Nova workboard

a blog from young economists at Nova SBE


In reply to: An Unsuccessful Merger

The case described in the post (https://novaworkboard.wordpress.com/2014/03/10/an-unsuccessful-merger/) is the example of following the principle of not decreasing the welfare of the society. And I totally agree with the author that the benefit for the end-customer in case of merger between Volvo and Scania was at least doubtful.

As far as I’m concerned the critical issue in this story was the defining of the geographical market. And as it was described in the post the major role in truck sales plays the after-sales service. It creates several cons for defining the market as the global European one. The main is the necessity to use this service in the place of the truck exploitation, which leads to higher prices for the truck charged by the foreign dealer if you buy it abroad, as the dealer loses profit from after-sales service. So nothing stops the future JV in such countries as Sweden having 90% of total market share from increasing prices to the level of the near-by countries.

But I want to show the very different situation regarding competition on the truck market. 15 years after unsuccessful merger with Volvo Scania is being a newsmaker for one more time. Now VW, which already owns 75% of German truck producer MAN controls 62.6 percent of Scania via a direct holding and an additional stake, is owned by MAN. The VW started buying stock in the Swedish manufacturer in 2000 and acquired majority voting control in 2008. Though both companies have 27.4 percent of the market share in total making them the biggest player (compared with 22.9 percent for Daimler and 22 percent for Volvo) they are not as concentrated on any specific European market as possible JV between Volvo and Scania could be on the Swedish market.[1] So VW won the permission from European Union regulators to buy the controlling stake, with the EU saying that it had no antitrust concerns.[2] And transforming BIG 7 of truck producers to BIG 6 doesn’t seem to worsen the level of competition.

VW according to Swedish law needs to exceed 90% threshold in Scania shareholding to force the remaining owners to sell their holdings and delist the company. It is necessary for achieving synergy between the companies via integration processes as at the moment the minority shareholders of Scania refuse to share know-hows with VW and MAN preventing them from cost savings of about 200 mln EUR annually. [3] But doing this could increase the profit of the company and shareholders’ welfare, potentially decrease the prices for the end-customers for the product and increase the overall welfare of the society. But the minority shareholders do not do it waiting for the best price.

And till now VW hasn’t managed to reach this 90% of shareholding, which indicates that not having the ability to merger can also, bring the negative effect to the society welfare as sometimes having this ability does.

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Comment on intended O2, E-Plus merger [German market for cellular networks]

Background: There exist four cellular network providers in Germany. Market leader T-Mobile Germany (33% market share by clients) and runner up Vodafone GmbH (30,50%) are considered to have the best network quality and coverage. In summer 2013 the fourth largest carrier O2 (Telefónica Germany) announced its intentions to merge with number three E-Plus (owned by KPN) to create Germany’s biggest network provider (36,50% market share by clients). Ceteris paribus the merged company would still trail T-Mobile in revenues. O2 and in particular E-Plus are positioned to compete for consumers with lower valuations and both compete with one another in prices as their network quality and coverage is inferior to that of T-Mobile and Vodafone.

Proponents of the merger, that is expected to create synergies worth €5bn until 2019, argue that both firms individually would find it difficult to raise enough money for upcoming auctions for cellular network licences in 2017 and needed investments in infrastructure as smartphone sales and demand for mobile internet increase. They argue that for competition in the long run it is vital to have a third big competitor as the gap to the two front-runners is increasing and fan fears of a (harmful) duopoly of T-Mobile and Vodafone in the future that both O2 and E-Plus cannot compete with individually. A consolidated network of O2’s and E-Plus’ network might be able to compete in quality as well as coverage with the two market leaders. As Telefónica Germany’s CEO puts it: “We are confident that the authorities will allow the merger as a third strong player promotes competition in the interest of the German consumer.”

If the merger were to be allowed there would exist an oligopoly consisting of three (very) homogeneous firms with similar amounts of costumers, network quality and coverage. The large investments needed to obtain licences in combination with an almost equally divided market between the three incumbents would make further entry highly improbable. As a result pricing pressure will most likely drop as the provider with the lowest prices (E-Plus) would be incorporated in the new company. Overall the above facts facilitate collusion among the providers and are most likely to be harmful to the consumer.

Let us first consider the case in which the merger is not allowed. Then there exist two possibilities: The first possibility is that the status quo with four companies remains the same. The decision not to allow the merger was the ex-post right decision in this case. The second possibility is that E-Plus and/or O2 can’t keep up with the two big providers and eventually go bankrupt. In this case the decision of forbidding the merger might have been wrong as in return a duopoly of T-Mobile and Vodafone are the only companies in the market. Though there is the possibility that a new competitor with the needed capital acquires one of the bankrupt firms or their infrastructure. If the result was a homogeneous duopoly in the future forbidding the merger might have been wrong ex-post.

