The EU merger control regime seeks to catch all major transactions in the world that have a material EU element, and to prohibit those that are likely to create a significant impediment to effective competition. Despite the current financial situation, the number of notified transactions has been about 300 per year, and 2012 will be no different. With so many transactions, it might be expected that several would be prohibited each year. The reality is quite the opposite, with only four prohibition decisions in the last 10 years. The common view is that this is because businesses and advisers have become adept at anticipating where competition concerns may arise and either not proposing transactions that have concerns, pre-structuring them so that concerns are removed or entering into commitments with the European Commission to deal with such concerns, usually by divestments. In this regard, 42 commitment decisions have been made in the last 10 years.
Despite this apparent working model, on February 1 2012 – following a seven-month procedure – the European Commission prohibited the planned merger between Deutsche Börse and NYSE Euronext (for further details please see "Deutsche Börse and NYSE Euronext merger blocked"). The question that arises is whether this misalignment between the parties' view of the issues and that of the European Commission was a one-off caught in the commission's merger control net or whether it is of more general relevance.
The material issues that arose in the Deutsche Börse/NYSE case were:
- the definition of the relevant market;
- whether efficiencies created could overcome any concerns held; and
- the possible commitments to be offered by the parties to ease the commission's concerns.
Concerning the relevant market definition, the debate concerned whether:
- the relevant product market was exchange-traded instruments, over-the-counter products or both; and
- the relevant geographic market was European or worldwide.
Debates on market definition are common, but in the Deutsche Börse/NYSE case, winning the debate was crucial for the parties. If the European Commission were to pick the narrower definition – which it did, thus targeting its concerns on the market of financial derivatives based on European underlyings – then the parties would have a market share of 90%. That is a level that no competition regulator could allow. The difference in market share if the commission had included both exchange-traded and over-the-counter products could not have been more contrasting, given that over-the-counter products represent 90% of the total worldwide trade in European underlyings and the parties had no material presence in this activity. Therefore, winning the market definition debate was a zero-sum game for the parties.
In relation to efficiencies, the parties argued that several consumer benefits would arise following the concentration, especially in the form of greater liquidity. It is difficult to assess the robustness of this efficiency argument from the published decision, but it appears that the commission did not consider seriously the possibility that any efficiency may have outweighed its concerns. This may be unsurprising given that, in practice, the commission has never considered efficiencies as a robust counterbalance to competition concerns. More particularly, no clearance has relied primarily on efficiencies and only a few decisions have considered the argument seriously. This is despite the change of wording of the EU Merger Regulation in 2004, which opened the door for a greater balance between competition issues and benefits for customers. It is also despite the fact that, arguably, efficiencies (particularly innovative ones) are being pushed by EU institutions to be included in the application of EU law, including competition law, in order for the European Union to meet its 2020 growth objectives.
In the Deutsche Börse/NYSE case the commission clearly stated that efficiencies may be successfully invoked only up to a certain level of cumulated market shares. Given the 90% market share finding in this case, the commission dismissed entirely the parties' arguments for efficiencies.
Therefore, the last chance to save the deal was to find an agreement on commitments that the parties could offer. The only one that the commission seriously envisaged was a divestment of activities in the field of European interest rate derivatives, which the parties considered as unacceptable. This demonstrates that an understanding of the deal's economic rationale was apparently not shared by both sides.
The misalignment on these three issues resulted in a prohibition decision, which is now the subject of appeal. It may be that this misalignment arose because of the difficulties in applying classic concepts of competition law and policy to the finance market. It may also be that the parties had forgotten the typically conservative attitude that the European Commission takes in its decisions, particularly when market shares can be high on one view of the market. It is hoped that the changes to the regulation and supervision of the banking and finance sector will facilitate a better understanding among all stakeholders, and thus avoid such misalignment in future. If so, then the EU merger control by-catch of the Deutsche Börse/NYSE case – a $10 billion deal, with breakdown costs exceeding $200 million according to some commentators – will be avoidable.
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