Mergers and acquisitions play an important role in the economy, allowing companies to take advantage of synergies to achieve business efficiency, build expertise and services, and diversify risk. At the same time, consumers benefit from maintaining and encouraging healthy competition between businesses selling goods and services to ensure that prices remain affordable.
The Australian Competition and Consumer Commission (“ACCC”) monitors and investigates the impacts of mergers and acquisitions in Australia to minimise potentially negative effects of a merger of two or more players within a market. It is difficult for companies to anticipate the likely outcome of a merger review by the ACCC, and it can be equally as difficult for consumers, service providers and other stakeholders to assess the possible impacts of a proposed merger on their business. Balancing the interests of companies and consumers is challenging and must be done by the ACCC on a case-by-case basis.
In this newsletter, Moulis Legal senior lawyer Emily Murphy and lawyer Alexandra Geelan examine the ACCC’s merger and acquisition review processes and provide some practical guidance to companies considering or undergoing a merger review, and to stakeholders interested in the outcome of a review.
Prohibited mergers – when the ACCC says “no”
Before we examine the ACCC’s merger and acquisition review process, it is important to understand what the ACCC is looking for when conducting a review under the Australian Competition and Consumer Act 2010 (“the Act”).
Section 50 of the Act prohibits mergers or acquisitions that would have the effect, or be likely to have the effect, of substantially lessening competition in a market. The ACCC is responsible for monitoring, investigating and, if necessary, taking legal action in relation to mergers and acquisitions in Australia under section 50 of the Act.
There are many factors which must be considered when determining whether a merger may substantially lessen competition. Section 50(3) of the Act provides a non-exhaustive list of merger factors, including:
- the level of import competition for the new merged company;
- the barriers to entry into the market for new competitors;
- the likely effect that the merger will have on prices;
- the availability of substitute products that will compete with the merged company; and
- any special characteristics of the particular market.
These key factors allow the ACCC to consider whether – and to what extent – the merged company will be constrained from dominating the market in the foreseeable future. The ACCC generally only looks one or two years into the future because of the possible variances after that time. If there will be one or more effective competitive constraints on the merged company, this can be an indicator that the merger will not substantially lessen competition.
After conducting its review, the ACCC will decide whether it believes the merger will or will not substantially lessen competition. In most reviews, the ACCC has the option of opposing or not opposing the merger or acquisition, or indicating that they will not oppose if the parties meet certain conditions.
Depending on the type of review which has been conducted – the different types of review are discussed below – the decision made by the ACCC may or may not be binding on the parties.
In an informal review, the parties are not legally required to follow the ACCC’s decision which is why the ACCC cannot given formal approval for a merger but will instead state that it ‘does not oppose’ a merger. If after an informal review the ACCC opposes a merger, the parties can legally proceed with the merger or acquisition however they risk legal action by the ACCC. This legal action could ultimately reverse the merger or acquisition, and be very costly for all parties.
If the ACCC conducts a formal merger clearance review or merger authorisation – discussed further below – then the outcome of that process can be binding on the parties, although those formal reviews are extremely rare. In these special proceedings the ACCC can provide a formal approval.
As an example, in December 2015, the ACCC opposed the acquisition of Covs Parts – a supplier of vehicle, mining and industrial products – by GPC Asia Pacific Limited, the owner of a large number of Repco automotive stores in Western Australia. The ACCC argued that Repco and Covs Parts were the two biggest suppliers of automotive parts in Western Australia and were each other’s closest competitor. Through its informal review and investigations, the ACCC determined that if the acquisition went ahead, the merged company would be able to raise the trade price of automotive parts without effective competition. This would particularly impact regional towns where customers relied heavily on both Covs Parts and Repco and there were few other local competitors.1
Covs Parts and Repco could have simply ignored the ACCC’s decision and proceeded with the merger and risked legal action under section 50. But Covs Parts and Repco did what most companies do: followed the ACCC’s decision and cancelled the acquisition.
Not all mergers that lessen competition are prohibited
Under section 50 of the Act, a merger will be prohibited if it substantially lessens competition. The “substantial” threshold is a high bar to reach.
Generally, the ACCC will consider that a merger substantially lessens competition if it “confers an increase in market power on the merged firm that is significant and sustainable”2. For example, if the merged company will be able to significantly and sustainably increase prices or reduce service offerings then it is likely that the merger will be considered a substantial lessening of competition.
This threshold can be difficult to assess because there is often a fine line between whether the competitive effects of a merger will be substantial or not. This has been highlighted in the recent review of the PMP/IPMG merger concluded in February 2017. In that case, the ACCC decided not to oppose the merger of two of Australia’s largest commercial printers, PMP Limited and IPMG Group despite finding that the merger would lessen competition in the market. ACCC Chairman Rod Sims said of the merger3:
While the ACCC considers that the merger is likely to lessen competition, we do not believe that it reaches the threshold of being a substantial lessening of competition.