The second case in which the merger is allowed is desirable if O2 and E-Plus would otherwise drop out of the market. As barriers to entry are large due to costs for network licences and reaching a critical mass of consumers to make the business profitable is difficult as there might also be networking effects for consumers[1], T-Mobile and Vodafone would most likely share the market between themselves for years to come.

One thing is sure: If the merger were to be allowed it would have to be allowed subject to structural remedies. As network licences are awarded subject to “independence in competition” the conditions may include a partial restitution of network licences owned by the new firm that then were to be reserved for potential entrants. This is a reasonable measure as the new firm would be better positioned with licences for the competition in the next years opposed to Vodafone and T-Mobile who are scarce on that resource.

As T-Mobile and Vodafone are not dramatically protesting against the proposed merger and only demand conditions as the above explained restitution of licences my personal feeling is that the merger should not be allowed as market concentration would increase drastically and the soft reaction of T-Mobile demonstrates that the company might expect competition to soften and anticipate collusive behaviour in a stable oligopoly consisting of three firms in the future. Then the stated €5bn as efficiency gain of the merger over the next 5 years might not outweigh the losses for consumers. With a market share above 25% but below 40% the new firm would not necessarily hold a dominant position – also considering the competitors it is faced with. Though the joint dominance of three homogeneous network providers must be considered. Further the Herfindahl–Hirschman Index would c.p. exceed 3000 while any number above 2000 raises concerns according to EC Guidelines on the assessment of horizontal mergers (2004/C 31/03)[2].

The decision by the European Commission on whether to allow the merger or not is pending and expected for May 2014.

SLH #685


[1]An easy example to consider are offers that include free calls to all numbers within one provider’s network.


UGF-Premafin – Is competition vanishing in Italian insurance market?

The horizontal merge between Unipol (UGF) and Fondiaria Sai (Fonsai) represents one of the most important mergers realized in the italian insurance market. It occurred in 2012 and involved two of the most relevant insurance companies operating in Italy. They communicated their intention to the Italian Authority, as the law requires, and the Authority carefully analyzed the situation, in order to find any possible anti-competition effect. The operation consisted in the acquisition of Fonsai by UGF, with important consequences involving the network of financial links between the two insurance companies and banks involved in the merge and the governance of the post-merger entity.

The resulting entity is playing an important role in insurance market, supplying more than 14 millions of customers. Mediobanca, an Italian banking institute, was involved in credit operations with both companies. UGF and Fonsai were instead shareholders of Mediobanca. Furthermore, Mediobanca owned part of Generali, another insurance company operating in Italy, and could exercise its right of vote in the decision process. Many other links between the two entities were also in place.

The analysis leaded by the Authority brought to relevant results, showing that the post-merger entity would have been the dominant company in the insurance market related to damage branch. An analysis based on HHI and CR3, two indices of concentration, displayed that the post-merger entity would have gained even more power after the concentration, as the table below shows. Moreover, the new company would have been able to manage a particularly dominant premiums’ strategy, offering prices above those of other competitors while keeping its market dominance. The analysis led by the Authority brought to the conclusion that the post-merger entity would have been a dominant company in the insurance market. The competition in the market would have been compromised, also considering the relationship with Generali, that would have represented the main competitor of the entity. UGF and Mediobanca proposed many commitments in order to decrease the anti-competitive effects, trying to divide the interconnections between the firms involved in the merge.

The Authority evaluated their proposal and provided different arrangements and, in the end, decided to allow the merge, even if it would have brought restrictions to the competition. Many modifications were required in order to avoid harm to consumer and competition, starting from forcing the parts involved to dismiss their shares of other companies included in the merge and to relax, and in more extreme cases remove, any possible linkage. [1]

This decision was, for some parts, surprising, because the analysis clearly outlined restrictions to the competition, both on the side of horizontal merge and also through cross-ownership with other insurance companies operating in the same market. Recent news have highlighted how companies involved have disobeyed some of the rules imposed by the Authority about the transfer of their shares. This represents an interesting case where many restrictions to competition apply and where competition is likely to be compromised. Commitments are useful solutions but some doubts arise in this case, since anti-competitive effects appear so remarkable that even Authority could face difficulties in making them followed rigorously.

