It has been more than five years since the P.R.C. Anti-Monopoly Law came into effect on August 1st, 2008. The Ministry of Commerce, one of the three major anti-monopoly authorities, is responsible for the review of “concentrations of undertakings”. From 2008 through the first half of 2013, the Ministry received a total of 754 declarations of concentration of undertakings, among which 690 cases were docketed and 642 were concluded. These figures represent a great achievement. Of all concluded cases, 75% of the total, or 625 cases, were unconditionally approved. 18 cases were approved with conditions; and the only prohibited merger was subject to the decision on concentration of undertakings issued to the largest foreign investment merger transaction to date — U.S. Coca Cola Company’s merger of its controlling stake in China’s Huiyuan Juice Group Co., Ltd. In the article A Five-Year Retrospective and Prospects for the Anti-Monopoly Work of the Ministry of Commerce recently published by Mr. Ming Shang, the Director of the Anti-Monopoly Bureau of the Ministry of Commerce (China Pricing Supervision and Inspection, Volume 9, 2013), this case was again listed as a milestone in concentration of undertakings reviews over the past five years. In the article, Mr. Shang reiterates that “the reason for prohibiting this merger was that once the merger was completed, Coca Cola’s control of the juice market would be significantly enhanced. Combined with its current dominant position in the carbonated beverage market and the corresponding transmission effect, the concentration would significantly increase the obstacles for potential competitors attempting to enter the juice market. Meanwhile, the merger would squeeze the living space of medium-and-small domestic juice companies and suppress the capacity of domestic companies to participate in competition and independent innovation in the juice market. This would adversely affect competition in China’s juice market in a manner that would be unfavorable to the sustainable and healthy development of China’s juice beverage industry.” 

It can be seen that although the reasoning behind the prohibition is consistent with the interpretations presented by the spokesman for the Ministry of Commerce, it remains unconvincing. Since so far this is the only case that has prohibited a concentration of undertakings, currently parties from various fields still hope that the Ministry will disclose the review details. A typical expression of this anticipation comes from the European Union Chamber of Commerce in China (the “EUCCC”): “This is a big experiment for us. We are interested in what actually happened and why approval was not granted.”

In the author’s opinion, the problem is not that the Ministry is unwilling to provide further details on this case, but that the case involved a difficult issue in the review of concentrations of undertakings — how should the anti-competition effect of a conglomerate merger be determined? 

  1. The Concept of a Conglomerate Merger and the Nature of Coca Cola’s Proposed Merger With Huiyuan Juice

Traditional competition law theory classifies company mergers (also known as concentrations of undertakings) into two types -- horizontal and non-horizontal. The former usually directly reduces competition and affects market structure because it occurs between/among manufacturers or distributors competing in the same market sector; consequently, horizontal mergers are more strictly regulated throughout the world. In contrast, since non-horizontal mergers occur more often between/among indirect competitors, they do not directly increase a company’s market share in a particular market. Instead, they tend to enhance company efficiency. For this reason, more economic analysis is needed for the review of non-horizontal mergers and they need to be examined on a case-by-case basis. Non-horizontal mergers can be further subdivided into vertical and conglomerate mergers. Vertical mergers are mergers between/among companies at different levels of a supply chain, while conglomerate mergers generally involve different markets. According to an interpretation of the U.S. Merger Guidelines, “conglomerate mergers” refer to mergers occurring between/among companies in different product markets. Furthermore, the EU Non-Horizontal Merger Guidelines note that the different product markets may be closely related -- for example, markets involving complementary products or products of the same series, usually purchased by the same type of consumers for the same ultimate purposes. Under this classification system Coca Cola’s proposed merger of Huiyuan Juice should be classified as a conglomerate merger because Coca Cola’s core product (carbonated beverages) and Huiyuan’s product (juice beverages) are both soft drinks. The products are even interchangeable to some extent, but still belong to different product markets because of limitations on their interchangeability.

