Steering Mergers Through the EU’s Regulatory Rocks:

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European Management Journal Vol. 20, No. 5, pp. 549–561, 2002  2002 Elsevier Science Ltd. All rights reserved. Printed in Great Britain S0263-2373(02)00094-4 0263-2373/02 $22.00 + 0.00

Steering Mergers Through the EU’s Regulatory Rocks: Remedies Under the EU Merger Control Regulation ELEANOR MORGAN, University of Bath

Remedies are increasingly used to modify merger proposals and obtain clearance under the EU Merger Control Regulation. Although remedial policy is one of the most rapidly evolving areas of European merger control and is of considerable importance to firms seeking to frame their deals to win regulatory approval, it has received comparatively little attention. This paper examines features of the policy from a managerial perspective in the light of the European Commission’s recent guidance notice (press release IP/00/1525, 21 December), case evidence and related literature. An understanding of the Commission’s approach should decrease the risk of proposed deals either being damaged unnecessarily or breaking up on the EU’s regulatory rocks.  2002 Elsevier Science Ltd. All rights reserved. Keywords: Mergers, Competition policy, EU merger control regulation, Remedies, Divestiture

Background The EU Merger Control Regulation (MCR) has been in operation since September 1990. With the increase in merger activity, particularly since 1998, and the rising importance of cross border mergers, it has become a significant player on the world stage and is now probably the most important merger jurisdiction alongside the US. One thousand and ninety-three mergers have been notified under the MCR in the last European Management Journal Vol. 20, No. 5, pp. 549–561, October 2002

four years compared with the 701 notifications from September 1990 to the end of 1997. After more than a decade of operation, the main features of the MCR are well known and the changes since its introduction have been discussed elsewhere (Morgan, 1998). Briefly, the MCR, which is administered by the European Commission’s Merger Task Force (MTF) based in Brussels, covers the largest mergers and merger-like transactions affecting the EC.1 These have to be pre-notified to the Commission and fall under its exclusive control subject to limited exceptions. Merger assessment may be divided into two stages. First, there is a Phase I screening stage after which the merger can be approved either unconditionally or with conditions. If there are sufficient concerns about the likely effects which have not been dealt with at Phase I, a full Phase II investigation is opened. The Commission then decides whether to approve the merger, possibly with conditions, or to block it, taking into account the opinions of an Advisory Committee (consisting of representatives of the Member States) on the draft decision. If the parties do not comply, the Commission has the power to levy fines of up to 10 per cent of aggregate world wide turnover and can take the necessary action to restore effective competition, such as ordering the break up of a merger. Decisions under the MCR can be appealed in the European Courts. The main features of the process are illustrated in Figure 1; a further flowchart, which details the procedures involved at the various stages, is discussed later in the paper.2 549

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Figure 1 Conditional Settlements Under the MCR

Table 1 shows the increasing tendency over the life of the MCR for problematic mergers to be settled conditionally by agreeing remedies (known as ‘commitments’) to meet the Commission’s concerns about the effect of the deals as originally proposed. By the end of 2001, 143 cases had been cleared conditionally, 106 of these from 1998 onwards. Remedial settlements have become more common during Phase 1 in the last four years as a whole (6.5 per cent of all Phase I final decisions compared with just 2.5 Table 1

per cent in the period up to 1998). This is due to the Commission gaining specific power since 1997 to accept and enforce commitments without full proceedings (Broberg, 1997; Morgan, 1998). Year by year figures, however, suggest a greater caution about accepting Phase I settlements in 2001 than in the immediate past, as discussed later. Conditional clearances have accounted for 60 per cent of all Phase II decisions but, athough clearance with conditions was the most usual outcome of full investigations, it has

Notifications and Outcomes Under the MCR: 21 September 1990–31 December 2001

Notifications Cases notified Cases withdrawn — Phase 1 Cases withdrawn — Phase 2 Final decisionsa Phase 1 Unconditional clearance Clearance with conditions Total Phase 2 Unconditional clearance Clearance with conditions Ban Total

1990–1997

1998–2001

Total

701 28 2

1093 28 19

1794 56 21

539 14 553

1035 72 1104

1574 86 1657

9 23 8 40

1120 34 10 55

20 57 18 95

Source: European Commission a Final decisions for mergers within MCR’s scope. Not all notifications led to a decision or withdrawal in the same year. Decisions to refer cases to the national authorities are ignored here

550

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not always been possible to agree acceptable remedies. This has resulted both in proposals being withdrawn part way through the proceedings and in prohibition orders. By the end of 2001, a total of eighteen mergers had been banned. The rising numbers of mergers falling under the MCR and the possibility of negotiating remedies to obtain clearance mean that it is important for managers to appreciate the kinds of commitment most likely to win regulatory approval in the EU and the processes involved in reaching a settlement. Remedies are, of course, a feature of other merger regimes, but each operates with its own appraisal criteria, procedures and timetables although, as discussed later, the approach in the EU is moving closer to the established US practice. Until very recently, this rapidly evolving area of EU policy received little attention from either a public policy or managerial perspective (but, exceptionally, see Drauz (1997), for an early review of Commission policy). The role of remedies in EU merger policy is beginning to attract more interest, as demonstrated by the recent papers at the September 2000 10th anniversary conference of the MCR by Brandenburger (2001), Canenbley (2001), Radovsky (2001) and Rodriquez (2001) and as well as Ersbøll’s work (2001). In December 2000, the European Commission adopted a Notice on commitments (hereafter the ‘Notice’) giving guidance on this aspect of merger policy (European Commission, 2001a). The Notice gives useful advice on the structuring and drafting of commitments, their timing and implementation. The purpose of this paper is to examine the Commission’s rapidly evolving practice on remedial settlements under the MCR from a managerial perspective in the light of the available literature, the recently adopted guidelines, case evidence and a limited fieldwork study carried out to clarify particular issues and to assist in interpreting the findings.3 Rather than providing a detailed appraisal of the guidelines, the paper aims to highlight some of the main aspects firms may wish to consider in deciding whether and when to offer remedies to the MTF as part of a merger proposal and how they may be structured. Details of how remedies are actually implemented, once agreed, will be largely left aside. First, the paper looks briefly at the types of mergers that are likely to prove problematic under the MCR’s appraisal criteria. Then the types of remedies which may be used to settle such mergers are examined. Next, some procedural aspects are discussed. The paper concludes by summarising the recent developments in EU policy and highlighting how an understanding of the Commission’s approach and evolving policy may help firms to prevent their merger proposals from foundering unnecessarily on the regulatory rocks. European Management Journal Vol. 20, No. 5, pp. 549–561, October 2002

