The document discusses European Union competition law regarding mergers. It defines different types of mergers like horizontal, vertical, and conglomerate mergers. It explains the purpose of merger control is to maintain competition and prevent the formation of monopolies that could harm consumer welfare. Merger control evaluates whether a merger could allow the merging companies to unilaterally exercise power over the market and reduce competition. Theories of potential competitive harm from mergers include unilateral or non-coordinated effects where competition between the merging companies' products is eliminated.

1. European Union Competition Law: Mergers
By
Gurkaran Babrah

2. Introduction
● Merger is a legal agreement between two or more existing companies to get together and form
a company. In other words, it’s a combination of two companies to form one legal entity.
Mergers and acquisitions come under competition law. In some countries, it’s also called
Antitrust laws. For example - The U.S. European competition law regulates and controls the
activities within the European Union.
● The objective of European Union competition law is to maintain the competition within the
European single market. It does by regulating anti-competitive conduct by companies, to
ensure that they do not create cartels and monopolies as it would damage the interest of the
others. Under European Union, there is a treaty called The Treaty On The Functioning Of The
European Union (TFEU). This treaty is the basis of European Union law. It sets the scope of
the EU’s authority to legislate in those areas where the EU operates

3. Terminology
The meaning of ‘merger’ and ‘concentration’
Merger -
Merger is a voluntary activity by two companies to get together and set up one legal entity. Companies which merge together
are usually equal in terms of size, customers, scale of operations, etc. Generally companies merger to increase their market
share, reduce their production and operating costs, expand their territories, unite common products, grow revenues and
increase their overall profits
Concentration -
Under EU competition law, a concentration arises when there is a change in the control of an entity engaged in economic
activity, which the EC calls an undertaking, on a lasting basis. It either involves:
● The merger of two or more previously independent undertakings;
● The acquisition of direct or indirect control of an undertaking; or
● The acquisition of joint control over a “full-function joint venture”.

4. The horizontal, vertical and conglomerate mergers
Horizontal Merger -
When two companies operating in the same type of industry mutually agree and merges together to form one legal entity is known as a
horizontal merger. It’s a part of consolidation between two competitors offering the same kind of products or services. The goal of the
merger is to have a large business, large market share and large scale of economies. The synergy formed by the merger enhances the
efficiency of the business performance and financial gains. The cost-efficiency also leads to increased margins of the company. For
example - The merger of Daimler-Benz and Chrysler.
Vertical Merger -
A vertical merger is a merger between companies that have an actual Supplier-customer relationship. It’s a merger between players that
are complementary to each other. Vertical mergers also have their effects but are different from horizontal mergers. Examples of
vertical mergers are - Producer and retailer, car parts producer and car producer, cement producer and concrete producer.
Conglomerate Merger -
Conglomerate merger is a merger which is neither horizontal nor vertical. It is a different kind of merger. It is a merger between the
firms which are non-competitive in nature. The firms may operate in different industries or geographical regions. For example - Walt
Disney Company and The American Broadcasting Company

5. Merger Activity
❖ As stated above, companies combining with each other is known as merger or merger activity. Merger activity helps
to expand markets, bring benefits to them and to the economy, but some combinations may reduce competition.
Merger activity further helps to develop new products more efficiently and to reduce production and distribution
costs. Through the increased efficiency the market may become more competitive and consumers may benefit from
higher quality goods at fair prices.
❖ As mentioned above, some mergers may reduce the competition in the market by creating a dominant player in the
market. This is likely to harm the consumers as it will give the companies the right to exploit consumers by charging
high prices and reducing the consumer’s choice. Mergers are capable of increasing competition in the European
industry, improving the conditions of growth and raising the standard of European Union (EU). Reorganisations or
mergers are welcome but they should not violate competition laws and should not impede the fair competition.

6. The Proliferation of Systems of Merger Control
❖ The proliferation of merger review around the world has given rise to a broad number of commercial
and strategic issues. These issues are for those parties who intend to engage in merger activities. The
process of merger at an international level has added significant layers of complexity and has made
the merger process very bewildering and expensive.
❖ A large number of jurisdictions are now involved in the merger review process. The thresholds for
merger filings are many, the timing of merger review is different and it is subject to different levels
of procedural complexity.

7. Why do firms merge?
Economics of scale and scope
Economies of scale are the cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output
decreasing with increasing scale. The merger will help the company to increase the scale of operations and economies of large scale can
be achieved A merged company will have more resources as compared to an indiviual company.. A large economy can occur because of
intensive utilisation of production facilities, distribution network, research and development facilities
Other efficiencies
Mergers help the firms to increase their efficiency in different ways. They help to expand research and development opportunities or
more robust manufacturing operations. Sometimes companies may want to combine to leverage costly manufacture operations. By
merging, companies complement a current product or service. Two firms may be able to combine their products and services to gain a
competitive edge over the others in the market.
National champions
National champion is a government policy in which large organisations seek profits and advance the interests of the nation. They
usually set the policies which favour these organisations. By giving an unfair advantage against market competition, the policy
promotes economic nationalism domestically and global pre-eminence abroad contrary to the free market. This policy is mostly
practised in every country’s sector.

