| Doing its bit for the Celtic Tiger: Competition Authority is getting more aggressive in tackling mergers head-on |
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| Paku Khan reviews the work of the Competition Authority in 2006, which saw the number of merger notifications increase by 17 per cent. The Authority only blocked one transaction in 2006, the proposed acquisition of Xtratherm by Kingspan. |
How do you generate €784,000 turnover in a year, meet or beat all previous productivity statistics, and still not make a cent?
It's easy if you are the Competition Authority's Mergers Division, charging €8,000 per filing submitted (or notified) to it. In 2006, the Authority reviewed a record number of notifications. Unfortunately for it, however, all the filing fees go straight to the Exchequer.
But there's still plenty of good news for the Authority in 2006 regarding its merger review function. Last year, merger notifications to the Authority were at an all-time high, increasing at a fairly substantial level with a total of 98 transactions submitted to the agency in 2006, compared to 84 in 2005. All told, that is an increase of about 17 per cent (although a few of these notifications were eventually withdrawn).
Do these numbers suggest that we are in the next wave of merger mania? It's hard to say, but they do indicate that the mergers division is busier than ever before. On top of that, the Authority seems to be getting more aggressive on tackling mergers head-on. In 2006, it investigated several mergers in depth and actually blocked a merger for only the second time since the Authority obtained sole merger oversight in 2003.
Beside the record number of notifications, the following 2006 statistics speak for themselves:
• The time to clear a merger in 'Phase 1' was generally shorter than in previous years, with some transactions being cleared as quickly as 13 calendar days. Because of a required public comment period of 10 calendar days, that is almost as fast as is legally possible
• The most common sectors reviewed by the Authority were media, IT, financial services, telecommunications, construction, and manufacturing
• The Authority embarked upon four full-blown 'Phase 2' investigations (which can last several months), a record number.
The one blocked transaction, Kingspan's acquisition of Xtratherm, involved the insulation sector and was prohibited because it, 'substantially lessened competition' in the view of the Authority because:
• The combined entity's market share would have been too high (in the region of 75-85%)
• Factors that could have placed a check on the combined company (such as low barriers to entry, numerous competitors, and limited import competition) were not present
Mergers are notified to the Authority under the Competition Act 2002 when certain financial thresholds relating to the parties are met (e.g., at least two of the parties must have worldwide turnover of €40 million mergers). Media mergers are an exception as all mergers in this sector, regardless of the size of the parties or the transaction, must be notified, primarily to preserve a diverse media in Ireland.
Early 2006 was noteworthy as it saw a new head of the mergers division, Dr. Paul Gorecki. Dr. Gorecki, a London School Economics doctoral graduate, brought a significant economics-based focus to the Authority's merger review, having previously headed up the Authority's monopolies division from 2000-2005. Indeed, most of the personnel in the mergers division are economists, so it is fair to say that there will be a considerable emphasis on economic analysis in merger review for the foreseeable future.
Another highlight of 2006 came just before Christmas when the Authority issued a notice that certain transactions having an insubstantial effect on the island of Ireland might not have to be submitted for review, notably affecting merging companies engaged in primarily 'foreign to foreign' (i.e., outside of the island of Ireland) transactions. These transactions, which usually impact Ireland in a relatively insubstantial way, were routinely notified to the Authority for review regardless of the extent of business that the parties actually transacted here. With its December 2006 notice, however, the Authority clarified that either a physical presence or annual sales in the island of Ireland of €2 million are required; otherwise, the merging companies do not have to notify (although they can voluntarily notify, which is a rare occurrence). Given this change, it may be that fewer transactions will be submitted to the Authority since a number of the transactions that it has reviewed to date are 'foreign to foreign' transactions.
For all the positives, October 2006 saw one sizeable set back for the Authority, arising out of the Topaz/Statoil Ireland transaction. There, the Authority miscomputed a statutorily set deadline by a day , which resulted in clearance of the transaction by default. While there was considerable media attention focused on the error, voluntary proposals made by the parties to resolve the Authority's concerns and some frank statements by the Authority's Chair Bill Prasifka (who took up his post last than a year ago) before an Oireachtas committee muted much of the controversy.
2006 may have been a watershed year for companies that have to make a merger filing before the Authority. If any lessons can be drawn from last year, the clearest one is that the Authority has no problems in engaging in detailed investigations of mergers that come before it, and under the right circumstances, would have no hesitation in blocking a transaction. In 2007 and perhaps beyond, expect to see a continuation of the Authority's vigorous merger review as it plays out its substantial role in the Irish economy. |
Paku Khan is an associate in the EU & Competition Unit of A&L Goodbody Solicitors, having previously worked at the Competition Authority.
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| Article appeared in the April 2007 issue.
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