Identifying Problematic Mergers The MCR is based on the assumption that most mergers falling under its scope will not raise concerns and aims to control the minority with significantly adverse effects on competition. As the Competition Commissioner, Mario Monti, stated in the press release on the adoption of the Notice: Merger control is not about blocking mergers. The merger regulation was adopted with the main goal of creating a one-stop shop in Europe where companies can get rapid regulatory clearance for mergers and acquisitions provided that sufficient competition is maintained to the benefit of European consumers. (European Commission, 2000a)

The test for a merger’s acceptability under the MCR is whether or not it would ‘create or strengthen a dominant position as a result of which effective competition would be significantly impeded in the common market or in a substantial part of it’. The Commission’s assessment of any competition problems raised by the proposed transaction is the key to determining whether any aspects causing concern can be remedied and, if so, what kind of remedy would be appropriate. If the parties involved wish to try to obtain clearance for a problematic case, they are responsible for devising and offering commitments to deal with the negative effects on competition in the light of their knowledge of the affected industry, their position within it, and the Commission’s practice. Mergers are dealt with on a case by case basis but, unlike the US system of merger control, there are no formal guidelines for the assessment of mergers. As well as the case evidence, there is by now, however, a considerable literature which gives insights into the Commission’s evolving approach to the substantive appraisal of mergers and highlights the possible features of deals which are likely to stand in the way of approval (see particularly Hawk and Huser, 1996; Rivas, 1999; Morgan, 2001).4 Most of the mergers investigated by the Commission are between two or more firms engaged in the same activities (so called ‘horizontal mergers’), where attention focuses on the possibility of anti competitive overlaps. The effects of transactions involving firms at different stages in production (vertical mergers) have increasingly attracted concern, whereas the extension of activities into different markets (conglomerate mergers) have only occasionally been regarded as problematic.5 The concept of dominance, on which appraisal under the MCR is based, has most frequently been applied to horizontal mergers involving a single market leader. According to the Commission, market dominance is more likely to be found as the market share of the merged entity increases above 40 per cent and it becomes difficult to refute when the share goes 551

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over 60 per cent. Dominance may, however, be established even with relatively low market shares. For example, buyer power was seen as giving the parties in Carrefour/Promodes (January, 2000) a stronger position in French food retailing than their 27 per cent market share indicated and remedies were needed to convince the Commission that there was no risk of a dominant position being created.

has led to additional uncertainties about how mergers will be treated and some of the recent decisions in emerging markets (such as WorldCom/MCI, which was cleared conditionally in July, 1998) have been based on rather speculative and unpredictable analyses of likely future developments. The assessment of future markets has been particularly important in the pharmaceutical industry where concerns have been raised about the possible anti-competitive effects that decisions to cut back, delay or redirect R&D following merger may have on the supply of new drugs.

Concerns about a merger’s effects on competition may arise even when the merged entity will not itself dominate the market if there is a danger that the remaining firms will compete less vigorously after Mergers between non-EU firms may be scrutinised the merger. A significant proportion of merger prounder the MCR if they are large enough to satisfy the posals going to full proceedings turnover thresholds for investinow involve oligopoly and this gation and have a ‘Community The trend towards seems likely to be a continuing dimension’ which is established trend. Recent Court decisions by reference to sales in the globalisation and increasing EEA. The trend towards glohave confirmed that the Commission’s powers under the balisation and increasing crossMCR extend to the control of cross-border merger activities border merger activities means oligopolistic market structures, that firms based outside Eurwhere problems are caused not means that firms based outside ope, especially US firms, are by single firm dominance but increasingly coming under EU by the ‘collective dominance’ of Europe, especially US firms, merger control. Deals that are a few large firms. The argunot regarded as problematic in ments in Airtours/First Choice are increasingly coming under the US may run into problems (September, 1999), which is curin Europe (and vice versa) rently under appeal after being although there is increasingly EU merger control banned on collective domiclose cooperation between the nance grounds, were less clear respective merger control authcut and not as convincing as those in earlier oligopoly orities. Such differences in treatment may result cases. This and later decisions suggest the Compartly from differences in the actual effects each side mission is widening its oligopoly net both by moving of the Atlantic. They may also result from the differbeyond duopoly (where two firms control the ent appraisal tests under the two regimes. The US market) to cases where more firms are involved, and authorities base their assessment on whether there by attempting to lower the standard of proof will be a ‘substantial lessening of competition’, in required for the creation or strengthening of colleccontrast to the EU concern with dominance. This tive dominance. leads to some differences in emphasis. EC investigations are inclined to place more weight on the Many of the mergers considered under the MCR effects on competitors and take competitors’ comhave involved well-established or mature activities plaints more seriously than the US authorities, who in manufacturing or, increasingly since 1993, in the tend to view such complaints as a positive indication service sector. Recently there has been substantial that the merger is likely to benefit consumers. There merger activity in high tech and newly emerging are also some differences in the antitrust theories activities, including those bringing together telecomapplied. For example, in contrast to the US, the Euromunications, the media and the Internet. The Compean Commission has occasionally relied on mission has taken a fairly strict approach to domi‘bundling theory’ to identify anti-competitive effects nance in newly emerging or fast changing markets, in conglomerate mergers due to their portfolio of with media and the newly liberalised telecommunicomplementary activities (as in GE/Honeywell, July, cations sector attracting especially careful scrutiny. In 2001). The US authorities’ use of ‘innovation markets’ these areas, there has been particular concern about analysis to assess the effects of mergers on R&D compossible ‘gatekeeper’ effects — foreclosure of market petition (as in Ciba Geigy/Sandoz, July, 1996) has access through the amalgamation of exclusive rights, resulted in tougher settlements than in the EU, where through the control of key technologies or through attention has been confined to the downstream network effects which favour larger, established effects on competition in current or future goods operators. markets. Likely future developments are taken into account in the assessment of mergers in such rapidly evolving markets and these may include effects on products and services that have not yet been introduced. This 552

