An increase in cases has been seen as a warning that the EU is ramping up its response to potential conglomerate effects. What can merging companies do to prepare for a challenge?

In the aftermath of the attempted merger of General Electric and Honeywell in 2001—the first time that a proposed tie-up between two US companies had been blocked solely by European regulators—merger agencies in the EU and the US have adopted a consistent approach for global mergers and cooperate closely based on best practice guidelines. However, the approach on the two sides of the Atlantic remains inconsistent when it comes to assessing mergers that could have ‘conglomerate effects'. These are transactions in which the parties are not competitors in the same product markets (there are no horizontal overlaps) and do not have a supplier-customer relationship (there are no vertical overlaps), but are active in two closely related (or neighbouring) markets. In such cases, the question is whether the merged company could leverage its power in one market over a neighbouring one, and exclude competitors in that second market.

EU trend

After prohibiting the GE/Honeywell and Tetra Laval/Sidel mergers in the early 2000s, mainly due to conglomerate issues and after being overruled by the European courts, the European Commission went quiet on conglomerate effects for more than ten years. In 2008, in its guidelines on the assessment of non-horizontal mergers, it stated that: ‘Conglomerate mergers in the majority of circumstances will not lead to any competition problems’ (at 92). However, recent decisions and pending cases reveal an increased pursuit of conglomerate cases. In 2016, the Commission examined four deals in close succession for potential conglomerate effects: Dentsply/Sirona (dental equipment and consumables); Worldline/ Equens/Paysquare (payment software and relevant machines); Microsoft/ LinkedIn (computer operating systems and social networking services/app) and Broadcom/Brocade (computer processors and interface cards). While in the US most transactions received unconditional clearances, the EU requested remedies from the parties in each one of these deals.

This trend continued in 2017 with the review of Qualcomm/NXP (baseband chips and near-field communication and secure elements chips), Essilor/Luxottica (eyewear and ophthalmic lenses) and Bayer/Monsanto (pesticides and seeds), all of which were subject to an in-depth investigation in the EU (varying from six to nine months), in addition to a (presumably) long pre-notification phase. By contrast, the Qualcomm/NXP deal was cleared in one month by the US authorities, and although the review of the Essilor/Luxottica transaction took longer, it primarily focused on raising rivals’ costs and not bundling concerns.

Concerns and remedies

The main concern in conglomerates cases is whether the merged company will have the ability and incentive to foreclose rivals either by: a) tying products technically and degrading interoperability between the merged entity's products and competing products in favour of the merged entity's own downstream product; or b) bundling products commercially.

With the exception of Essilor/Luxottica and Bayer/Monsanto, in all cases examined and cleared by the EU, remedies were requested to address the conglomerate concerns (see panel opposite). These were mostly behavioural remedies—in the form of assurances that the parties will not eliminate competition—as opposed to structural remedies, which are preferred in cases of horizontal effects.

Lessons learned

While Commissioner Vestager maintains that the conglomerate cases just happened to appear at the same time, many observers believe that the increased pursuit of such cases reveals a trend that merging parties should take into account when contemplating a transaction that could raise conglomerate effects in the EU. The parties should consider whether customers in the relevant markets might complain during the merger review process. They should also review internal documents to see whether statements were made by the sales and marketing teams about leveraging the merged company's increased strength in one market into other markets. In in-depth antitrust reviews, regulators both in the US and the EU ask companies to produce tremendous amounts of internal documents, which could be relevant to the competition landscape affected by the merger, on very short deadlines. It is important to ensure that the internal documents are not misinterpreted in a way that could jeopardise the antitrust review. Finally, if it is likely that conglomerate concerns are serious, and time is of the essence, the parties could explore whether to raise the issue in pre-notification talks with the authorities, and think of a suitable remedy early in the process in order to be prepared.

EU overview: Competitive concerns and the remedies

Merging entities

Concerns

Remedies undertaken

Bayer/Monsanto

Bayer and Monsanto could decide to bundle or tie sales of pesticide products and seeds, potentially making competitors' access to distributors and farmers more difficult in the advent of digital agriculture, which requires collection of information about farms with the aim of providing tailored advice or aggregate data to farmers.

The bundling concerns were not proven during the in-depth investigation and remedies were offered only in relation to the horizontal concerns of the transaction.

Broadcom/Brocade

Potential degradation of interoperability between the merged entity's switch chip and interface cards, which could lead to possible leakage and misuse by the merged entity of confidential information related to competing interface card suppliers.

Broadcom committed to cooperating closely and in a timely manner with competing interface card suppliers to achieve for them the same level of interoperability enjoyed by its own interface cards.

Dentsply/Sirona

Dentsply rivals that offered dental consumables would be excluded from accessing Sirona's dental equipment due to denial of commercial and technical information. The fact that Dentsply's offer of consumables was very limited in comparison to its competitors' and that Sirona had entered into long-term licensing agreements with Dentsply's competitors that would prevent it from changing its practices for a significant period, did not change the assessment.

Sirona extended existing licensing agreements with Dentsply competitors for ten years and undertook to continue the supply of all necessary know-how, commercial and technical information to them.

Essilor/Luxottica

The merged entity would use Luxottica's powerful brands to force opticians to buy

Essilor's lenses by means of bundling or tying, and thus exclude other suppliers.

None. The Commission engaged in extensive market testing, reaching out to 10,000 opticians and receiving feedback from 4,000 third parties, which helped it to understand the market and ultimately clear the transaction with no remedies.

Intel/McAfee

Rival security solutions would not have access to the necessary information to use the functionalities of Intel's CPUs in the same way as McAfee.

Intel committed to, among other things, ensuring that vendors of rival security solutions will have access to all necessary information required to use functionalities of Intel's CPUs and chipsets.

Microsoft/LinkedIn

Microsoft would pre-install LinkedIn on all Windows PCs, integrate LinkedIn into Office by combining the user databases, and shut out LinkedIn's competitors by not providing them with the technical information that they need to interoperate with Microsoft's products.

Microsoft undertook, inter alia, not to force PC manufacturers and distributors to pre-install LinkedIn on Windows PCs and to allow users to remove it should the manufacturer or distributor decide to pre-install it.

Qualcomm/NXP

Interoperability concerns; concerns that Qualcomm would bundle NXP's IP to its patent portfolio, increasing its bargaining power and allowing it to charge significantly higher royalties.

Qualcomm committed to: providing the same level of interoperability between its own products and NXP products with the corresponding

products of other companies for an eight-year period; offering certain licences; and not acquiring or enforcing certain patents.