Merger remedies vs. efficiency defence

My most recent working paper looks at how merging parties’ litigation strategy is determined in EC merger cases. The main focus of the paper is on two major components of merger litigation strategy: merger remedy offers and revealing efficiency related evidence. As the regulatory framework and the Commission’s decision together determine the payoffs that any combination of remedy offers and efficiency related evidence leads to, companies are expected to design their strategy that helps them achieve as early an approval as possible. Put differently, I tested how the Commission’s signals affect merging parties’ behaviour regarding their decisions on remedy offers and efficiency claims. By analysing the Commission’s practice between 1999 and 2008, the paper examines empirically the determinants of the strategy that parties follow in individual merger cases.

The motivation of the paper came from the finding that in about half of the mergers, parties signal saving (efficiency) expectations to the public (shareholders) but they only reveal the same expectations to the Commission in only a handful of cases. Even intuitively it seemed obvious that there must be some sort of signals coming from the Commission, which stops the merging parties from revealing efficiency gains. The decision on whether to reveal efficiency expectations only makes sense if analysed in the context of the other main constituent of litigation strategy: remedy offers. Efficiency defence and merger remedies are two alternative ways of reaching regulatory approval. This is a crucial element of my research as it means that when efficiency gains are not present, the merger can still be approved if remedies are offered. The analysis of litigation strategy therefore focused on this choice between efficiency defence.

To understand the Commission’s signals, I looked at three aspects of EC merger control: (1) regulatory framework, (2) case law, and (3) length of investigations. I found that (1) has very little to say about the interaction between efficiency claims and remedies. One thing clearly stands out though, that is, both the choice of the remedy offer, and the decision on whether to reveal efficiency related evidence, lies at the discretion of the merging parties (i.e. the Commission cannot investigate efficiencies if the parties do not claim them, and the Commission does not impose a remedy but only decides on whether the remedy offered by the parties is sufficient or not).

As far as the Commission’s case law is concerned, I found that efficiencies are never considered as the sole factor outweighing the competition concern (i.e. if a merger is approved, it is a result of several simultaneous factors, one of which is efficiency gains, but the Commission never reveals how important this latter one is). The analysed cases also show that when remedies are offered, they are not weighted against efficiencies (if claimed at the same time). This means that parties cannot realistically expect that as a result of some efficiency gains, a smaller set of remedies may be sufficient to eliminate the competition problems). I also found that the Commission claimed that efficiency arguments have to be investigated in a longer second phase procedure. Finally, there is the notion of efficiency offence, an accusation that the Commission categorically dismisses, nevertheless it still showed up in some case reports.

Finally, the length of the investigation can be summarised by this simple table, showing the probability of longer procedures given the timing of the remedy and efficiency claims:

It is easy to see which combination of choices firms will follow if they pursue a prompt approval of their merger.

These signals together are expected to have a very strong effect on how the parties will choose between remedies and revealing efficiency claims.

In the quantitative part of the paper, I looked at the determinants of revealing efficiency related evidence, and the factors affecting the timing of remedy offer (I investigated the determinants of the size of the remedy offer in a separate paper). I found that merging parties’ pre-merger saving expectations have a quadratic effect (positive first, then negative) on the probability of efficiency defence, but even with saving expectations, the probability of revealing efficiency related evidence never exceeds 30%. This implies that although having evidence on efficiencies increases a chance of revealing them to the Commission, this is strongly mitigated by the negative signals the Commission sends out. I also showed that after 2004 the probability of ED increases then decreases. This is another clear sign that merging parties (and their legal advisors) carefully follow the Commission’s practice. The ECMR reform in 2004 sent out a positive signal on efficiencies which was followed up by an increase in efficiency defence claims. However, the signals were updated by case law (suggesting that claiming efficiencies still risks the early approval of cases) and it resulted in a decrease in the number of efficiency defence cases.

As far as the timing of remedy offers are concerned, I found that saving expectations increase the likelihood of early offers, i.e. mergers that expect large savings will offer early remedies to ensure early approval [they are also more likely to offer larger remedies, see Ormosi (2009)]. Another finding is that efficiency claims are less likely to be accompanied by upfront remedy offers. If firms still decide to reveal efficiencies it shows that they are either not delay-averse or have incompetent legal advisers. This latter is further confirmed by the fact that they fail to offer early remedies in the same cases. There was also some evidence, that in more recent cases remedies are more likely to be offered early, implying that firms learn from previous cases and know how crucial early offers are for early approvals, and that the complexity of the case has no effect on the timing of offer, i.e. no matter how complex the merger is, if parties are delay-averse, they are able to offer something (sufficient) upfront.

To conclude, allowing merging parties to choose between remedy offers and efficiency claims means that they will opt for the strategy that results in as early an approval as possible. As a consequence – given the signals received from the Commission – efficiency claims will be disfavoured to remedy offers even where the merger has a strong potential to result in significant amounts of savings. The Commission’s practice therefore results in a situation where efficiencies are given a secondary role, which may not be the most fortunate thing at a time when the competitiveness of European firms should be so important.

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