Boeing/McDonnell Douglas (July, 1997) has been perhaps the highest profile case involving non EU firms. The merger was cleared by the US authorities but only approved by the Commission after a number of European Management Journal Vol. 20, No. 5, pp. 549–561, October 2002

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last minute concessions. This case suggested continuing scope for political influence under the MCR, and reinforced earlier suspicions that lobbying in high profile cases, especially in sectors where there has been extensive government participation, sometimes results in a different outcome than might be suggested by a purely economic analysis under the EU’s competition test (Neven et al., 1993). The effectiveness of lobbying will depend, in part, on the type of merger (in particular, whether government interests are involved in the sector) as well as the attitude of the Competition Commissioner. The current Competition Commissioner has stated that he regards the protection of merger control from political pressure as one of his prime functions and has resisted such lobbying in a number of recent high profile cases — e.g. Volvo/Scania (March, 2000) and the more recent GE/Honeywell decision.

Types of Remedies The purpose of accepting commitments is to strengthen competition and reduce the market power of the parties so that the deal can proceed without creating or strengthening a dominant position. In many cases, the difficulties will be confined to only one, or a small number, of the markets affected by the merger, so that the transaction as a whole remains attractive to the parties involved after acceptable remedies have been found in the problem areas. A major concern of merging parties is to establish what type of commitment will be seen as suitable by the Commission and will have the least damaging effect on the value of the transaction. The Commission, for its part, wishes to be sure that the remedies will speedily restore effective competition. As well as articulating remedial practice in the Notice, the Commission has also introduced new safeguards to reduce the risk of unsatisfactory remedies. These moves have been influenced by the more demanding US practice established in the mid 1990s to ensure faster and more effective settlements (see for example, Baer, 1996; Cary and Bruno, 1997; Parker and Balto, 2000) and by the recent results of a Federal Trade Commission (1999) study of a sample of divestitures, which highlighted potential risks in divestiture remedies. Divestiture to protect competition is the classic structural alternative to blocking a merger and the Notice confirms that this is the Commission’s preferred remedy. In 2001, the year after the Notice was introduced, a large majority of problematic cases were settled through divestment. Divestment of a business or businesses featured in seven of the thirteen deals cleared conditionally in Phase 1 while a further case, United Airlines/US Airways (January, 2001), was agreed subject to the disposal of landing slots at Frankfurt and Munich. Divestment of a business(es) European Management Journal Vol. 20, No. 5, pp. 549–561, October 2002

was also the most common remedy after full proceedings. Several conditions must be met before divestment is regarded as sufficient to restore effective competition. The first is that the assets to be divested must be suitable, in terms of allowing prospective purchasers to operate a viable and competitive business. Second, the purchaser must be suitable in the sense of being independent and having the incentives and ability to compete straight away. Third, the sale must be completed within a specified period. These aspects will be discussed in turn.6 Divestiture under the MCR has usually been achieved through the sale of an existing business which is regarded as able to operate viably on a stand alone basis and this solution is preferred by the Commission. The divestiture may, however, be made up of a combination of assets from the parties involved, as in Crown Cork & Seal/Carnaud/Metal Box (November, 1995) where five European plants producing tinplate aerosol cans accounting for 22 per cent of the EEA market were sold to reduce market share to pre merger levels. In addition, some divestitures have involved brands and supporting productive assets rather than the sale of a whole business. According to the Commission, these latter types of remedy, involving ‘mix and match’ divestitures and divestitures of less than an ongoing business, are scrutinised particularly carefully to ensure that a buyer would immediately be able to compete effectively in the market. The disposal package in Unilever/Bestfoods (September, 2000), for instance, included manufacturing factual property rights associated with the brands to be divested. The inclusion of these complementary assets was designed to ensure that the full value of the brands could be realised by the buyer in the future, not simply their current market shares. Divestitures may also involve the disposal of shareholdings where the merging parties do not control the business but have the possibility of exercising influence which might be anti-competitive. This approach was taken to settle four cases in Phase I and another four after full investigation in 2001. For example, Nordea/Postgirot (November, 2001) gave Nordea control of one of the two main bank payment systems in Sweden used to pay household bills. It agreed to reduce its stake in the second payment system to 10 per cent and waive its shareholder rights as part of the settlement. Remedies are intended to be proportional to the competition problem but a firm may still find itself having to sell off more than it is acquiring in a particular market to solve the difficulties. This is because it may only be profitable to produce a certain good or service if there is joint production of other goods and services (due to economies of scope or network effects). For example, the parties in TotalFina/Elf Aqui553