8. Greed, vanity, fear and drugs
Sometimes mergers are fuelled by the speculative greed of individuals or companies or the personal vanity of a particular
swashbuckling senior executive. Some mergers seem to be motivated by fear. If an undertaking in a particular sector appears to be
involved in mergers, it may be considered important not to be left behind in the process of industry consolidation. For some
individuals, the deal-making process can be the same as the feet of mood-changing drugs, altogether more exciting than the mundane
task of managing a firm well.
Increasing market power
One of the reasons behind the merger is increasing market power. By merging the companies they eliminate competition, increase their
market share, control over demand and supply and raise prices according to their own wish. These kinds of mergers tends to reduce
competition in the market. It usually emerges as a monopolist agenda from the combinations of powerful enterprises, along with the
unemployment which has a very adverse effect on the economy of the country. As the competition is reduced, it gives companies the
power to fix prices as per their wish. They can charger unnecessary higher prices from the consumers. Therefore, these kinds of
mergers are often scrutinised.

9. What is the purpose of merger control?
The fundamental question arises here that why there is a need to control the mergers in the market.
There are many reasons why governments, shareholders, consumers, and firms may object to these
mergers. A government may not like the merger of a foreign firm with the native firm, or a merger
may not fit with the industrial policy of the government, or if a merger leads to unemployment the
government may not approve that. A firm may object to the merger because it can become a target
of a hostile bid, or a merger can give an edge to the other firms. Shareholders may think that the
merger may have an effect on the value of their shares. These are individual interests of different
entities but the competition law focuses on maintaining the competition with the aim of
maximizing consumer welfare.

10. Is merger control necessary
The article 102 under TFEU strongly forbids the abuse of market power. The article not only focuses on simply
preventing future abuses but it talks about maintaining competitive market structures which leads to better outcomes
for consumers.
Therefore, Article 102 of the TFEU says that -
Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it
shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States.
Such abuse may, in particular, consist in:
(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
(b) limiting production, markets or technical development to the prejudice of consumers;
(c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a
competitive disadvantage;
(d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which,
by their nature or according to commercial usage, have no connection with the subject of such contracts.

11. Theories of competitive harm
Unilateral or non-coordinated effects
Unilateral effects are also known as non-coordinated effects. These arise when the competition between the products of the merging
firms is eliminated. It allows the entity to unilaterally exercise power over the market like a dominant entity. It can raise the price of the
one or both merging parties’ products.
Coordinated effects
Coordination does not require a written or explicit agreement. It is an implied understanding among the market participants.
Coordinated effects talks about whether the merger will make it more likely for a group of firms to coordinate and raise prices or not.
There are a number of factors whether the participants are able to:
● Align their incentives and reach a common understanding
● Collectively raise market prices
● Monitor and detect deviations
● Punish deviations from the common understanding or agreement.
Vertical effects
In microeconomics and management vertical merger is an arrangement in which a supply chain of a company is owned by that
company. Each member of the chain supplies a different product and combine it to satisfy a common need. Consider this example - if a
car manufacturer purchases tires from a particular shop who further supplies to many car manufacturers. Eventually, that car
manufacturer purchases the shop or merges with the tire supplier. Then, the car manufacturer may control the supply of tires to the
market and may destroy fair competition

12. Conglomerate effects
Conglomerate merger is a merger in which firms are involved in totally unrelated business activities. These types of mergers
have several effects. They lead to diversification, an expanded customer base, and increased efficiency. As the companies
diversifies the risk of loss also lessens.
For example - if one business unit performs poor or not up to the mark, other units of the company can compensate for
losses. For example - if A company is specialised in radio and merges with company B specialised in manufacturing watches
to form company C, company C will then have access to a large customer base to which it can sell its different products
The counterfactual
The counterfactual method can be used to assess the effects of an actual event. It has always played an important role in EU
competition law. Counterfactuals are discussed under Article 101 guidelines and Article 102 guidance paper of TFEU. The
term counterfactual refers to the hypothetical situation in which merger could not take place. If the commission finds the
counterfactual to be significantly more pro-competitive than the merger situation, it would oppose the transaction unless
the parties offer adequate remedies. Because EU merger control takes place prior to the implementation of the merger, the
counterfactual in merger cases is usually the status quo ante (previously existing state of affairs). However, in certain
circumstances, the commission has adopted a more dynamic interpretation of the counterfactual.

