantages that the merged company can enjoy from obtaining a wide and deep portfolio of products and brands. One of them is the strengthening of the position in relation to his customers such as intermediaries, multiple retailers, wholesalers, which is stemming from the ability to provide a wider range of products and thus to be account for a greater part of the customers’ interests. Also the pricing flexibility, potential for tying, promotion and discount advantages, possibility of realising economies of scale and scope and the more potent implicit or explicit threat of refusal to supply.
Then the Commission determined the main conditions depending on which the holder of portfolio could strengthen his advantages and intensify their potential effect, such as holding the brand leader or leading brands in a particular market (also named as “must stocks”) and number of these markets; the various brands’ market shares and their correlation to competitors’ one; the relative importance of the individual parties’ markets; the relative strength of competitors’ brands and their portfolio.
The Commission took “the view that the merger will not create or enhance a dominant position at the manufacturing level in any relevant product market” and agreed with the parties’ view that “consumers buy brands and not portfolios”, but pointed to the indicated above advantages of suppliers with a wide range of products to offer and decided that the resolving of the question of any portfolio effect strengthening depends on concrete geographic market. Greece was assessed as the market where the strengthening of this portfolio effect of a merged company could have been considered to be a significant feature. According to the Commission’s findings “the combination of the most important spirits categories in one single supplier's portfolio is expected to enhance that supplier's market power in individual categories”, in other words “the whole might be greater than the sum of the parts. Therefore, although individual leverage possibilities might have existed prior to the merger, the combined leverage possibilities post-merger, through product tying, became greater than the sum of the individual possibilities pre-merger.” [14] Also “a wide portfolio of categories confers major marketing advantages, giving GMG the possibility of bundling sales or increasing the sales volume of one category by tying it to the sale of another category.” Consequently it could lead to the permanent foreclosure of competing suppliers.
In the above case the Commission concluded that the concentration should be declared compatible with the common market, but the merged company was required to terminate the existing Guinness' distribution agreement for Bacardi rum in Greece.
In 2001 two significant mergers - Tetra Laval/Sidel case and General Electric/Honeywell case - were examined by the Commission primarily from the point of view of conglomerate effects, prohibited and appealed to courts. Before this the EU mergers cases which were appealed to courts mainly were concerning the horizontal and vertical effects. [15]
In Tetra Laval/Sidel case [16] the Commission blocked the acquisition of Sidel by Tetra Laval Group, a global player within the field of food equipment. Tetra Laval owned Tetra Pak, which is the world leader in liquid food processing and packaging (primarily for milk and juices), but also provides lines for processing and packaging of ice cream, cheese, dry foods, fruits, vegetables and pet food. In 2001 Tetra Laval announced and notified its proposed acquisition of Sidel, which was the world leader in producing and supplying of stretch blow moulding (SBM) equipment, which is used to blow plastic polyethylene terephtalate (PET) bottles for packaging liquids (primarily carbonated soft drinks and mineral water).
The Commission declared a concentration incompatible with the common market. An assessment of the so-called foreseeable anti-competitive conglomerate effects of the notified transaction was taken as a basis for the Commission’s decision. The Commission reckoned plastic bottles as a possible substitute in the nearest future for cartons packaging for certain sensitive products from the technical point of view as well as for commercial reasons. Thereby clients who produce these so-called sensitive products would have choice between carton packaging and plastic bottles. Drawing from this complicated sequence of events, the Commission concluded that merged company would be able to use its dominant position on the global market for carton packaging as a lever to create a dominant position on the market of PET packaging. Further, the merger would strengthen the existing dominant position of Tetra on the carton packaging equipment and aseptic carton markets through the removing of competitive restriction from the related PET market that was Sidel.
During the investigation process Tetra Laval proposed a few undertakings with intent to settle these competition issues and counteract anticompetitive effects, but these undertakings were considered by the Commission insufficient, moreover behavioural commitments were named “insufficient as such”. Taking into consideration the significant competition concerns and Tetra’s inability to resolve them, the Commission declared that it “had no other choice but to prohibit the merger”. [17]
It was natural that Tetra Laval appealed the Commission’s decision. The Court of First Instance rejected the Commission’s assessment as too speculative and decided in favour of Tetra Laval. [18] According to the CFI’s judgment the Commission was mistaken in its decision because it failed to prove that there would be serious hindrance of competition due to the likely creation or reinforcement of Tetra Laval’s dominant position on the packaging market. Moreover, the CFI held that the Commission did not give proper assessment to commitments offered by Tetra Laval and thus was wrong in rejecting them.