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taine (February, 2000) proposed to divest several assets to eliminate concerns about the effect on competition in the liquid petroleum gas industry. Doubts were raised about the viability of the proposed divestment when third parties were consulted (at the ‘market testing’ stage) and a complete subsidiary was eventually divested, a remedy which went beyond the competitive overlap created by the merger.7 Similarly, the divestment agreed in Unilever/Bestfoods included the whole range of products sold under the brands where there were overlaps both in the food retailing and food service sectors, rather than just the overlapping products.

expansion and the only likely buyers of overlapping assets may be part of the existing oligopoly. Until recently, EU settlements did not require buyers to be identified as part of the settlement and the buyers formally proposed by the parties were typically accepted by the Commission. Acceptance cannot, however, be taken for granted. The Commission formally rejected the proposed buyers of the motorway petrol stations being divested as part of the TotalFina/Elf Aquitaine settlement (February, 2000) as some of them were not seen as having sufficient incentives to compete vigorously with the merged firm. Eventually the Commission accepted eight purchasers, of which some (including the large French retailer, Carrefour) had a strong position in nonmotorway petrol retailing.

US settlements have increasingly relied on ‘crown jewel provisions’, where additional assets are specified which will be added to the original divestiture package if the parties’ preferred option is not achieved within the given time frame (e.g. The Federal Trade Commission’s recent study of the Glaxo/Wellcome). This is primarily to make the packeffectiveness of a sample of divestitures in the US age more saleable but may also be designed to ensure suggested that having a named buyer for the the merging parties’ divested assets up front is probcooperation in making the ably the most important conOver time, the settlement succeed. The EU dition for ensuring a successful authorities, in contrast, have Commission’s requirements for outcome. This ‘fix it first’ typically left it to the parties to approach, whereby the parties add to the divestment package agree not to complete or the implementation of afterwards if necessary to implement the transaction increase its attractiveness (as a binding sale and purdivestments have become more before occurred, for example, in chase agreement has been BP/Amoco). The Notice, howsigned with an approved purever, indicates that if there is detailed and demanding% chaser, is already established uncertainty about whether the practice in the US. Time scales parties’ preferred remedy can be achieved, they may under the MCR are shorter than under the US system need to give an alternative proposal as part of the and transactions have usually been allowed to prosettlement and this must be at least as suitable in ceed with a commitment to complete the divestment dealing with the competition concerns. In within an agreed time from the date of the decision.8 Nestle´/Ralston Purina (July, 2001), for example, the The Notice, however, states that when the effectiveparties preferred option was to license Nestle´ ’s ‘Frisness of the divestment package depends heavily on kies’ brand in Spain but a second alternative, which the characteristics of the buyer, the Commission will consisted of a larger and more easily saleable packrequire the purchaser to be identified and the sale age, was specified in case the licensing option was agreed up front, before the notified operation is comnot achieved in time. This approach seems likely to pleted. This safeguard has already featured in three feature more frequently in future EU settlements. cases. The second condition for a successful divestment relates to the proposed buyer, who has to meet the Commission’s ‘purchaser standards’ before the sale can take place. These standards, which are detailed in the Notice, are designed to ensure that the buyer will have both the incentive and the ability to compete effectively in the market from the outset. Finding a suitable buyer may be difficult in cases of single firm dominance where the merged firm would be much larger than any other competitor so that the gap cannot easily be bridged through divestment (e.g. the position of Wolters Kluwer/Reed Elsevier in academic and professional publishing). In more concentrated markets, the Commission will typically want to establish a competitor strong enough to challenge the existing oligopoly. This may, again, be problematic as there may be barriers to entry or 554

In Bosch/Rexroth (December, 2000), the Commission was concerned that any uncertainty in the transitional period about who would buy the business to be divested would favour the merging parties and increase their ability to win back custom after the merger. Bosch offered not to close the deal until an acceptable buyer was found and the transaction was only allowed to proceed when Bosch identified a substantial competitor in Europe as the potential buyer. A similar up front solution was adopted in TPO/TPG/SPPL (March, 2001) in relation to the clearance of two joint ventures providing cross border post and parcel services. This dealt with the Commission’s concerns that any buyer of the assets to be divested in The Netherlands would only be able to compete effectively if it had a sufficient volume of business and access to a cost efficient delivery sysEuropean Management Journal Vol. 20, No. 5, pp. 549–561, October 2002

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tem. The crown jewels provision in Nestle´/Ralston Purina, discussed earlier, was combined with a commitment to find an approved up front buyer. It seems likely that ‘fix it first’ remedies of this type will be looked for more often in the future. Even where it is not a requirement, identifying an up front buyer, especially one with complementary assets, may help to persuade the Commission that the proposed divestments will create a viable business.

behavioural remedies.12 The Notice makes it clear that commitments amounting to a promise not to abuse a dominant position are not acceptable and those requiring ex post monitoring will only be considered in exceptional circumstances.

