This document summarizes key differences between the European Commission (E.C.) and U.S. approaches to analyzing the competitive effects of conglomerate mergers, particularly regarding digital platforms. The E.C. has been more active in challenging conglomerate mergers based on various economic theories, while the U.S. has not challenged such mergers due to lack of empirical evidence of harm and concerns about penalizing efficiency-enhancing mergers. The document discusses several recent E.C. cases involving conglomerate theories and investigations into digital platforms, as well as uncertainties around U.S. treatment of acquisitions of potential competitors after withdrawing guidelines on non-horizontal mergers.

1. James Langenfeld, PhD
Ankura Consulting
James.Langenfeld@Ankura.com
U.S. v. E.C. Analysis of the Competitive Effects of Conglomerate Mergers
The Conglomerate Effects of Mergers
OECD – 10 June 2020

2. • E.C. Conglomerate Merger Actions
• U.S. Conglomerate Merger Actions
• Key Issues in Analyzing the Competitive Effects of Conglomerate Digital Platform
Mergers
Outline

3. • Merging Firms Do Not:
• Make directly competing products
• Make inputs used to produce the other firm’s products
• No Immediate Loss of Direct Competition
What is a Conglomerate Merger?

4. At least 9 Challenges & Non-Horizontal Merger Guidelines since 1997:
• Boeing/McDonald Douglas (1997)
• GE/Honeywell (2001)
• Tetra Laval/Sidel (2001)
• Non-Horizontal Merger Guidelines (2008)
• Intel/McAfee (2011)
• Dentsply/Sirona (2016)
• Worldline/Equens/Paysquare (2016)
• Microsoft/LinkedIn (2016)
• Broadcom/Brocade (2017)
• Qualcomm/NXP (2018)
EC Conglomerate Merger Actions

5. • Eleven Challenges (1964 – 1974)
• No Challenges of Conglomerate Mergers after 1974 Except Specific Potential Entrants (e.g., Pharmaceuticals)
• 1984 DOJ Non-Horizontal Merger Guidelines:
4.1 Elimination of Specific Potential Entrants
4.2 Competitive Problems with Vertical Mergers
• 2020 Draft Vertical Merger Guidelines & Withdrawal of Non-Horizontal Merger Guidelines
U.S. Conglomerate Mergers

6. E.C. sought to block the merger on grounds of both horizontal and conglomerate effects.
• The horizontal part involved the elimination of an actual competitor in the market for commercial aircraft.
• E.C. expressed non-horizontal concerns about Boeing’s large expansion in the defense and space businesses. U.S.
government funds both Boeing and McDonnell-Douglas, and E.C. was concerned that the revenue from the government
contracts could be used to subsidize the commercial aircraft market. E.C. also had concerns that Boeing would abuse its
increased bargaining power through exclusive contracting with its suppliers. E.C. approved the merger with conditions
designed to make Boeing’s use of R&D funding (on defense and space) transparent, and to limit Boeing’s newly-gained
bargaining power.
FTC investigated the merger, but did not challenge it.
Boeing/McDonnell-Douglas (1997)

7. E.C. moved to block the merger citing horizontal, vertical, and conglomerate effects.
• The horizontal part involved elimination of competition in the market for large regional jet engines. The vertical part involved input
foreclosure (refusal to supply GE’s competitor in the engine market with Honeywell’s engine starters).
• The conglomerate part involved GE’s potential bundling of aircraft engines with Honeywell’s avionic and non-avionic components,
resulting in foreclosure of competitors. E.C.’s theory was consistent with economic models predicting the merger would result in cost
advantages due to the “Cournot effect,” where the producer of the component system would be priced lower than specialist firms
initially, eventually driving them out of the market so prices could then be raised.
• The case went to court, which upheld the ban on the merger. However, the court based its decision on horizontal effect. The court found a
lack of evidence on the conglomerate and vertical effect, although it did not dismiss the theories.
DOJ found the merger would eliminate actual competition in certain aviation markets, and approved the merger on the
condition that the merged entity “divest Honeywell’s helicopter engine business and . . . authorize a new third-party
[maintenance, repair and overhaul] service provider for certain models of Honeywell aircraft engines and [auxiliary power
units].”
General Electric/Honeywell (2001)

8. E.C. found the merger to have both horizontal and conglomerate anticompetitive effects.
Tetra dominated carton liquid food packaging while Sidel led the industry in producing plastic liquid food packaging. These
two are “closely related neighbouring markets,” and their merger would lead to a reduction in actual competition in the
overall liquid food packaging market.
E.C. also expressed concern that Tetra would use its dominant position in carton packaging to enhance Sidel’s position in
liquid packaging through tying/bundling the two companies’ products.
E.C.’s theories are consistent with the economic models where a monopoly of one market (that of Tetra) is able to leverage
its market power into a market with imperfect competition (that of Sidel).
The case went to court, which annulled the E.C. decision and ordered the E.C. to conduct a second investigation with a
broader market definition. In this second directed investigation, the E.C. approved the merger, subject to compulsory
licensing of an upcoming technology Tetra developed.
Tetra Laval and Sidel (2001)

