CONGLOMERATE MERGERS

Av. Ebru DEMİRHAN
Taboğlu Law Offices

In order to expand business, reduce costs, or increase market power, entrepreneurs often seek to merge or acquire other firms. Mergers may be a threat to competition, depending on the type of the merger and the size and strength of corporations involved. In recent years, global economic growth both in Europe and across the industrialized world has put the “competition issue� in the center of discussions. For that reason, one must bear in mind that the issues and controversies are to be taken into consideration while building up the bridges in multi-jurisdictional merger regimes.

Besides horizontal and vertical mergers, conglomerate mergers, which have secondary effects on competition, are widely dispersed in the multilateral economical relations while integration into different markets through cross-subsidize from one product to another. A conglomerate merger is one that brings together firms, which do not compete with each other in any product market. Conglomerate mergers may be divided into three types: product line extensions (where one firm by acquiring another, adds related items to its existing products); market extensions (where the merged firms previously sold the same products in different geographical markets); and pure conglomerates (where there is no functional and economic link whatever between the merged firms).

Under U.S. Law Aspect

In theory, there is a disagreement on the effect of conglomerate mergers on competition. As per the US Antitrust Law, where there is a wealth of literature on conglomeracy, the Supreme Court foresees to hinder such mergers and takeovers if there is an outstanding elimination of potential competition or have a distorting and deleterious impact on the competition so that the reciprocal purchase and sale among the parties is alleviated. Through such mergers, an enterprise which is not active in that of the acquired firm’s business or geographical market prefers to make an investment to obtain a satisfactory market share rather than enter into the market independently. Nonetheless, this activity may dissuade new entrants and discourage active competition from the firms already in the industry. A conglomerate merger may also reduce the number of small firms and strengthen the acquired firm’s economical and political power.

The Supreme Court concluded that the merger between large firms in the can (Continental Can) and bottle industries (Hazel-Atlas Glass) with the given market shares would have a detrimental effect based on the reasons that these two products might be substantive, which could be effected by price increase and they might be potential competitors due to the cross-elasticity of demand if they were deemed not to be grouped in the same market.

The Court used the potential competitor test in Federal Trade Commission v. Procter & Gamble Co. Case , where PG, an expanded producer of soaps, detergents and cleaners excluding bleach, requested to takeover Clorox, the leading manufacturer of bleach and reasoned that “the substitution of Procter for Clorox would dissuade new entrants in the liquid bleach field, discourage active competition from firms already in the industry due to fear of retaliation from Procter (having the advantageous of the huge promotional (advertising) efficiencies) , and diminish potential competition by eliminating Procter, the most likely prospect, as a potential entrant.�

Afterwards, the Court declined the application of potential entrant theory in Tenneco, Inc. v. FTC Case and expanded the concept by giving the attention to the acquiring firm’s actual intend. The Court found that the economical barriers in the market might adversely affect the entry of the acquiring firm and establish the following pre-conditions in order to find out any distortion of competition under the aforesaid theory:

It should be determined that “i. the relevant market is concentrated; ii. the acquiring firm would likely have entered the market in the near future either de novo (enter the acquired firm’s market by internal expansion) or through a toehold acquisition: and such entry carried a substantial likelihood of ultimately producing de-concentration of the market or other significant pro-competitive effects.�

As a consequence of economical barriers in the market (the Court find out that the first above stated condition was satisfied), Tennoco was unable to enter the market via other less anticompetitive means and therefore, the Court approved the merger between the parties.

EU Law Aspect

Under EU Competition Law, during the investigation, economical situation of the parties to the merger, concentration tendency and level in the market where the merger is realized, shall be taken into consideration.

In Tetra Laval/Sidel Case the European Commission has decided to prohibit the take-over by Tetra Laval B.V, which belongs to the Swiss based Tetra Laval Group, owner of the Tetra Pak packaging business, of the French company Sidel S.A. Tetra (notifying party) is active in the design and manufacture of equipment, consumables and ancillary services for the processing, packaging and distribution of liquid food (known as Tetra Pak packaging business). Tetra’s business includes traditional carton packaging, where it is the world-wide market leader and more limited activities in the plastic packaging sector. Tetra is also engaged in the supply of equipment, systems, accessories and consumables to dairy farm production and animal husbandry.