‘Quasi structural’ remedies (which are contractural arrangements such as compulsory licensing) which use behavioural commitments to bring about structural change are more likely to be accepted, as are remedy packages consisting of both structural and Over time, the Commission’s requirements for the behavioural elements. Licensing has been an implementation of divestments have become more important type of remedy where intellectual prodetailed and demanding in other ways. For example, perty is the key to competitive advantage and time limits for the disposal of assets (the third constraightforward divestitures appear unworkable, as dition which has to be satisfied for a successful in the pharmaceutical industry. Glaxo/Wellcome, for divestiture) have been reduced. Unlike the US pracexample, was agreed in February 1995 subject to the tice, this time limit is not publicised so as to reduce granting of an exclusive license the likelihood that the seller will be forced into a ‘fire sale’. Detailed prenotification to one of the parties’ compounds for research into oral The Notice also details a numdrugs; non ber of different mechanisms (or discussions may also play an anti-migraine exclusive licenses to a gene ‘obligations’) that are now typifor tumour treatcally used to ensure the divestiimportant part in ensuring technology ment were accepted as a conture proceeds quickly and for clearing Cibaeffectively. These include the clearance without the need for dition Geigy/Sandoz (May, 1996). appointment of a ‘hold separate trustee’ to see that the competifull proceedings The adoption of remedy packtive potential of the business to ages with both structural and be divested is preserved pendbehavioural elements is well illustrated by some of ing sale and of a ‘divestiture trustee’ to supervise the the cases in the rapidly developing telecommunidivestment. In 2001, trustees were used in all except cations, media and Internet sectors that were settled one of the cases resolved by conditional clearance.9 after initial scrutiny in the year prior to the adoption of the Notice. These also highlight the Commission’s There has been a good deal of confusion about growing concern about ensuring third party access to whether remedies other than structural ones are essential infrastructures or networks and regulating acceptable under the MCR. On the one hand, the the emergence of ‘gate keepers’ controlling access to Commission has indicated that it cannot accept non these facilities. structural remedies, as for example in Gencor/Lonhro (April, 1996).10 On the other, it has actually accepted In telecommunications, for example, Vodafone undertakings that are not purely structural in nature Airtouch/Mannesmann was approved in April 2000 on to settle a substantial number of merger cases. The the basis of a remedy package including the Notice does not distinguish between structural and divestment of Orange, the third largest mobile telecbehavioural remedies (a distinction often made in the oms operator in the UK, and a three year undertaking literature). It explicitly states, however, that although to provide European operators with access to the divestiture is the preferred remedy, other types of merged company’s integrated network. In the media settlement will be considered when divestiture is not sector, one of the Commission’s concerns about the appropriate or does not by itself meet all of the comproposed acquisition of Vivendi by Seagram was that petition concerns. the vertical integration of the music and film business of Seagram (conducted through the Universal group) Purely behavioural remedies that involve agreements with the Vivendi’s pay TV and internet portal would about future conduct but no structural change in the raise foreclosure issues. A package of commitments market (such as agreements not to exchange price was agreed (October, 2000), including the divestment information, not to use certain trademarks for a speciof Vivendi’s shareholding in BSkyB, the UK pay TV fied period, to guarantee rivals access to specific key operator, as well as an undertaking to ensure access inputs or to ring fence particular activities) have to Universal’s film production and co production by occasionally been accepted in the past.11 The conlimiting the ‘first window’ rights of Vivendi’s pay ditional clearance of Boeing/McDonnell Douglas, TV channel. where competitive overlaps were addressed by the agreements to modify conduct (which included, for In 2000, the Commission accepted Phase I remedies example, the ring fencing of McDonnell Douglas’ involving commitments to provide access to delivery commercial aircraft activities rather than divestment), networks (as in the decisions mentioned above) or revived the debate about the acceptability of such European Management Journal Vol. 20, No. 5, pp. 549–561, October 2002

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potentially blocking patents (as in Shell/BASF, March 2000, discussed later) in six cases. It is noticeable, however, that such remedies have only been accepted after full proceedings in the year after the adoption of the Notice. This change would seem to suggest some toughing of policy as regards Phase I settlements. The reduced number of Phase I settlements in 2001 (13) compared with 2001 (27) and slight increase in Phase II investigations (22 compared with 20 in 2000) also suggest increased caution by the Commission in accepting remedies on the basis of initial Phase I scrutiny. The Notice warns that remedies cannot be approved if they are so extensive and complicated that it is impossible to determine with sufficient certainty that they will actually restore effective competition. MCI WorldCom/Sprint (June, 2000), for example, was prohibited because the Commission was not sufficiently certain that the proposed divestment of Sprint’s Internet business would immediately restore effective competition for top level Internet connectivity. The Commission is also keen to ensure that remedies are not more complicated than the problems they are intended to solve. Some proposals designed to create strong vertical links between the parties have been banned because the links could not be removed without destroying the value of the deals. For example, a series of recent mergers in the media industry was prohibited (see Bertelsmann/Kirch/Premiere and Deutsche Telecom/ Betaresearch, May, 1998) because of the Commission’s concerns about the creation of vertical links for which no suitable remedy could be found.