It should be noted that some domestic scholars including the prominent anti-monopoly scholar and professor Mr. Xiaoye Wang did not originally classify Coca Cola’s merger of Huiyuan as a conglomerate merger. Professor Wang believed that “since considerable interchangeability exists between carbonated and juice beverages, and since Coca-Cola and Huiyuan are competitors, the merger should be classified as a horizontal merger.” (Xiaoye Wang’s speech at the Third Anti-Monopoly Summit Forum: Legal Seminar on Coca Cola’s Proposed Merger of Huiyuan hosted by the Renmin University of China on March 23rd, 2009). The Ministry of Commerce emphasized in its subsequent interpretations that “the Ministry pays great attention to economic analysis, and it conducted an in-depth analysis of the interchangeability of juice and carbonated beverages…based on evidence surveyed and collected from the market, the Ministry determined that the juice market was the relevant market…the interchangeability between juices and carbonated beverages is relatively weak…(although) both are non-alcoholic drinks, they actually belong to closely adjacent markets (Detailed Interpretations of the Ministry of Commerce on the Prohibition of the Proposed Merger of Huiyuan, People’s Daily, March 25th, 2009). The Ministry’s commentary also confirmed that the merger involved the juice beverage market and the carbonated beverage market. For these reasons, the author believes there should no longer be any great dispute over defining a merger between closely adjacent markets to be a conglomerate merger.

  1. A Review on the Evolution of Viewpoints on the Review of Conglomerate Mergers in Western Countries based on European Union Cases

Based on the very nature of conglomerate mergers, the Ministry of Commerce needs to prove that it is likely fall within Article 28 of the Anti-Monopoly Law — “have or may have the effect of eliminating and/or restricting competition” before it prohibits the merger. Such proof, however, is difficult to establish in both theory and practice. Consider Western countries with well-developed anti-monopoly law systems -- the United States, for example, prohibited conglomerate mergers in the 1960s and 1970s in cases such as P&G’s merger with Clorox. Under strong criticism from the “Chicago School”, however, the U.S. Merger Guidelines promulgated in the 1980s amended the provisions on conglomerate mergers by affirming their positive role in enhancing efficiency and generally working to the ultimate benefit of consumers. Another look at the European Union is also instructive -- from the limited typical cases in the more than two decades of practice that followed the promulgation of the European Community Merger Rules, we can see changes in the EU’s viewpoint on conglomerate mergers.

In the first decade, the EU adopted strict regulatory measures for conglomerate mergers. In the case of Coca Cola’s merger with Carlsberg, for example, which also involved two closely adjacent markets, the EU Commission intervened because it considered the merger likely to result in enhanced market dominance. It finally approved the concentration of undertakings by demanding that the acquiring company sell off its shares in a carbonated beverage bottling company and a Danish cola manufacturer. Similarly, in the Guiness/Grand Metropolitan case, the EU restricted the merger of two companies with strengths in two different alcoholic beverage markets. This was the case in which the EU first introduced the Portfolio Effect doctrine for conglomerate mergers, i.e. the concept that a merger between two influential brands is likely to tempt the purchaser to utilize its dominance in one market (e.g. whiskey) to influence sales in another market (e.g. gin). Nevertheless, the examiners were ambiguous about a number of questions in this case and provided no further explanation -- for example, how does the Portfolio Effect restrict competition? Is this achieved through tie-in or bundle sales? Fortunately, the two companies were approved for the merger by promising to comply with restrictive conditions, thereby forming the largest alcoholic beverage company in the world today (Diageo). Although scholars have already noted EU’s negative attitude towards conglomerate mergers during that period, the satisfying outcome dampened any serious controversy or heated discussions.

