On March 18, 2009, China’s Ministry of Commerce rejected Coca-Cola’s proposed $2.4 billion takeover of the country’s leading juice maker, Huiyuan, saying that the deal would have an adverse impact on competition. The decision shows that China will aggressively enforce its Antimonopoly Law, which took effect on August 1, 2008, and suggests that companies pursuing mergers and acquisitions involving companies operating in China will face tough scrutiny by Chinese competition authorities.
Both before and after the Antimonopoly Law took effect, speculation ran high about how the Ministry of Commerce’s Anti-Monopoly Bureau (“AMB”) would apply the new law. Among other things, commentators debated whether the AMB would be protectionist in its application of the law and whether the AMB’s approach to merger analysis and its enforcement policies would adhere more closely to those of the European Commission or those of the U.S. antitrust enforcement agencies. The Coca-Cola decision is the first significant application of the new law, and it provides some insight into the answers to these questions.
Article 27 of the PRC Antimonopoly Law directs the Ministry of Commerce, in reviewing mergers and acquisitions, to consider the parties’ market shares and market power, market concentration, the impact on market entry and technological advance, the effect on consumers and other relevant business operators (which could be read to include competitors, customers, and suppliers), and the “effect on the development of the national economy.”
Since the Antimonopoly Law went into effect, the Ministry of Commerce has received 40 notifications of a concentration of business operations. In accordance with the law, 29 of these proposed transactions were reviewed. Until the Coca-Cola-Huiyuan decision, the Ministry of Commerce had completed 24 reviews and approved 23 transactions without condition. The 24th transaction, regarding Inbev’s acquisition of Anheuser-Busch, was approved after the acquirer agreed to refrain from acquiring shares in certain competing companies in China without prior approval of the Ministry.
The proposed Coca-Cola-Huiyuan acquisition is the first transaction blocked by the Ministry of Commerce under the new law. Coca-Cola has a strong presence in China's carbonated drinks market—with some estimates putting its market share at 54 percent—and Huiyuan is the dominant player in the pure fruit juice market in China, with an estimated 42 percent market share. In the statement announcing its decision, the Ministry said that it blocked the deal after determining that a combined entity could use its market dominance in carbonated soft drinks to limit competition in the market for juice through tying, bundling or other exclusive transactions, resulting in consumers being forced to accept higher prices and reduced variety. The Ministry also determined that the combined entity would “reduce the room of operations for small and medium-sized juice companies.”
One immediate reaction among observers in the U.S. and Europe was that the Ministry’s decision was based on nationalistic concerns as opposed to a concern this transaction could adversely impact competition. Coca-Cola’s target, Huiyuan, is perceived by some to be a beloved national brand. Support for the notion that the Ministry was seeking to promote nationalistic goals can be found in Article 27 itself, which directs the Ministry to consider the impact of the transaction on the development of the national economy.
The Ministry's conclusion that Coca-Cola’s acquisition of Huiyuan might allow the combined firm to bundle products and stifle competition is not without precedent, however. Although U.S. competition authorities would probably be unlikely to view as anticompetitive an acquisition of a dominant competitor in juices by a dominant competitor in carbonated beverages, the European Commission might be more open to blocking such a transaction, as suggested by its 2001 decision regarding GE’s proposed acquisition of Honeywell. In that decision, the Commission blocked the GE-Honeywell transaction because it feared that GE's dominance of the small jet engine market, if combined with Honeywell's portfolio of regional jet engines and avionics, would enable the firm to “bundle” products by, for example, requiring competitors who purchased GE’s engines also to purchase Honeywell’s avionics and stifle competition.
Although the Ministry of Commerce’s Coca-Cola-Huiyuan decision is only a single data point, the decision demonstrates that the Chinese competition authorities will not hesitate to block transactions they deem to be anticompetitive under the new law. The Ministry’s decision also suggests that Chinese merger analysis may evolve in a direction that follows the European Commission’s approach to merger analysis, which seeks not only to protect consumers (as the U.S. approach to merger analysis does), but also to protect the competitive process by ensuring a large number of competitors. In addition, it appears likely that the Ministry may also make it a priority to protect medium- and small-sized competitors.