9. The merger did not present any horizontal overlaps, but the E.C. was concerned about the complementarity of their
products and cleared the transaction subject to commitments.
E.C. was concerned that the merged entity would degrade the interoperability of its own switches with third-party
competing Host Bust Adaptors by delaying or failing to transfer the necessary information and equipment about their next
generation products to other HBA suppliers. This would lead to reduced interoperability of future generation competition
with the merged entity’s switches. E.C. was concerned about the misuse by the merged entity of confidential information
related to competing HBAs. The E.C. was also concerned that post-transaction the merged entity’s business unit producing
switches would pass on this information to the unit responsible for HBAs and favour its own HBAs. Broadcom committed to
cooperate closely and in a timely manner with competing HBA suppliers to achieve the same level of interoperability as its
own HBAs and to protect third parties’ confidential information.
In contrast, the FTC raised concerns about Broadcom’s potential use of Cisco’s competitively sensitive confidential
information to coordinate action between Brocade and Cisco in the concentrated market for switches. FTC imposed a
firewall to prevent the use of confidential information for any purpose other than designing, manufacturing and selling
products for Cisco.
Broadcom/Brocade (2017)

10. Given the Agencies’ longstanding practice, the Section recommends that the VMGs be revised to explicitly state that the
Agencies do not recognize “conglomerate effects” as a theory of merger harm. For example, the DOJ’s 2001 note for the
OECD’s Roundtable on Portfolio Effects in Conglomerate Mergers explains that “there is no empirical support for the notion
that size alone conveys any significant competitive advantage that is not efficiency-related.” The DOJ went on to say that
one of the “problem[s]” with the theory that a merger may harm competition by facilitating the bundling of complementary
products “is that it has been used in some cases to block mergers . . . on the basis of a theory of competitive harm that
depends on a highly attenuated chain of causation that invites competition authorities to speculate about what the future is
likely to bring.” The DOJ concluded by saying: “Such hypothetical possibilities would not support a challenge under Clayton
Section 7, which requires a showing of a substantial probability that the merger will lessen competition. This requirement is
a sound one—an effort to assess and weigh anticipated near term efficiency benefits against more speculative longer term
market power possibilities would carry a high risk of enforcement errors and of deterring economically desirable
transactions.”
COMMENTS OF THE AMERICAN BAR ASSOCIATION ANTITRUST LAW SECTION ON THE U.S. ANTITRUST AGENCIES’ DRAFT VERTICAL MERGER GUIDELINES --February 22, 2020,
emphasis added & footnotes omitted.
American Bar Association Antitrust Law Section on Draft U.S. Vertical Merger Guidelines

11. Common Features of Platforms:
• Connect two or more distinct groups of consumers;
• Create valuable interactions between users by reducing transaction costs;
• Cross-group network effects or indirect network effects exist;
• Can set prices & other conditions to users of each side that affect the volume of transactions/number of users on the
platform.
Examples: Google, Facebook, Microsoft, Uber
Digital Platforms – New Concerns About Conglomerate Mergers?

12. • Economies of Scale
• Low Marginal Cost
• Economies of Scope
• Ability of Firms to Incorporate Ties into Their Product Design
• Direct and Indirect Network Effects
• Complementarities with Other Products and Services
• Large Shares of Some Markets
Characteristics of Digital Platforms That Could Contribute to Anticompetitive Conglomerate
Mergers

13. 3.92 The evidence that we have reviewed so far suggests that Google has significant market power in general search.
3.94 In order to compete effectively, search engines must be able to access consumers and deliver relevant results to a wide
range of queries.
3.97 We consider that Google’s extensive default positions across the desktop and mobile landscape act as a significant
barrier to expansion for rival search engines, by limiting their ability to grow into stronger competitors over time.
3.98 Scale effects also apply on the advertising-side of search engine platforms.
Online platforms and digital advertising -- Market study interim report
Competition & Market Authority (18 December 2019)

14. 3.165 The evidence we have gathered so far suggests Facebook has significant market power in social media.
3.166 . . . Network effects act as a strong barrier to entry and expansion in the social media sector, because consumers value
the presence of other consumers and an array of relevant, high-quality content.
3.168 . . . Instagram has been far more successful than Snapchat in monetising, despite similar levels of consumer
engagement. This suggests Instagram’s access to Facebook’s wider resources may have contributed to its success.
Comments: 77 submitted by 8 April 2020
Final Report: 2 July 2020
Online platforms and digital advertising -- Market study interim report
Competition & Market Authority (18 December 2019)

15. • Common Elements of Anticompetitive Theories
• Bundling & Envelopment
• Access to Key Inputs & Components
• Pre-emptive Acquisitions
Theories of Harm to Competition from Conglomerate Digital Platform Mergers