Procedures The Commission encourages firms to discuss merger proposals with it in advance of formal notification and the resulting pre-notification guidance can be very valuable in helping to assess the likely acceptability of a proposed deal and the types of competition problems it may raise. In some cases, it may be clear that the problems are so severe that it is not worth notifying the merger. In others, the guidance may allow firms to modify their proposals prior to notification to deal with potential problems in advance. Detailed prenotification discussions may also play an important part in ensuring clearance without the need for full proceedings. It appears, for example, that Hoechst/Rhone Poulenc (August, 1999) would not have been cleared after initial scrutiny if detailed discussions had not taken place with the parties before the deal was notified (European Commission, 2000b). According to the Notice, Phase I remedies are ‘designed to provide a straightforward answer to a 556

readily identifiable competition concern’ so that an in-depth investigation is unnecessary. As long as they are clear cut, the remedies accepted at Phase I may be substantial. Where the competition problems are obvious, dealing with them as soon as possible and giving an early indication of the type of settlement that the parties would consider will help to ensure a safe and speedy passage under the MCR. This is emphasised in the Commission’s press release on Shell/BASF (March, 2000), which was cleared after initial scrutiny by a complicated settlement:13 Such a complex package can only be accepted at this stage because the parties have been open with the Commission about the problems that the operation would raise, they discussed these problems and potential remedies with the Commission before submitting formal notification of the operation, and they have subsequently cooperated at all stages of the investigation. Without such cooperation, it is highly unlikely that the Commission’s concerns about the operation could have been eliminated at this stage. (European Commission, 2000c)

There are strict time limits for submitting proposed commitments both in Phase I and II (see Figure 2) and the Commission has emphasised the importance of respecting these. A three week deadline applies in Phase I. Proposals for ‘limited’ modifications to the original commitments resulting from consultations with the Commission may be accepted after this if they are seen as improving their workability and effectiveness, but this element of flexibility is at the Commission’s discretion. When commitments are offered within the three week deadline, the Phase I investigation is extended for two weeks beyond the normal month allowed for initial scrutiny so that the Commission can assess whether they are all necessary and whether they meet the competition concerns. If the commitments offered are found to be unnecessary, they are not included as a condition of clearance and may be withdrawn — as for example in Thales/Raytheon (March, 2001). There is a danger, however, that firms may be tempted to make more concessions early on than are really needed to deal with the competition problems. In addition, as the Commission acknowledged in its draft of the Notice, the commitments offered in Phase I may have to be more substantial than strictly needed because of the limited time available to check that the threat to competition has been removed. This tendency seems to have been exacerbated by the heavy workload of the MTF in recent years, the interests of third parties consulted about proposed remedies in securing potential divestments and the wish of most firms proposing a merger to avoid a costly Phase II investigation. Phase II investigations can be finished speedily if doubts are resolved early on, as in Pirelli/BICC, where the 9 July 2000 clearance was only three months and a day after full proceedings were opened. This was one of the relatively few cases cleared unconEuropean Management Journal Vol. 20, No. 5, pp. 549–561, October 2002

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hook’ (Ross, 1995). Comparatively few appear to gain approval on pure competition grounds after full investigation without making any concessions. Phase II commitments have to be offered not more than three months after full proceedings are opened. The Commission may extend this deadline in ‘exceptional’ circumstances, a provision that it interprets narrowly. Any request has to be made within the formal three month deadline and the commitments must still be offered in time to allow third parties and Member States to be consulted. Such late commitments were accepted in Telia/Telenor (October, 1999), the first merger to be considered between two established telecommunications operators. This was both because the proposed commitments (which were previously advised to the Commission) could not be formalised before the parliaments in Norway and Sweden were consulted and because they were so clear cut that they could be assessed fully despite their late formal submission. In addition, modified commitments may be accepted after the first three months if the Commission can see that the revised remedies will solve the competition problems without requiring any further market testing, as long as there is still enough time for the Member States to be consulted. In Alcoa/Reynolds (May, 2000), for example, some of the commitments were accepted at a late stage in the Phase II procedures as they clearly solved the remaining competition problems. There are, however, a number of examples of late commitments being rejected in Phase II. A revised package of commitments was submitted ten days after the deadline in Legrand/Schneider Electric (October, 2001). It was rejected and the deal banned as the uncertainties associated with these last minute proposals could not be resolved in the available time. As Mario Monti, the Competition Commissioner reportedly commented: This unfortunate outcome illustrates the absolute need for the partners in a merger which involves clear competition problems to give thought, at a very early stage in the project, to possible remedies and to enter into discussion without delay with the competition authorities. Taking this precautionary step should obviate the need to submit last minute remedies which, by their very nature, may be inappropriate and may raise uncertainties which cannot be dissipated within the brief period of time remaining.’ (European Commission, 2001b)

Figure 2 Procedures Flowchart

ditionally after full proceedings. Although the Commission may be persuaded that some of its concerns are unfounded as investigations proceed, there seems to be an ‘informal etiquette’ whereby firms are expected to make some concessions to ‘get off the European Management Journal Vol. 20, No. 5, pp. 549–561, October 2002

The tightness of the timetable in both phases makes the appropriate framing and discussion of remedies difficult, especially in the more complicated cases. In practice, one method of dealing with the strict Phase I deadlines which has come into play more frequently is for filings to be declared incomplete so that they may be withdrawn and renotified. BP/Amoco, for example, was successfully settled without full proceedings after refiling. In Phase II, parties may find themselves having to prepare to negotiate possible remedies at the same time as they are trying to 557

