In recent months we have seen a number of horizontal mergers being scrutinized under national and EU merger rules. Since the fall-out from the Siemens/Alstom merger refusal, we have also seen a number of ministers from member states, including Poland, France and Germany, call for increased tolerance and indeed support for the emergence of so-called 'national champions'. Recently in March there have been calls for companies to 'reshore' operations which they had outsourced to other countries – including not only third countries but also other member states. Targets included Peugeot and Renault and there have been calls for the European Commission to provide support for such moves.
Key Questions for Regulators
In horizontal mergers, there are a number of key questions authorities ask: for example
- where are the markets where the merging parties overlap?;
- what are the effects of the merger in those identified markets?;
- are there markets where the parties are not close competitors?;
- are there markets where there are enough rival suppliers?;
- in overlapping markets, are the barriers to entry high for new rivals to enter (e.g. regulatory hurdles, specialist experience, global/geographic reach, track record needed for credibility)?
It is also worth bearing in mind that the Commission will shortly re-examine its market definition guidelines (which date from 1997) and this will include consideration of horizontal mergers. The Competition Commissioner has only just acceded to the pressure to give a specific timeline for review of the market definition guidelines. The Commission likes to have live cases on which to test any possible adjustments to policy and we now have two significant horizontal mergers in play where significant regulatory issues are raised and in which there can expected to be material political interest and engagement. The Commission's Industrial Policy, published this past week, provides a steer on the importance of keeping up to date with market structure and technological changes – companies should innovate and remain competitive for the benefit of European consumers.
Cases Under Review
Hyundai/Daewoo
The first case is the Hyundai/Daewoo shipbuilding merger where the Commission has moved to a Phase Two in-depth examination. The parties are two of the leading cargo shipbuilders in the world. Maritime transport is a substantial part of the EU's internal and external freight trade, with European shipping companies regularly purchasing vessels from these two shipbuilders, and so there are real concerns as to the effects the merger might have in Europe. The preliminary investigation concluded that the deal might remove Daewoo as an important competitive force in the following markets: (i) large containerships, (ii) oil tankers, (iii) liquefied natural gas (LNG) and (iv) liquefied petroleum gas (LPG) carriers. The Commission’s concerns are the lack of competitive constraints from the remaining shipbuilders, lack of customer bargaining power and high barriers to entry. Cargo shipbuilding is heavily reliant on technology and so the ability of the merged company and competitors to continue to innovate in this space is likely to be under the spotlight.
Finatieri/Chantier de l'Atlantique
A second case in the shipbuilding sector is the concentrative JV between the two state-owned companies Finatieri (Italy) and Chantier de l'Atlantique (France). The two companies have been cooperating at different levels, including naval vessels, which is one of Fincantieri's core sectors, for about twenty years. This JV fell below the European merger thresholds but the two states decided to notify in any event and the Commission identified the global shipbuilding market as the area of overlap which gives it concern. The case has gone into Phase 2 but the clock (for review) has just been stopped.
Aon and Willis
The third case is the recently announced merger of Aon and Willis into a group with a combined value of about $80 billion. In the European Union (including the UK), the antitrust and merger control authorities – in particular, the European Commission – are familiar with the application of antitrust rules in the re/insurance sector. Past encounters include: self-regulation in joint data and co-re/insurance; post-Spitzer and, more recently, EU and national inquiries into insurance broking generally, and specific sectors including motor insurance and aviation broking; restructuring post-financial crisis; and, the Marsh/JLT merger in 2019, which combined two of the most significant global players in securing cover for large and complex re/insurance risks in specialty sectors. The Marsh /JLT decision illustrates the authorities’ thinking in such horizontal cases: the European Commission approved the deal but only following commitments by the companies to divest JLT’s global aerospace practice,
i.e. removal of the overlap between the companies’ activities in the supply of insurance broking services in the specialties of aircraft operators and aerospace manufacturing.
In practice, a huge proportion of the world's largest companies buy their insurance in selected centers of expertise, such as London, Bermuda, Zurich and Singapore. Aon and Willis (and Marsh) are pre-eminent in those locations. Merger authorities will also recognize that the market is circumscribed by the regulatory classification of insurance risks: re/insurers (suppliers of cover) and brokers (acting for buyers) are authorized in accordance with the classification of insurance risks. Brokers’ role includes not only negotiating terms of coverage but also creating new types of products, such as cyber insurance wordings. The big three brokers are pre-eminent in numerous product types (such as commercial property, casualty, warranty and indemnity, aviation hull), and so it is foreseeable that other market participants (insurers or other brokers) may argue that an Aon/Willis merger will result in a duopoly and excessive monopsony power. As to barriers to entry, while setting up a broker need not be particularly difficult (subject to compliance requirements and the like), expanding a client base into a very sizeable operation would be challenging. In other words, large incumbent brokers are able to exert huge pressure on insurers to agree on wide coverage and other terms, whereas a new entrant would not have that ability. Brokers understandably emphasize their ability to get the best deal from insurers for their customers.
A Difficult Choice Facing Regulators
In horizontal mergers which materially increase the combined entity's share of supply in any given product market, the regulators, therefore, face a difficult choice: will the merger create or strengthen such a dominant position in the market (in these two cases, particular shipbuilding markets (HHI/Daewoo) or direct insurance and reinsurance markets (Aon/Willis)) that, in order to preserve market entry or expansion for other operators, it must prohibit it? Alternatively, will they clear the merger subject to divestment commitments in overlapping (product) markets, thereby creating opportunities for other players to buy divested assets? What are the likely tensions between competition and industrial policy in the shipbuilding case in particular, where technology is key to innovation? And in Aon/Willis will the unique opportunities for innovation, the challenges of cyber and the untapped value of intangible assets as areas for growth resulting from the merger be sufficient to outweigh concerns about high levels of concentration?
Will the antitrust authorities in the major centers globally reach a coordinated view? A unique, high-stake challenge indeed.