16. Absence of effective competition in one market with barriers to entry
Economies of scale/scope or network effects in the other market
Unilateral Effects
• Merger leads to efficiencies that provide it an advantage over single market competitors
• Using those advantages, can significantly disadvantage or exclude rivals in at least one market
Coordinated Effects
• Cross market information sharing
• Provide monitoring & disciplining of tacit collusion
Common Elements of Anticompetitive Conglomerate Merger Theories

17. Bundling or tying can allow a firm to foreclose rivals by disadvantaging single market competitors and potential competitors.
Technical tying makes a firm’s tying or bundling strategy more credible, and can be particularly common in digital markets due to the ability
of firms to incorporate ties into their product design (such as limited compatibility or pre-installation).
The markets are initially oligopolistic and there are cost advantages due to the “Cournot effect,” allowing the producer in one market to price
lower than single market firms initially, eventually driving them out of the market.
• When separate firms produce complementary products, they do not take into account the impact of their decisions on their product’s
complements. If the firms have market power in their respective markets and they do not co-ordinate with one another, they are unlikely
to increase their combined sales with their pricing decisions. By merging, they could bundle or co-ordinate the prices across products.
Social platforms (such as Facebook) and instant messaging (such as WhatsApp) could be complements.
• The resulting Cournot effect could eliminate competitors, but it would also result in the incentive to lower prices for consumers, higher
output, and improved efficiency.
Similar results from strong economies of scope, such as the ability to share common information of consumers.
Bundling & Envelopment

18. The control of key components may impede market entry when a firm controls components needed to compete in a market.
When there is a potential bottleneck for access to users (for advertisers, sellers, etc.), a digital platform may have an
incentive to expand into new markets to broaden the involvement of its customers with a larger line of products and
services. By providing a wide array of products and services, the firm can lock its customers into its product “ecosystem” so
the firm can become a gatekeeper for access to its customers and in effect monopolize advertising or other access to these
customers.
If a firm acquires the control of essential components through internal development, requiring a firm to provide access to a
key resource can reduce the incentives of the firm to develop those components.
Access to Key Inputs & Components

19. A conglomerate merger can deter entry into a market where the incumbent has market power. The acquisition is in a market
that would make the participants likely entrants into the incumbent’s market.
Two types of pre-emptive acquisitions
• Dominant firm enters another market through potential competitors with an acquisition designed to weaken the potential
competitors. A dominant firm in one market could use the acquisition to weaken the potential competitor in the other
market though aggressive pricing, making it more difficult for the potential entrant to expand into the dominant firm’s
market.
• “Killer Acquisitions” are when a dominant firm is one market acquires a new entrant in another, but potentially related
market, preventing the new firm from eventually displacing the dominant firm from the market it dominates.
• Many new smaller innovative firms are motivated by the ability to be purchased by established firms that can better
implement the innovation of the complementary product.
Such entry has taken place in digital markets, such as Google’s expansion into many markets from its search functions.
Pre-emptive Acquisitions

20. 3.100 The combination of barriers to entry and expansion above may negatively affect consumers in several ways. Firstly,
Google is likely to face weaker incentives to keep improving Google Search in the interests of consumers, compared to a
scenario where it faced a stronger competitive threat. . . . Secondly, Google may be able to collect more consumer data (or
offer consumers worse terms in return for their data), compared to a scenario where it faced a stronger competitive threat
from other search engines. . . . . Finally, consumers may be harmed indirectly through higher prices for other goods and
services, if Google is able to use its market power over consumers to raise search advertising prices above competitive
levels.
Online platforms and digital advertising -- Market study interim report
Competition & Market Authority (18 December 2019)

21. 3.169 The Facebook ‘family’ of apps further insulates Facebook.com from competitive pressure.
3.170 In combination, we consider that the factors above limit the competitive pressure on Facebook. This may have several
negative impacts for consumers. Firstly, Facebook may have weaker incentives to innovate and to develop its platforms in
ways that are valued by consumers, compared to a more competitive scenario. In addition, Facebook may be able to extract
more consumer data, or worsen the terms that it offers consumers for this data. . . . Finally, consumers may be harmed
indirectly through higher prices for other goods and services, if Facebook is able to use its market power over consumers to
raise the prices its charges to display advertisers above competitive levels.
Online platforms and digital advertising -- Market study interim report
Competition & Market Authority (18 December 2019)

22. E.C. modestly active in challenging conglomerate mergers
• Concern over “Type II’’ errors
• Challenges mergers based on many theoretical economic models
• Digital platform markets have many of the necessary conditions for raising concerns
• Policy initiatives investigating the need to target digital platforms
U.S. not challenging conglomerate mergers
• Concern over ”Type I” errors
• Lack of reliable empirical evidence showing harm to competition
• Theories of anticompetitive effects involve exploiting efficiencies from the merger
• Little indication of a significant change because of digital platforms
• What is the policy on acquisitions of potential competitors after DOJ withdrew the Non-Horizonal Merger Guidelines?
Conclusions