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defend themselves against the Commission’s objecthe confidential business information submitted by tions. The MTF identifies concerns about the competithe parties in their filings. Firms are increasingly tive effects of a proposed transaction in a formal deciding that it is worth agreeing to this as it reduces statement of objections, typically served on the parthe burden of information provision and speeds matties about two months into Phase II. The parties have ters, as well as facilitating joint discussions of proan opportunity to request a hearing to address these posed settlements. They are also recognising the concerns. As remedies must be formally proposed importance of ensuring coordination between those before the end of the third month, not surprisingly, dealing with the issue on their behalf in different jurcommitments are often submitted on the last possible isdictions. day. This means that there is very little time for the necessary consultations, assessment and negotiation A transaction may have different effects in different of possible modifications. The present timetable is jurisdictions resulting in substantially different outwidely regarded as too compressed. The introduction comes - as in Shell/Montecatini, discussed above, in of ‘stop the clock’ procedures both in Phase I and Air Liquide/BOC (January, 2000), where the merger Phase II to allow extra time at the parties’ request for was approved after Phase I investigations subject to the consideration of remedies a substantial package of comby all concerned, as proposed Decisions under the MCR mitments in the EU and subin the Commission’s recent sequently banned in the US merger policy Green Paper, and, more recently, in can be appealed in the seems a useful way of reducing GE/Honeywell. In addition, the the pressures (European Comtighter deadlines under MCR European courts and the mission, 2001c). may result in considerable delays after EU approval before Decisions under the MCR can prospect of possible litigation a deal can be finalised. SmithKbe appealed in the European Beecham/Glaxo Wellcome, for acts as a constraint on the line courts and the prospect of possexample, was approved conible litigation acts as a conditionally under the MCR in Commission’s decisions straint on the Commission’s early May 2000, after Phase I decisions. There seems little scrutiny, but agreement in the chance, however, of specific remedies being overUS (which was also subject to conditions) was not turned after judicial review. Commitments are often reached for a further seven months. included as an essential part of the decision, so it is difficult to separate them off without altering the substance of the decision, and the Courts are reluctant to get involved in the detailed economic assessConclusion ments. In addition, judicial review is a very slow process although there have been some changes recently The Commission’s readiness to negotiate suitable to allow a ‘fast track’ procedure (European Comremedies rather than allowing deals to founder mission, 2000d). Exceptionally, Shell/Montecatini unnecessarily on the regulatory rocks is a key feature (June, 1994) was reopened by the Commission itself of recent merger control in the EU but one that has and the original remedy modified. The parties had received relatively little attention. Policy is still evolvexplicitly reserved their right to request a review of ing but the Commission’s Remedies Notice, the first the remedy as they were facing proceedings in the official guidelines on the subject to have been proUS at the same time. They were released from their vided by any merger regime, usefully codifies past commitment to keep a particular technology outside practice. An examination of this, together with the their joint venture as the remedy agreed in the US recent case evidence and other literature, gives helpmeant that their links with the main competing techful insights for firms wishing to secure safe passage nology were severed by divestment. for transactions which may raise potential competition concerns. Many of the larger mergers notified under the MCR require clearance in merger regimes outside the EU and often involve investigation in the US as well as Divestment is the Commission’s preferred remedy as in Brussels. There has been much closer cooperation it is easy to understand and administer and there is between the US authorities and the Commission no on-going relationship between the parties and the recently based on a bilateral agreement introduced in divested assets to monitor. Where this is not suitable, 1998. In Alcoa/Reynolds, Exxon/Mobil and Astra the Commission has accepted other types of remedy, Zeneca/Novartis, for example, the two authorities carespecially quasi-structural ones such as licensing. ried out their negotiations with the parties in parallel Increasingly complex remedial settlements have been and assessed the remedies together. The risk of accepted, although the Commission is wary of comincompatible remedies in these cases was avoided as plex remedies if they leave too much uncertainty a result. At an early stage in the proceedings, the EU about the likely outcome. It also prefers arrangeand US authorities will ask permission to exchange ments that are self-monitoring. 558

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In negotiating divestiture settlements, the merging parties typically need to concentrate on minimising the package of divested assets, as well as on obtaining sufficient time for asset disposals and on reducing the risk that the divestiture obligations will disrupt their normal business. The Commission will be primarily concerned to ensure that the divested assets are sufficient to solve the competition problem, and that they will be transferred promptly, without unnecessary loss of value, to a suitable buyer who has the incentive to compete effectively. Essentially settlement negotiations revolve around the allocation of the various risks between the merging parties and the competition authority. Uncertainties about how particular remedies are likely to work out in practice increase the risks and add to the natural tension between the parties’ interests and the Commission’s concerns. Much of the negotiation tends to take place fairly late on in the proceedings. The process has been likened by a previous Director of the MTF to a poker game, although one where the parties always act as the dealer (Overbury, 1992). The assessment of proposed remedies has become more rigorous recently and there is now increasing use of safeguards to try to reduce the risks of strategic behaviour in the way commitments are handled post-merger and of ineffective settlements. Assets in divestment proposals are scrutinised more carefully, with particular attention to the viability of packages that are not made up of ongoing businesses. Crown jewel provisions may now be required to satisfy the Commission that there is a suitable alternative solution in place if there is uncertainty whether the parties’ preferred remedy would attract a suitable buyer. There is more attention to the suitability of proposed buyers, including use of up front settlements, which seems likely to increase in future. In addition, divestiture times have been reduced and trustees are typically used to supervise assets in the transitional period and ensure the sale proceeds smoothly. These changes are bringing remedial policies under the MCR much closer to established US practice. The new attention to remedies is reflected in the presence of a dedicated Enforcement Unit within the MTF since April 2001 to advise on the acceptability and implementation of merger settlements. Firms looking for clearance under the MCR need to take adverse effects on competition and possible solutions into account at an early stage as these will affect the viability and eventual value of their proposed deal as well as its completion date. The Commission takes a particularly strong line on mergers regarded as foreclosing competition through the amalgamation of exclusive rights, the control of key technologies, and network effects favouring larger operators. Indeed, no remedies to provide access to delivery networks or to patents which might be potentially blocking were accepted in Phase I in the year following the publication of the Notice, although they featured significantly in Phase I settleEuropean Management Journal Vol. 20, No. 5, pp. 549–561, October 2002