Concerning the horizontal and vertical effects the CFI held that the Commission wrongly assessed them. The CFI did not consider the probable increase in market share of the merged company as significant, moreover, it reckoned that commitments offered by Tetra Laval regarding its future conduct were sufficient enough to minimise probable anticompetitive horizontal effect. In the similar way the CFI did not find any evidence of high likelihood of the creation of a dominant position on the market of the PET mechanisms which would lead to a serious vertical effect.
Concerning the conglomerate effects “the CFI confirmed the possibility for the Commission to analyse a conglomerate merger through the “leveraging” economic theories, [but] it held that the Commission failed to base its decision on sufficient and convincing evidence of the fact that Tetra would have used leveraging methods in order to strengthen its dominant position on the carton packaging market and/or acquire a dominant position in the PET market.” [19] The Court came to the conclusion that “the Commission’s assessment is based on the possibility, or even probability, that Tetra will engage in such conduct”, so the Commission failed to prove properly that the merge is likely to create a significant anticompetitive effects and its conclusions cannot be upheld.
According to the CFI’s judgement as a result of new investigation of the proposed merger the Commission’s decision was reviewed and the merger was approved [20], but Tetra Laval was required to license its upcoming “Tetra Fast” stretch blow moulding (SBM) technology to third parties. Almost simultaneously the Commission announced that it decided to appeal the CFI’s ruling and in its Press Release [21] devoted to reasons of appeal the Commission declared that “the CFI judgment … raises problems of legal principle concerning several aspects of the work of the Commission in the field of merger control.” Also the Commission argued that the Court required a disproportionate standard of proof for merger prohibition decisions and also exceeded its function consists in reviewing the Commission’s administrative decision, and tried to substitute its view of the case for that of the Commission.
The Court of Justice affirmed the CFI’s judgment. [22]
The famous case of General Electric/Honeywell is rooted in the USA. In 2000 General Electric (GE) and Honeywell announced the merger between them, under which GE would acquire the entire share capital of Honeywell. Both companies are large, international conglomerates. GE’s activities relevant to the merger included business in aircraft engines, gas turbine and financial services, one of them was GE Capital Aviation Services (GECAS) which owned and leased aircraft. Honeywell, an advanced technology and manufacturing company, also is a supplier of aircraft engines, but as well of engine starters, diverse control equipment and aviation electronic equipment, among them navigation and communication systems.
Naturally, first of all, the companies obtained the approval of the US Department of Justice, which decided to permit the implementation of the merger but imposed some remedies. Taking into consideration an international effect of the prospective merger, the parties required the approval of the European Commission.
The Commission decided [23] that GE already had a dominant position in the global market for jet engines for both large regional and commercial aircraft. The Commission took into account the existing GE’s powerful position on the market and stable financial strength, but also a significant role in determining of dominance played the holding by GE of financial services, particularly - of the aircraft leasing. Honeywell was determined by the Commission as the leading supplier of avionics and non-avionics products, corporate jets engines and engine starters, which are used in producing of aircraft engines.
According to the decision in the event of acquiring of Honeywell GE would further reinforce its dominant position and this conclusion is based on three possible anticompetitive effects of perspective merger.
The first, the horizontal overlaps of GE and Honeywell activities on the markets would enable GE to strengthen its existing dominant position on the market of large regional jet engines and also the companies would be able to create a dominant position on two markets - for corporate jet aircraft engines and for small marine gas turbines.
The second, vertical effect would be created as a result of summing of GE’s manufacturing facilities of large commercial aircraft engines and Honeywell's ones of starters for those engines, and it would lead to the strengthening of the existing dominant position on the market for large commercial jet aircraft engines of GE.
The third, the transformation by Honeywell of its existing strong and confident behaviour into dominant position on different world markets for avionics and non-avionics products, as a result of conglomerate effect. This effect could be brought about by two ways. Firstly, by so-called “share shifting” process, when GE’s general financial strength and influence of its GECAS’s businesses in aircraft purchasing and leasing are spread on above mentioned markets of Honeywell activity. Secondly, by using bundling arrangement, when products of the one company, for example GE’s aircraft engines, are combined in a package with the production of the other one, for example with Honeywell’s avionics or non-avionics products, and are sold for a single price. It would enable GE to strengthen its dominant position on the aircraft engines market. The Commission concluded that these practices are highly likely to be implemented by parties after merger taking into consideration their premerger similar practices.” [24]
The companies proposed structural and behavioural commitments to the Commission twice, but they were not accepted as insufficient to deal with possible anticompetitive effects on markets on several different grounds. The Commission concluded that the merge would enable companies to create and strengthen their dominant positions on different markets, thus the effective competition in the Common Market would be seriously impeded and that the merger should therefore be declared incompatible with the Common Market.