In the twenty-first century the EU has gradually amended its Merger Rules by taking advantage of the experiences of other countries. The sensational case of the GE/Honeywell merger once again drew attention to conglomerate mergers. In that case GE’s bid to purchase Honeywell’s shares and was quickly approved by U.S. anti-trust authorities because a more permissive attitude towards conglomerate mergers prevailed at that time in the United States. Nevertheless, the EU Commission prohibited the merger, reasoning that after the merger GE would be able to utilize its dominance of the airplane engine market to bundle its airplane engine products with other avionic devices manufactured by Honeywell, and thereby consolidate GE’s dominance in different markets. This decision is considered a further interpretation by the EU of the Portfolio Effect of conglomerate mergers. It is considered extremely similar to certain views expressed by the P.R.C. Ministry of Commerce when it prohibited the Coca-Cola/Huiyuan merger. What is regretful, however, is that the EU did not conduct an in-depth analysis of the contemplated bundle sale of engine products and other electronic devices, a deficiency that has drawn criticism of the decision from various countries, including the United States. It is worth noting that the case was later filed with the European Court of First Instance, which supported the EU’s decision to prohibit the merger. Nevertheless, the court’s reasoning was that a horizontal merger between the two companies consolidates control and restricts competition in the avionics market. The logic behind the decision was probably changed for an intriguingly subtle reason -- to allow the court to avoid analyzing the Portfolio Effect of conglomerate mergers.

In the author’s opinion, Tetra Laval’s 2002 merger with Sidel was a milestone in the history of EU review of conglomerate mergers. The Swedish purchaser Tetra Lavel was a world-famous manufacturer of paper box packaging with extremely strong market dominance, while the target Sidel was a major player in the market for manufacturing equipment for polyethylene glycol terephthalate plastic bottles (but with no market dominance). Since the paper boxes manufactured by Tetra were usually used for milk and juice beverages, and since plastic bottles are usually used for carbonated beverages, the merger was defined as a conglomerate merger and the EU rejected the merger based on its pre-established viewpoint. The Commission’s reason for the rejection was that after the merger Tetra would be able to utilize its dominance of the paper box packaging market to persuade consumers to buy Sidel’s products at the same time and thereby win market dominance for the new company in the plastic bottle equipment market. This decision is to a large extent consistent with the “transmission effect” described by the P.R.C. Ministry of Commerce for the prohibited Huiyuan merger. The disappointing nature of the decision brought the case before the European Court of First Instance and it was eventually appealed to the European Court of Justice. These two Courts issued judgments overturning the EU’s prohibition of the merger in October 2002 and February 2005, respectively. The Courts held that although a conglomerate merger was likely to result in unfavorable effects such as restricting or obstructing competition, as a law enforcement authority the EU Commission must bear the burden of proving the unfavorable effects it predicted during the review process. The European Court of Justice took pains to emphasize that “special care” must be taken in analyzing such a viewpoint, since by nature it is more like a prediction for the future. Consequently, a comprehensive review must be conducted regarding all factors and effects arising from a proposed merger, to determine which circumstance is most likely to occur. Solid evidence is “especially important” in this review. The EU Commission’s prohibition decision in the Tetra/Sidel merger relied completely upon subjective assumptions rather than objective evidence and analysis. For these reasons, the decision was overturned by both courts and the merger was eventually completed. Of course, the prohibition of the merger by itself should not be a main focus of attention. In the author’s opinion the greatest value of this case lies in the fact that the courts imposed very high analysis and evidence production standards for determining anti-competitive effects during the anti-monopoly enforcement authority’s review of a conglomerate merger. These requirements make it even harder to ascertain the anti-competitive effect of a conglomerate merger. From that perspective, the P.R.C. Ministry of Commerce’s ambiguous attitude towards its prohibition decision in the Coca Cola/Huiyuan case becomes understandable.