ments the previous year, suggesting a further toughening of policy. Where such effects lie at the heart of the transaction, any remedy sufficient to satisfy the Commission may destroy the rationale of the original proposal so agreeing suitable remedies may not be possible, even in Phase II. Finding acceptable remedies for horizontal mergers is also becoming more difficult in sectors where there has already been substantial consolidation. Respecting the MCR’s tight deadlines is essential in negotiating remedies and it appears that close cooperation with the MTF and consultation with the relevant Member States (which play the only official external role in the decision making process) may help to achieve the least unfavourable outcome. Detailed prenotification talks with the MTF can play a valuable role in determining likely stumbling blocks and possible solutions in advance, as well as preparing the ground for any subsequent investigation. The Commission’s approach is not entirely predictable, however, and despite the parties’ best efforts, there may still be unpleasant surprises about the way a merger is actually assessed and the final outcome. In GE/Honeywell, for example, the key part played by the previously little used bundling theory in opposing the conglomerate aspects of the deal could hardly have been foreseen. A key decision faced by potential acquirers is whether to make an early offer of proposed remedies to gain regulatory approval or whether to sit tight, hoping that no problems will crystallise. The advantages of trying to settle problematic cases rapidly need to be weighed against the possible disadvantages of having to make larger concessions in Phase I, owing to the Commission’s greater (and apparently increasing) caution at this stage, than might be found necessary in a full Phase II investigation. Whether it is better to try to avoid Phase II proceedings will depend on the extent to which acceptable Phase I remedies would affect the deal’s value and the estimated advantages of speed, as well as the firms’ assessment of the strength of the Commission’s case and their willingness to confront the Commission. It remains to be seen whether the Commission’s current proposals to extend the timetable for remedial settlements will be adopted and how this will affect firms’ future strategies. Acknowledgements An earlier version of this paper was presented to the 29th Annual Conference of the Academy of International Business (UK Chapter) in April 2002. I am grateful for the comments received which were helpful in finalising the paper.

Notes 1. Mergers and merger-like transactions under the scope of the MCR are known as ‘concentrations’ but will generally be referred to here as mergers for simplicity.

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2. The limited referral possibilities to and from Member States under the MCR are ignored for the purposes of this analysis. 3. Semi-structured interviews were held with a competition official in the EU; two competition officials in the US; an in-house competition lawyer in a firm which had negotiated complex remedial settlements under the MCR, and a competition lawyer who has acted as counsel in a number of such cases. 4. Dates of the final Commission decision on cases referred to in this paper are given in brackets after the name of the case when it is first mentioned. The complete text of cases decided under the MCR is available on the web from the Commission’s Competition Directorate’s website (http://europa.eu.int/comm/competition) where they are arranged alphabetically, by decision date and by product code. This website is also a valuable source for firms seeking information on developments in merger policy. 5. Guinness/Grand Metropolitan (October, 1997) where the concept of ‘portfolio power’ was used. Wolters Kluwer/Reed Elsevier (December, 1997) and GE/Honeywell (July, 2001) are also notable for concern about conglomerate effects. 6. The acquisition of a business divested as a result of an undertaking is not exempt from notification under the MCR if it satisfies the MCR’s threshold criteria. 7. There are specific procedures under the MCR for third parties to express their interests in the outcome of a specific transaction. Those who register interest in being involved usually have more influence. Encouraging customers and suppliers favourable to the merger to register may therefore be worthwhile. 8. The only exception in the MCR’s first decade was WorldCom/MCI. In this case, a coordinated remedy involving the sale of MCI’s Internet assets in advance of, but conditional on the merger, was agreed with the US authorities; the details of the EU settlement were affected by the US approach. 9. The exception was Allianz/Dresdner (July, 2001). 10. ‘The commitment offered is behavioural in nature and can not therefore be accepted under the Merger Regulation.’ Gencor/Lonrho (April, 1996). 11. As, for example, in several decisions involving postal services. National postal monopolies which had set up a joint international express postal delivery service agreed not to discriminate in favour of their joint venture as regards the provision of local delivery services. See TNT/GD (December, 1991); PTT Post/TNT/GD Net (July, 1996), and PTT Post/TNT/GD Express Worldwide (November, 1996). 12. The Commission was criticised in this case, as in Coca Cola/Carlsberg (September, 1997), for using merger remedies to secure changes which had little relationship to the likely effects of the transaction and more resemblance to those which might have resulted from a monopoly investigation. The apparent use of remedies to further other policies has also featured in telecommunications; national governments have been persuaded to speed the liberalisation of telecommunications as a de facto condition for allowing mergers involving their national telecoms operator (e.g. Telecom Eireann, December, 1996). 13. The proposed joint venture was made up of the parties’ world wide polypropylene (PP) and polyethylene (PE) interests. The remedies included the divestment of three PP resins plants and a PP compound plant. The parties also undertook to divest BASF’s Novolen PP technology business and the joint venture was to license its metallocene patent rights to all interested third parties. In addition, the parties agreed not to assert patent rights against third parties who wanted to license the technology from others.

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ELEANOR MORGAN, School of Management, University of Bath BA2 7AY, UK. E-mail: [email protected] Eleanor Morgan is Senior Lecturer in Business Economics at the University of Bath. She is also Editor of the International Journal of the Economics of Business. Her research interests focus on the development of European competition policy and in innovation policy as well as the links between these.

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