An ‘Efficient’ or ‘Failing’ Defence? Matt Tavantzis Economist, Mergers All views are personal and not necessarily those of the OFT

Efficiencies ● What? ● When? ● How? ● Which? ● Who?

Efficiencies – What (1) ● Better utilisation of assets/ resources so that the merged entity will face lower costs (or other incentives) than the standalone businesses, leading to increased rivalry or benefits. ● Choose the error!

Efficiencies – What (2) ● Supply side  Cost savings (fixed v average and marginal costs)  Better use of existing capacity  Economies of scale or scope  Innovation incentives (R&D) ● Demand side  Network effects  Product quality improvements

Efficiencies – When ● ‘Integrated’  During competition assessment  Increased rivalry so no competition harm larger sized competitor more R&D ● Countervailing factor  Outweighing proven competition harm  Balancing exercise

Efficiencies – How ● Proven and verifiable  Probability, Time, Size  Quantify (?) ● Merger specific  Compare to counterfactual  Less anti-competitive alternatives ● Customers’ benefits  Who are the customers?  Which markets?  Degree of market power post-merger

Efficiencies: Customer benefits in a monopoly Q P - + D MR MC MC’

Efficiencies - Which ● Horizontal v Vertical ● Unilateral v Coordinated ● Total Welfare v Consumer Welfare

Efficiencies - Who ● Information Asymmetry ● Evidentiary burden on the parties  Pre-merger strategy documents / Internal documents  External reports  Accounting and financial accounts and valuation  Historical examples (‘natural experiments’)

Failing firm ● Deterioration of its financial situation  Depletion of assets  Cash flow problems  Accumulating debt  Trading conditions ● No possibility of restructuring  Difficult to establish; even if in a parlous situation, the firm could survive  Linkages to financial difficulties  No refinancing options ● No less-anticompetitive alternative  Exit may be ‘desirable’

Efficient or Failing: Common ground ● Acquisition of a failing firm can generate efficiencies (“… utilisation of assets/ resources …”) ● ‘Easy’ to claim but difficult to prove ● Not common/ few cases ● Need to consider alternatives

Recent cases (ECMR) ● Efficiencies:  Inco/ Falconbridge  Korsnas/ AD Cartonboard ● Failing Firm  VB Autobatterie/ FIAMM

An ‘Efficient’ or ‘Failing’ Defence? Matt Tavantzis Economist, Mergers