13. Guidelines
There are a number of guidelines on the substantive assessment of mergers. Many competition authorities have
published guidelines on substantive assessment. Horizontal guidelines of the US, joint guidelines of the OFT
(Office of fair trading) and competition commission in the EU are some important guidelines. The European
Commission has published guidelines on the assessment of horizontal mergers and guidelines on the assessment
of non-horizontal mergers. Guidelines must strike a balance between providing guidance for firms and their
advisers as to what might be expected of a system of merger control and avoiding too much speculation, which can
lead to a loss of certainty.
A specific problem in systems of merger control is whether a merger which reduces competition but which leads to
gain in efficiency should be permitted or not. In certain circumstances, the European commission’s horizontal
guidelines take efficiencies into account within the overall assessment of a merger. Another issue that sometimes
arises is whether a merger should be allowed in order to save a failing firm even though there will be less
competition in the market after the merger than before. A failing firm defence does exist in US law has been
applied under the EUMR and is recognised in an appropriate case under the guidelines of the Uk competition
authorities.

14. Remedies
It is very common that most aspects of a particular merger gives rise to no competition concerns. However, it can
be possible that there are certain parts of the businesses of A and B that may overlap horizontally. In that case a
competition authority, rather prohibiting the entire transaction, may look for a remedy whereby its competition
concern is relieved and the rest of the deal is allowed to proceed. Some cases may require a complex remedy, for
example, a right of access to an essential facility or the licensing of technology to competitors on reasonable and
non-discriminatory terms. The OECD published Merger remedies in 2004 following roundtable discussions in
which a number of recommendations as to best practice were made. In 2005 the European Commission published
a merger remedies study in which it reviewed the effectiveness of 96 remedies.

15. Loss of efficiency and ‘short-termism’
Some commentators argue that mergers, far from promoting economic efficiency, have a disruptive effect upon the
management of one or both of the merged firms and may be detrimental to their long term projects. This claim is made in
particular of contested takeover bids, where it is possible that the management of the target company will either be removed
by the new shareholders or will resign rather than stay on in the new conditions. Sceptics of the way in which the market for
corporate control functions would argue that it is not inevitable that the decisions of shareholders will produce the best
result in the public interest, although it may yield the best financial deal for the shareholders themselves. In particular,
many would argue that a problem with takeovers is that they are motivated more by short-term profit-taking than by
genuine concern for the long term prospects of the company.
Concentration of wealth
Some may object mergers on the grounds that they lead to firms of such size with such power as to be contrary to a balanced
distribution of wealth. This is a socio-political argument, but one which has become more widely accepted as aggregate
industrial concentration (it is concerned with the measurement of large enterprises) with has increased. In the US the
merger control provisions laws were strengthened at a time when this problem was a dominant concern.

16. Unemployment and regional policy
This is another objection to mergers. Some say that mergers lead to the closure of factories or offices and result in serious
unemployment. Mergers that appear to have no regard for the social problems that may follow attract particular
opprobrium (criticism) from the sceptics of the free market.
Overseas control
Mergers may result in the control of indigenous firms passing to overseas companies, in which case any economic
advantages of the merger may be thought to be outweighed by the desirability of maintaining the decision-making process
and profits at home. Strong opposition was expressed in the US 2006 when the possibility of seaports there coming under
the control of Dubai ports became known. Many Uk firms have expanded abroad, in particular into the US. the case for
intervention against foreign takeovers may be more compelling where there is a lack of reciprocity between the laws of the
two countries: if the law of the country A prevents inward investment, whereas country B permits it, there may be a case for
blocking a takeover by a firm from A of a firm in B.

17. Special sectors
Some sectors of the economy - for example, the electronic and print media - are especially sensitive and this may
mean that concentration of ownership within them requires special consideration. In the UK, as in several other
countries, media mergers are subject to special provisions and mergers in industries such as oil, banking, and
defence may be particularly closely scrutinised; the UK also has a special regime for mergers in the water industry
and the Communications Act, 2003 contains special provision on change of control. Article 21 (4) of the EUMR
specifically recognises that member states may have a legitimate interest in investigating a merger other than the
grounds of harm to competition.

18. Designing a system of merger control
Whenever a country decides as a matter of policy to adopt a system of merger control, a number of issues have to be
addressed. The following are some of the issues that must be confronted while designing a system of merger control.
● Which transactions should be characterised as mergers? How should the acquisition of minority shareholdings and of
assets be dealt with?
● Will joint ventures be considered as a matter of merger control or under the legal provisions that prohibit cartels and
other anti-competitive agreements?
● To what extent should a system of merger control should apply to transactions consummated outside a country but
which have effects within it?
● What should be the time period within which a merger investigation must be completed?
● Who should make decisions in merger cases? A commission, A court, or A minister in the government?

19. Conclusion
As discussed in the article, it can be observed that there are many outcomes of mergers under EU competition law.
There are always a number of reasons behind the mergers. Therefore, it is important to figure out the possible
outcomes, both negative and positive before merging. If not properly examined and evaluated, it may lead to huge
losses.

20. Evaluation of merger decisions
Competition authorities increasingly evaluate the impact of their decisions to clear or modify mergers. This process of self-
evaluation enables authorities to test the accuracy of their predictions about individual mergers and to improve the quality
of future decision making.
Merger control and the public interest
A number of arguments can be made against the mergers that have nothing to do with the maintenance of competitive
markets. It would be possible to conceive a system of merger control that allows intervention for non competition reasons.