Sidel is a company involved in the design and production of packaging equipment and systems, in particular blow moulding machines (SBM machines), where it is the market leader, barrier technology (enables PET bottles to be used for the packaging of light sensitive and oxygen sensitive products like juices, milk and beer) and filling machines for PET (polythelene terephtalate) plastic bottles. Sidel is the world-wide leader for the production and supply of SBM machines. The company also has activities in engineering, conveying, over wrapping and palletizing, health and beauty.

The decision contains a passage exemplifying that the aforesaid markets are separate and distinct:
“It is therefore concluded that the market definition, carton packaging systems and PET packaging systems (and hence carton packaging equipment and PET packaging equipment) form distinct relevant product markets.� However, continued that: “The Commission’s analysis shows that even tough it has concluded that PET and carton packaging systems do not currently form part of a single product market, they belong to closely neighboring product markets with a common pool of customers.�

In the light of the data collected during its investigation, the Commission found out that the merger would create a dominant position (via combining Tetra’s dominant position in carton packaging with Sidel’s leading position in PET plastic packaging equipment) in the European Economic Area for PET packing equipment, in particular SBM machines used for the sensitive products (namely fruit juices, liquid diary products, fruit flavored drinks and ice-tea beverages) and strengthen a dominant position in aseptic carton packaging machines and aseptic cartons (with consistently high market shares of 80-90%) and a leading possession in non-aseptic carton packaging, which confirms it a dominant position in the overall market for carton packaging equipment and carton consumables as a result, which effective competition would be impeded in the common market and in the EEA. Hence, barriers to entry would be increased with the overwhelming presence of the merged entity in the relevant market.

Nonetheless, the Court of First Instance annulled the Commission’s prohibition decision within this year stating that “on the evidence the Commission’s case was not sufficiently convincing and that in effect it had not discharged its burden of proof as to the likelihood that Tetra would be able through leveraging of its dominant position in one market to gain a dominant position in another market or that its position would be strengthened by the elimination Sidel as a potential competitor� although the Court upheld the principle that the conglomerate mergers could under certain circumstances fall within the scope of the Merger Regulation.

The reasoning of the Commission in General Electric/Honeywell Case was quite the similar that of Tetra Pak/Sidel while concluding that the proposed merger would lead to the creation or strengthening of a dominant position on the markets for large commercial jet aircraft engines, large regional jet aircraft engines, corporate jet aircraft engines, avionics and non-avionics products, as well as small marine gas turbine and thus effective competition in the common market would be significantly impeded . Two broad categories, namely aerospace products (the market for jet engines, avionics, non-avionics and engine starters) and industrial systems sectors (the market for small marine gas turbines) by the proposed merger between GE and Honeywell were affected by the proposed merger. The Commission has divided the jet engines market in to three categories i.e. jet engines for large commercial aircraft, jet engines for regional aircraft and jet engines for corporate jet aircraft, as well as their related markets for maintenance, repair and overhaul (“MRO�). According to the Commission’s investigation, engines for large commercial aircraft could be considered as constituting a single product market, whereas other two groups of engines could be subdivided into distinct markets. The notified operation did not operate any horizontal overlap in the market for jet engines for large commercial aircraft while such overlaps were accepted in the markets for jet engines for large regional aircraft and for medium corporate aircraft.