The ACCC has not yet released the details of its decision, but the ACCC indicated in its press release that it was influenced by increased competition from a third player in the market that was expected to provide a competitive constraint to the new merged printing company. According to the ACCC to threshold was not met and so the ACCC did not oppose the merger.
Types of review conducted by the ACCC
Parties to a merger are not required by law to notify the ACCC, or seek approval from the ACCC, in order to complete a merger. However, proceeding with a merger without a review by the ACCC exposes the parties to a real and substantive risk that the ACCC may investigate the merger after it has been completed. The ACCC has the power to take formal legal action against the parties which can result in the merger being reversed.
Submitting a merger to the ACCC for review before it has been completed allows the parties to reduce or, in some cases, eliminate any risk that the ACCC will oppose the merger after it has been completed.
There are three ways in which the ACCC can review a merger:
- Informal merger review;
- Formal merger clearance; and
- Merger authorisations.
In practice, parties to a merger will generally approach the ACCC early in the merger process and work with the ACCC to consider the options for review of the merger. Our focus is on informal merger review process because it is, by far, the most common form of merger review. Formal merger clearance and merger authorisations are very rare with no formal clearances having been conducted to date. There are hundreds of informal merger reviews every year, whereas there have been only three applications for merger authorisation since the process was introduced in 2007.4
The mechanics – how an informal merger review works
The process for informal merger reviews is not set out in legislation because, as the name suggests, it is an informal process that has developed over time to provide a commercially practical alternative to the onerous formal merger clearance or merger authorisation proceedings.
As discussed earlier, the outcome of an informal merger review is not that the ACCC ‘approves’ or ‘rejects’ a merger – such language would imply a formal administrative decision has been made. Rather the outcome is that the ACCC ‘opposes’ or ‘does not oppose’ a merger. This is an important distinction between an informal merger review, and the formal review proceedings. The informal merger review process does not fully protect merger parties from further investigation or action by the ACCC and does not prevent challenges of the merger brought by third parties.
Despite this, informal merger reviews do provide merger parties with a level of comfort and confidence as to the ACCC’s views on the merger and a clear indication on how the ACCC will treat the merger. In practice, most mergers and acquisitions involving one or more large market players will be subject to completing the ACCC’s informal review process in order to minimise the legal and commercial risks of the transaction.
The ACCC has wide discretion as to how it runs an informal merger review. Generally there are three broad categories of assessment the ACCC can take:
- Pre-assessment – the ACCC forms a view on the information available that the risk of substantially lessening competition is low, and therefore a confidential or public review is unnecessary.
- Conditional confidential review – if the merger parties request, the ACCC can provide a preliminary conditional view on a confidential merger proposal.
- Public review – the ACCC can notify the public of its intention to conduct an informal review, publish a Statement of Issues and consider submissions from the public prior to issuing a final decision.
In 2015-16, the ACCC conducted 319 informal merger reviews, 287 of which were pre-assessments, 31 were public reviews and 1 was a confidential review.
The ACCC does not publish or provide details of pre-assessments and confidential reviews that it conducts, although details are released in relation to public reviews which have been conducted.
Public merger reviews – a chance to have your say
Public merger reviews involve consultation with interested parties and more detailed engagement with the merger parties to comprehensively determine the likely impacts of the proposed merger.
Details of the merger, including the deadlines for submissions from interested parties, are posted on the ACCC mergers register.
The public register includes an indicative timeline for the review, which lists the commencement date, due date for submissions and a provisional date for an announcement of the ACCC’s decision. The decision by the ACCC to either oppose or not oppose the merger is published on the register, or the ACCC may seek further information by releasing a ‘statement of issues’ for comment on particular aspects of the merger before making its decision to oppose or not oppose.
In certain cases, the ACCC can also accept enforceable undertakings from the merger parties under section 87B of the Act to mitigate any concerns it has about the competitive effects of the proposed merger. In July 2016, the ACCC announced that it would not oppose Metcash’s acquisition of Home Timber & Hardware on the basis that Metcash provided enforceable undertakings including that it would not restrict who could supply Home Timber & Hardware stores and would not favour supplying its own stores over nearby independent stores.5
According to the guidelines released by the ACCC, the public merger review process typically takes 6 to 12 weeks without a statement of issues, and 12 to 24 weeks with a statement of issues, however these time periods can be longer depending on the issues in the review.
Informal merger reviews provide the best opportunity for parties interested or affected by the outcome of a merger review to have their say. Any interested party, including producer, supplier, customer and service provider, can make a submission to the ACCC as to their views on the effect the merger may have on the market.
Using the review process to manage costs and risk
Mergers are an exciting but challenging time for businesses and other market participants. Parties should approach the ACCC early in the merger or acquisition process to discuss their review options and attempt to avoid the risk of legal action after the merger has been completed. Similarly, interested parties who are concerned about the proposed effects of a merger should take advantage of the opportunity to make a submission to the ACCC setting out their views. By taking advantage of the merger review process it is possible to avoid expensive, time-consuming and risky litigation.