Sources:

In Italian: http://www.agcm.it/component/joomdoc/doc_download/3213-c11524chiusura.html

[1] http://www.agcm.it/en/newsroom/press-releases/2001-c11524-conditional-go-ahead-for-ugf-premafin-operation.html

Edoardo Sezzi, 1747


1 Comment

An Unsuccessful Merger

On August 99’, Volvo tried an agreement with Invest AB with the purpose of acquiring Scania.

After a first stage was developed by the Commission in order to assess the outcomes of such merger, authorities decided to follow up with a second phase, since there were numerous concerns related to the compatibility with the rules of the Merger Regulation.

In the end, the Commission Decision did not allow such an acquisition. It is important to understand that the determination of the relevant product and geographic market placed a crucial role on this decision.

Volvo and Scania enjoyed at that time the two largest market shares of trucks and buses in the Nordic market. Hence, a possible merger between these two companies would create the largest truck company in Europe. While this merger’s share was about 30% in the Western European market, in the Nordic ones it would be about 66%. Particularly, in Sweden, 90% of market share would likely occur.

Volvo basically relied on a series of non-price factor to support the argument that the relevant geographic markets were the EEA countries. Nonetheless, the Commission objected this position by stating the following: demand price-elasticity and technical configurations differ among countries considerably; the selective and exclusive distribution system links ales with after-sales services. This point may be crucial since the Commission assumes that dealers may be induced to charge higher prices to foreign customers because of the importance of after-sales service’s profits. Yet, there are significant differences of market shares among countries.  

In essence, the Commission will prohibit a merger if it creates or strengthens a dominant position in a common market. Factors like market shares, barriers of entry and customer purchasing power were analyzed as well through this Competition Authority. The undertaken investigation was made in countries where effects would be more noticed by the public if the acquisition was to occur. The commission gave a very weight to market shares in assessing dominance. As a final point, it also assessed the likely market share of both the joint venture and the largest remaining competitor in all those countries. What’s more, the Commission found out indicators of relevant brand loyalty and of a dispersed customer structure. In summary, it was concluded that there was not enough public buying power to offset the increased market power of the merge. Moreover, the Controlling Commission argued that it would increase entry barriers in the market. After all, the Commission understood that the Volvo-Scania merger would most likely lead to an insufficient effective competition in these Nordic countries.

As we see, this case illustrates quite well the important of relevant market definitions in competition cases. Most people would be worse off with such a merger, meaning a decline of welfare for the society in this case.

 

Diogo Ribeiro


The “integrators” UPS and TNT Express

The EU Competition Policy press release, July 2012, stated that “UPS and TNT Express are two out of the only four so-called “integrators” currently operating in Europe. Integrators are companies that control a comprehensive air and road small package delivery network throughout Europe and beyond and are capable of offering the broadest portfolio of such services. The other integrators present in Europe are DHL, which is owned by Deutsche Post, and FedEx, a US-based company”

A great example of an network industry is international parcel industry, where fixed costs are high and marginal cost of collecting, sorting and delivering of each parcel is significantly below the average cost of a given firm orders. In this sense, two global integrators, UPS and TNT Express, are prepared to join forces in Europe as part of a merger. As mentioned by the companies “The complementary strengths of both organizations will create a customer-focused global platform that will be a leader in transportation technology and customer service,”

However, the European Commission was investigating this horizontal integration in the sense that a large business combination will raise the levels of market concentration for a position that can jeopardize consumers.

Indeed, as stated in EU Competition Policy press release, July 2012 “The European Commission has opened an in-depth investigation under the EU Merger Regulation into the proposed acquisition of TNT Express of the Netherlands by the American company United Parcel Service (UPS), both major players in the small package delivery sector. The Commission’s preliminary investigation indicated potential competition concerns in the markets for small parcel delivery services, in particular international express services, in numerous Member States, where the parties would have very high combined market shares. The opening of an in-depth inquiry does not prejudge the result of the investigation. The Commission now has 90 working days, until 28 November 2012, to take a decision on whether the proposed transaction would significantly impede effective competition in the European Economic Area (EEA)”.

In 2013, the European Commission confirmed the final decision blocking the proposed acquisition of TNT Express by UPS: “The Commission found that the take-over would have restricted competition in 15 Member States when it comes to the express delivery of small packages to another European country. In these Member States, the acquisition would have reduced the number of significant players to only three or two, leaving sometimes DHL as the only alternative to UPS. The concentration would therefore have likely harmed customers by causing price increases.”

 

(Mafalda Gomes)