More mergers spell more bans

Date: 05/12/1996

By Tim Jones

IS KAREL van Miert getting tougher?

Brussels lobbyists have been asking themselves this question with increasing frequency this year each time the Competition Commissioner put his pen to yet another decision to block a company take-over.

Between the adoption of the Merger Regulation in 1989 and the end of last year, the European Commission used its powers to veto a corporate concentration just four times.

But this year alone, three more have been blocked on the recommendation of the Directorate-General for competition (DGIV) - and a fourth would have bitten the dust had the deal not collapsed just days before the formal decision was taken by the full Commission.

DGIV-watchers have started to wonder what is going on.

“I think it has a lot to do with the idea of an independent cartel office,” said one competition lawyer. “This idea has now been put on the table - a taboo has been broken.”

Under this scenario, it was the German government's decision to table proposals for the creation of an independent merger-vetting agency modelled on its Bundeskartellamt which made DGIV jump. Officials recognised that the Commission not only had to take on companies which were creating or strengthening a dominant position in their markets, it had to be seen to be doing so in order to justify its powers.

But this is a highly-Machiavellian way of looking at the trend towards merger blocking. In reality, it has much more to do with the growing number of notified mergers and the markets in which they operate.

Van Miert himself predicted this turn of events at the end of last year. “With more merger cases and bigger and bigger mergers, the likelihood of more negative decisions is also increasing,” he said, as he revealed that take-overs in 1995 were worth more than 50 billion ecu.

The figures for this year have not yet been released, but they will certainly be much higher. The single European market has really started to bite.

Larger companies are finding it increasingly important to win footholds for distribution in other member states and are keen to build on enterprises which already exist on the ground. Making goods for another market is one thing; being able to distribute them and understanding the kind of marketing that works in another country is quite another.

As a result, firms are looking to expand by acquisition. A survey by accountancy firm Price Waterhouse published this autumn found that half of Europe's top 500 firms were planning to grow through take-overs during the next 12 months.

Many of these deals will receive the blessing of the Commission's regulators, since the rationale behind them is to shrink the cost base of the acquirer and actually benefit consumers by passing on the savings through lower prices.

In some markets, the arrival of a new big player through the merger of two smaller firms can send a shock wave through incumbent enterprises and force them into cutting costs or making their product marketing more innovative.

However, an increasing number of mergers do the opposite.

The most recent veto - that in the chemical abrasives market last week - provides a case in point.

When France's Saint-Gobain decided to blend its silicon carbide division with those of Wacker-Chemie, DGIV refused to consider its defence that this market was now global. Even though the two firms have been fighting to compete with low-priced silicon carbide imported largely from China and Ukraine, DGIV would not allow such a merger, however defensive it purported to be.

Investigators found that the deal would have put 65&percent; of the western European silicon carbide market into the hands of the combined company ranged against just three small producers.

The same motive lay behind the Commission's veto of the biggest retailing merger in Finnish history. If wholesaler Kesko had been allowed to join forces with its rival Tuko, the new group would have been the happy beneficiary of 50&percent; of the Finnish market for basic consumer goods, as well as the dominant player in the import of these products.

The decisions in these cases mirror that taken in the very first - that of the

then Competition Commissioner Sir Leon Brittan in 1991 to block a Franco-Italian take-over of the ailing Canadian aircraft manufacturer De Havilland.

His decision provoked a storm of protest from the French government, which argued - and continues to do so - that the Commission is often mistaken when it choses the relevant market where a merger will allegedly create a dominant position.

In the case of De Havilland, Brittan maintained that the take-over of the company would have a created a “powerful and unassailable position in the world market for turboprop aircraft”.

This decision not only upset Paris, but also those proponents of a more dirigiste industrial policy for the Union.

“The market for turboprops is very specific,” said one. “The market for aircraft in general is much bigger. Why block a merger that would have secured an important place for European manufacturers in the North American market just over this?”

These critics have been dubbed by Van Miert's supporters as proponents of 'European champions' - firms which are big enough, diversified enough and innovative enough to take on American and Japanese giants in the global market.

Commission President Jacques Santer's espousal of their views in the spring - when he told a meeting of business executives that “sometimes we break up our companies when we should be making them stronger” - irritated Van Miert.

Yet the Competition Commissioner himself seems to annoy the champions' lobby more.

This is especially so when it comes to the key industrial area of the future - the information society. Of the eight cases which have been blocked, four have been in the information and media sector.

“It is no coincidence that most of the cases where we had to say no were in the media,” admits Van Miert. “But where we did take these negative decisions, we have barely been criticised because we had very strong cases.”

The first was in November 1994, when Media Services GmbH (MSG) - which brought together German publisher Bertelsmann, Deutsche Telekom and media company Kirch to provide pay-television - was blocked by the Commission.

Bertelsmann and Kirch already jointly ran Germany's only pay-TV station, Premiere, while Telekom was dominant in the supply of equipment for this infant sector. Van Miert was worried the venture would dominate the provision of digital decoders, which are leased to clients to unscramble programmes.

In July 1995, the Commission vetoed the creation of Nordic Satellite Distribution, a joint venture between Scandinavian media and telephone companies, for fear that it would dominate the Nordic market because it included operators which already bestrode their national markets like colossi.

The veto of the Holland Media Groep at the end of last year was motivated by similar concerns - the market was still largely national and would have been dominated by a single production company.

“We do have a specific problem in Europe that we still have many separate markets roughly along the lines of languages and cultures,” says Van Miert.

The Commissioner would have applied the same rule to the Spanish market last month had it not been for the collapse of the Cablevision deal between phone operator Telefónica de España and Canal+ España's subsidiary Sogecable.

Van Miert is determined to ensure that emerging markets, such as that for cable television and all the multimedia applications it can have, are not foreclosed by incumbent companies.

Under Spanish law, Telefónica was entitled to a licence to operate cable services in each government-designated territory of more than 20,000 inhabitants, while other companies would have to compete for a second licence. Many local authorities were not expected to bother looking for a second operator.

Expect more of these cases. With the greater involvement of companies in the information sector and Van Miert's campaign to reduce the threshold at which the Commission begins inquiries, more mergers are likely to mean more vetoes.