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.