As a result of prohibition of the merger implementation in the EU market, General Electric and Honeywell had to cancel it in general. However, they applied for review of the Commission's decision to the CFI but the appeal was dismissed. “The judgment is quite similar to the Court's three other famous merger judgments in Airtours, Schneider and TetraLaval. But there was one difference to the three other appeals: the Commission won the case. But it was a Pyrrhic victory.” [25]
Thus, in spite of everything, the broadly criticised Commission's merger prohibition decision was upheld by the CFI. [26]
The CFI affirmed the Commission’s finding that GE had a dominant position in the world market for large commercial aircraft engines and findings on horizontal overlap on all three described above markets. However, concerning the vertical effect the CFI ruled that Commission's findings were not founded. [27]
Concerning the conglomerate effects the CFI concluded that the Commission’s analysis was wrong. It pointed out that only the existence of financial strength or vertical integration was not sufficient evidence of the fact that companies would create or strengthen a dominant position in the nearest future. The CFI also criticized the Commission approach to probability of occurrence of bundling arrangements on different grounds, thus reckoned them unlikely. [28]
“The CFI confirmed the views it had expressed in Tetra Laval/Sidel, where it overturned the decision to prohibit the proposed merger on the basis that the Commission had failed to prove that a merged entity would not only have the ability to harm competition, but that it would actually act anti-competitively because it had the appropriate incentives to do so. In GE/Honeywell, the CFI did not find it necessary to prove the existence of conglomerate effects, since the merger's horizontal effects were sufficient to establish that the concentration was incompatible with the common market. Importantly, however, the CFI has expanded the relevance of article 82 in merger cases, since its impact as a potential deterrent to certain forms of anti-competitive conduct must be taken into account. In doing so, it has limited the scope of the Commission's ability to block a merger solely on the basis of predictions of future anti-competitive behaviour.” [29]
Summing up, the possibility of only anticompetitive horizontal effects of the merger on the markets of engines for large regional jets and corporate jets as well as small marine gas turbines was enough for the CFI to consider the Commission’s decision as motivated and not to cancel it.
Later there were some other cases examined by the Commission, but it appeared mainly, particularly in 2005, “that conglomerate aspects did not play a major role and were reviewed in particular as to portfolio effects, resulting from the strengthening of a portfolio of brands.” [30] The mergers of Proctor&Gamble/Gillette and Pernod Ricard/Allied Domecq were both allowed.
In Proctor&Gamble/Gillette case [31], where again both well-known companies were based in the USA, Proctor&Gamble was going to acquire Gillette and that would create one of the biggest companies in the world for producing consumer goods with a turnover more than €50 billion. Thus the Commission focused primarily on the existing significant market shares and on the prospective combined portfolio of the merged company. The potential foreclosure of competitors’ products and possibility of bundling practices were examined, but the Commission found that even after such a merger there would be a sufficient competition among producers of consumer goods. Thus the Commission approved the proposed acquisition only under the one condition to sell the battery toothbrush business of Procter&Gamble.
In Pernod Ricard/Allied Domecq case [32] the Commission examined prospective anticompetitive effect arising from the creation or strengthening of the merged company’s position in a number of national markets, particularly in the Scotch and Irish whisky in different countries and in champagne in Portugal. However the Commission approved proposed diverse commitments and cleared the acquisition.
Summing up above-mentioned cases it could be concluded that “the Commission's difficulty in defending its analysis of vertical conglomerate effects seems to stem from its methodology which was developed in 2001 when both GE/Honeywell and Tetra Laval/Sidel were considered side by side by the Commission. The Commission's effects-based approach is not based on structural factors, such as market share, on removal of pre-existing competitive constraints; instead the Commission speculates about a chain of events, which starts with the assumption that a certain behaviour will be adopted by the merged entity, a behaviour, which often would violate Art.82 EC and thus is not be necessarily likely to be adopted and be sustainable over a long period of time. This analysis is inherently complicated and fraught with uncertainties.” [33] The Non-horizontal guidelines clarified many issues of conglomerate effects and mainly resolved some problems: “it is to be welcomed that the Guidelines now recognise that the realisation of efficiencies by the merger or the fact that the merged firm would have large financial resources do not in themselves lead to competition concerns.” [34]
Thus, in conclusion the EU treatment of conglomerate mergers can be summarised as quite ambiguous, which moved from the rather tolerating position with declaring and application of neutral character of this type of mergers to the sticky analysis with a lot of speculative assumptions by the Commission, which was not uphold by courts, and then back. The Commission clarified the approach to the treatment of conglomerate mergers in EU by releasing Non-horizontal guidelines but some uncertainties still surround this issue.