  1. Some Problems in the Review of Conglomerate Mergers in the Coca-Cola/Huiyuan Prohibition

Returning to the Coca Cola/Huiyuan case, Ministry of Commerce spokesman Jian Yao elaborated on the reason why the merger was blocked: “After the merger, Coca Cola would be able to utilize its dominance of the carbonated beverage market to apply tie-in sales, bundle sales or other exclusionary practices to transactions involving juice and carbonated beverages…this would seriously weaken or even eliminate the ability of other juice beverage manufacturers to compete with Coca-Cola. The resulting impairment of the juice beverage market could force consumers to deal with fewer products at higher prices.” To some extent, this is actually consistent with the analytical perspective on the potential anti-competitive effect of conglomerate mergers under the Non-Horizontal Merger Guidelines promulgated by the European Union in 2008, i.e., “the major issue worthy of attention in a conglomerate merger is foreclosure…the specific means can be bundle sales, tie-in sales or other exclusionary practices”.

Although it is reasonable for the Ministry of Commerce to refer to the forgoing example, when the EU analyzed the “foreclosure effect” it emphasized that strong evidence must be relied upon concerning: (1) whether the companies proposing to merge have the capacity to foreclose; (2) whether the companies have the intention to foreclose; and (3) the overall effect of the merger on product prices and consumer options. For example, when analyzing the ability to foreclose the EU not only emphasized the market shares held by the companies in their product markets, but also required very few substitutes for the products at issue. When assessing the feasibility of carrying out a bundle or tie-in sale, the EU paid special attention to the interchangeability of the products at issue because the stronger the interchangeability the more likely a bundle or tie-in sale will occur, and the more serious the anti-competitive effect will be. In the prohibited Huiyuan merger case, although Coca Cola controlled the carbonated beverage market, strong competitors with directly interchangeable products such as (Pepsi) were not rare. Moreover, since the interchangeability between carbonated beverages and juice beverages is very weak, it makes sense to ask how Coca Cola could “have the capacity” to carry out foreclosure activities such as tie-in or bundle sales. To use another example, the EU pointed out when it analyzed foreclosure intentions that the intention to foreclose competitors by means of bundle or tie-in sales depends on whether foreclosure is profitable, since a bundle or tie-in sale is likely to offend consumers and thereby trigger losses rather than profits. In its Non-Horizontal Mergers Guidelines, the EU particularly emphasized  that “if total sales revenue and profits of a certain market are relatively low, the entity to be merged is unlikely to be willing to abandon another profitable market just for the market share contemplated in the current transaction. It is no secret that Coca Cola has earned huge profits from the carbonated beverage market. Although Huiyuan has a place in the juice beverage market, it focused on the super-concentrated juice market for many years even though profits continuously declined. This circumstance seems to be consistent with the EU’s analysis that the company to be merged is unlikely to be willing to carry out a foreclosure. To take yet another example, when analyzing the overall effect on prices and consumer options, the EU focused on whether the post-merger company would be likely to carry out a foreclosure to prevent potential competitors from entering the market. The P.R.C. Ministry of Commerce concluded that “the merger would squeeze the living space of small- and medium-sized domestic juice companies”. In view of this, Professor Jichun Shi from the Renmin University of China accurately pointed out that since the juice beverage market “lacks customary industrial standards or legal barriers” it is almost impossible to restrict potential competitors from entering the market by means of foreclosure (Jichun Shi’s speech at the Third Anti-Monopoly Summit Forum: Legal Seminar on the Coca Cola/Huiyuan Merger Case” hosted by the Renmin University of China on March 23rd, 2009). All of the foregoing issues require careful further study.

It is likely that some people consider conglomerate mergers quite complicated and find the concept difficult to fully grasp. This attitude is probably justified to some extent, because if even the systematically formulated EU Non-Horizontal Merger Guidelines are still being criticized for being “too simple and hesitant”, how can the newly-promulgated P.R.C. Anti-Monopoly Law be any better? Nevertheless, due to the constant development of diversification strategies by domestic companies, the number of conglomerate mergers is likely to increase. Under these circumstances, the flexibility in the understanding and determination during the review process under the P.R.C. Anti-Monopoly Law might provide lawyers with a broad platform for practice.