In result of the Commission’s investigation it was concluded that: i. GE enjoyed a strong position, indicative of dominance in the supply of jet engines for large commercial aircraft; ii. GE and Honeywell were found the only engine suppliers whose engines have been certified for large regional jets that are still in production. GE’s dominant position on the markets for engines for both large commercial and large regional aircraft, GE’s high and increasing market shares and its vertical integration into aircraft purchasing, financing and leasing have been achieved through GE Capital, major financial organization owned by GE and GE Capital Aviation Services, the largest purchaser of aircraft via leasing; iii. Honeywell has been the leading engine supplier in corporate jet aircraft engines where the merger would have strengthened the Honeywell’s position by horizontal integration of GE into the market; iv. Honeywell has been the leading supplier of a range of avionics and non-avionics products. In the light of the foregoing, the Commission stated that “…the merger will result in the creation/strengthening of a dominant position on the markets for large commercial aircraft engines, large regional jet aircraft engines and corporate jet aircraft engines, as well as on the markets for avionics and non-avionics products� as a result of horizontal overlaps between some of the parties’ products and “the combination of Honeywell’s leading market positions with GE’s financial strength and vertical integration in aircraft purchasing, financing, leasing and aftermarket services.

Turkish Law Aspect
It is presumed that diminutive and closed state economy, intention of the acquisition of political power, professional management demand, and existence of undeveloped financial markets may be the causes of the conglomerate mergers and takeovers. There has been a decline in the number of such mergers since late 1980s around Europe whereas they have a widespread effect in Turkish economy due to the factors stated as above.

There are various decisions of the Turkish Competition Board regarding conglomerate mergers. In accordance with one of the Board’s decisions dated 28 April 1999 , a conglomerate take-over of 51% of Tansaş İzmir Büyükşehir Belediyesi İç ve Dış Tic. A.Ş. ’s shares by Doğuş Holding A.Ş. and T. Garanti Bankası A.Ş was approved by the Board. It was deemed as an acquisition within the framework of subparagraph (b) of Article 2 of Communiqué No. 1997/1 on the Mergers and Acquisitions Calling for the Authorization of the Competition Board (as amended by Communiqué No. 1998/2).

According to the Communiqué No. 1997/1 (as amended by Communiqué No. 1998/2), the consent of the Board is required in case “as a result of the merger or acquisition, if, regarding the relevant product market, in whole country or a part of the country, the total market shares of the merging or acquiring undertakings exceed 25% of the market, or their total turnover exceeds twenty-five trillion Turkish Liras (even though the total market shares do not exceed this rateâ€�. The parties stated that the relevant product market was the supermarkets on an area of 400 square meters or more in the Republic of Turkey and the relevant geographic market was the Aegean Region. Pursuant to the information set forth in the submitted documents, it has been determined that the turnover and market share of Tansaş exceeded the limits avowed in the Communiqué. Article 7 of Law No. 4054 on the Protection of Competition denotes that “…merger of two or more enterprises and acquisition which creates or strengthens the dominant position of one or more enterprises as a result of which, competition is significantly impeded in the market for goods and services in the whole or part of the territory of the State, is unlawful and prohibited...â€� Moreover, it was understood from the information and documents set forth in the file that Tansaş A.Ş. had a market share in the Aegean region exceeding the threshold included in the Communiqué No. 1997/1, whereas Doğuş Holding A.Ş. and Garanti Bankası A.Ş. had no turnover or market share in the relevant product market and did not become involved in retailing sector. Hence, this acquisition should not cause an alteration in Tansaşâ€™ position in the Aegean Region which has been the relevant market. In other words, such acquisition should not create or strengthen the dominant position in the respective region. It is possible to perceive that the competition in the relative market would not be affected negatively because of such take-over.

Briefly, the Competition Board approved the entrance of Doğuş Holding A.Ş. and Garanti Bankası into the retailing market where the aforesaid companies did not have any activity before acquisition of Tansaş and such a conglomerate acquisition would not create or strengthen the dominant position of Tansaş in the relevant market evidencing that with the respect to the supermarkets on an area of 400 square meters or more, Tansaşâ€™ market share would continue to remain under the market shares of Migros T.A.Ş., Metro A.G. and Carrefour Sa after the acquisition as well.

To conclude, it maybe difficult to determine which test or investigation type is the most appropriate one for the conglomerate mergers. Nevertheless, the common intent in horizontal, vertical and conglomerate mergers is quite the same; to give the importance on the analysis of market structures and the appraisal of a transaction’s economic impact in order to concentrate in cases those detriments or eliminates the competition in the economic market.