New U.K. Merger Assessment Guidelines Introduce More Flexibility In Defining Markets

On September 16, 2010, the United Kingdom's Office of Fair Trading (“OFT”) and the Competition Commission (“CC”) published the final version of their new joint Merger Assessment Guidelines (“Guidelines”). The Guidelines expand and revise the previous guidance published separately by OFT and CC in various publications and attempt to clarify the 2002 Enterprise Act.
Key revisions compared to previous guidance include the following:

New Guidelines expand the concept of 'theories of harm' and uses such theories in assessing whether or not a substantial lessening of competition (“SLC”) has been created by the merger. The Guidelines explain that a merger gives rise to an SLC when it has any impact on rivalry that is likely to cause harm to customers. Therefore, evidence on likely adverse effects will be a key factor in the assessment.

New Guidelines shift from a detailed assessment of market definition towards a more effects-based approach in competition. For example, unilateral effects are more likely where customers have little choice of alternative suppliers. The Guidelines explain that in assessing whether a merger leads to unilateral effects from a loss of perceived potential competition, the authorities will consider whether the presence of perceived potential competition resulted in the pre-existing prices of the incumbent firm (or firms) being lower than they would otherwise have been. The Guidelines direct authorities to take coordinated effects into consideration, when determining whether a merger may give rise to an SLC. Authorities should analyze the characteristics of the market that could be conducive to coordination. They should examine whether there is evidence that the firms in the market were coordinating pre-merger. If there is no evidence of pre-merger coordination, the OFT and CC will examine whether the merger makes it more likely that the firms in the market will start to coordinate.

There is more detail in the counterfactual, barriers to entry, non-horizontal effects and efficiencies sections of the Guidelines.

The application of the SLC test involves a comparison of the prospects for competition with the merger against the competitive situation without the merger. The latter is called the 'counterfactual'. The counterfactual is an analytical tool used in answering the question of whether the merger gives rise to an SLC. According to the Guidelines, the counterfactual position needs to be reasonably foreseeable, and not speculative to enable the authorities to predict with some confidence. However, the OFT and CC may still consider the effects of the merger in the context of events or circumstances that are not sufficiently certain to be included in the counterfactual.

Barriers to entry that potential and actual competitors may encounter are taken into account to assess how the merger may affect the likelihood of new entry or expansion. In assessing whether entry or expansion might prevent an SLC, the authorities will consider whether such entry or expansion would be timely, likely, and sufficient. The guidelines note that the fear of entry might deter the merged firm from exploiting any market power resulting from the merger and in such cases the OFT and CC need not expect that entry would actually take place. Furthermore, the Guidelines identify four broad categories of barriers to entry or expansion: (1) Absolute advantages for current market players, including legal advantages and technical advantages; (2) Intrinsic/structural advantages, arising from the technology, production methods or other factors necessary to establish an effective presence in the market; (3) Economies of scale which arise where average costs fall as the level of output rises; and (4) Strategic advantages which arise where incumbent firms have advantages over new entrants because of their established position.

The Guidelines provide examples in which OFT and CC may assess whether a merger gives rise to an SLC on the basis of non-horizontal effects. That includes (1) vertical merger between an upstream supplier and a downstream customer which purchases the supplier's goods, either as an input into its own production or for resale; (2) Diagonal merger between an upstream supplier and a downstream competitor of the customers that purchase the supplier's goods; and (3) conglomerate merger of two suppliers of goods which do not lie within the same market, but which are nevertheless related in some way.

Efficiencies arising from mergers may enhance rivalry, with the result that the merger does not give rise to an SLC. However, the Guidelines point out that the efficiencies must be timely, likely and sufficient to prevent an SLC from arising and must be a direct consequence of the merger, judged relative to what would happen without it.

The Guidelines, which are now in effect are designed to provide a greater clarity on how the competitive impact of mergers is assessed by the OFT and the CC.

Parva Fattahi
(202) 589-1834
pfattahi@dbmlawgroup.com