[1] The website of the European Commission http://ec.europa.eu/competition/mergers/overview_en.html, visited 30th December 2009,
[2] Elhauge, E. and Geradin, D. (2007) Global Competition Law and Economics, Hart Publishing, Oxford and Portland, Oregon.
[3] Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of concentrations between undertakings (2008/C 265/07).
[4] Non-horizontal guidelines paras 2, 3.
[5] Non-horizontal guidelines paras 5, 91.
[6] Non-horizontal guidelines paras 11, 12.
[7] Non-horizontal guidelines paras 15.
[8] Non-horizontal guidelines paras 17, 95-97.
[9] Petrasincu, A. (2008) “The European Commission's new guidelines on the assessment of non-horizontal mergers - great expectations disappointed”, 29(4) E.C.L.R. 221-228.
[10] Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings.
[11] Weitbrecht, A. (2002) “E.U. merger control in 2001 - the year of controversy”, 23(8) E.C.L.R. 407-412.
[12] Commission Decision, Case IV/M.833, Coca Cola/Carlsberg, 11 September 1997.
[13] Commission Decision, Case IV/M.938, Guinness/Grand Metropolitan, 15 October 1997.
[14] Drauz, G. (2002) “Unbundling GE/Honeywell: The Assessment of Conglomerate Mergers under EC Competition Law”, 4 Fordham International Law Journal 885-908.
[15] Prete, L. and Nucara, A. (2005) “Standard of proof and scope of judicial review in EC merger cases: everything clear after Tetra Laval?”, 26(12) E.C.L.R. 692-704.
[16] Commission Decision, Case COMP/M.2416, Tetra Laval/Sidel, 30 October 2001.
[17] Commission press release “Commission prohibits acquisition of Sidel by Tetra Laval Group” IP/01/1516 Brussels, 30 October 2001 http://europa.eu/rapid/pressReleasesAction.do?reference=IP/01/1516, visited 30 December 2009.
[18] Tetra Laval v. Commission, T-5/02 [2002] ECR II-4381 (Court of First Instance) of 25 October 2002.
[19] See note 15 supra.
[20] Commission Decision, Case COMP/M.2416, Tetra Laval/Sidel, 13 January 2003.
[21] Commission press release “Commission appeals CFI ruling on Tetra Laval/Sidel to the European Court of Justice” IP/02/1952 Brussels, 20 December 2002, http://europa.eu/rapid/pressReleasesAction.do?reference=IP/02/1952&format=HTML&aged=0&language=EN&guiLanguage=en, visited 30 December 2009.
[22] Commission v. Tetra Laval, C-12/03 P [2005] ECR I-987 (European Court of Justice) 15 February 2005.
[23] Commission Decision, Case COMP/M.2220, General Electric/Honeywell, 3 July 2001.
[24] Killick, J. (2007) “Case Comment The GE/Honeywell judgment - in reality another merger defeat for the Commission”, 28(1) E.C.L.R. 52-62.
[25] See note 24 supra.
[26] General Electric v. Commission, T-210/01 [2006] 4 CMLR 14 (Court of First Instance) 14 December 2005.
[27] Alexiadis, P. and Wood, D. (2006) “Case Comment Court upholds contentious prohibition”, 56 European Lawyer 14-15.
[28] Howarth, D. (2006) “Case Comment. The Court of First Instance in GE/Honeywell”, 27(9) E.C.L.R. 485-493.
[29] See note 27 supra.
[30] Weitbrecht, A. (2006) “EU merger control in 2005 - an overview”, 27(2) E.C.L.R. 43-50.
[31] Commission Decision, Case COMP/M.3732, Proctor & Gamble/Gillette, 15 July 2005.
[32] Commission Decision, Case COMP/M.3779, Pernod Ricard/Allied Domecq, 24 June 2005.
[33] Weitbrecht, A. (2007) “EU merger control in 2006 - the year in review”, 28(2) E.C.L.R. 125-133.
[34] See note 9 supra.