On 8 February 2008, the ACCC released its Draft Merger Guidelines 2008 for public consultation. The new guidelines will replace the original Merger Guidelines issued in 1999.

They will supplement the ACCC’s merger review process guidelines issued in 2006 for informal merger reviews and the review process guidelines for formal merger applications issued by the ACCC in 2007.

The purpose of merger guidelines is to provide the business community with an indication as to the broad analytical framework applied by the ACCC when assessing whether a merger is likely to substantially lessen competition under section 50 of the Trade Practices Act 1974 (Cth) (“TPA”).

The new guidelines do not significantly alter the basic principles underlying the ACCC’s approach to merger analysis pursuant to section 50 of the TPA. However, they do seek to introduce a more sophisticated analysis of mergers that reflects developments in international best practice. Interestingly, they also involve the removal of indicative market concentration thresholds or “safe harbours”, as well as refining the ACCC’s divestiture process as part of merger remedies.

Removal of “safe harbour” thresholds

There is no compulsory pre-merger notification requirement for mergers in Australia under the TPA. However, the current guidelines provide some guidance on when to make a notification based on indicative market concentration thresholds. These indicative “safe harbours” assist merger parties in determining whether a merger is likely to be reviewed by the ACCC in terms of whether it is within a “safe harbour” and is therefore unlikely to warrant further investigation.

As the guidelines currently stand, a merger will fall outside the safe harbour if:

• it will result in the combined market share of the four largest firms (CR4) being 75% or more and the merged firm having at least 15% of the relevant market; or
• the merged firm will have 40% or more of the relevant market.

The proposed new guidelines step back from these indicative market share thresholds. It seems this stems from the ACCC’s concerns that some parties have claimed these “safe harbours” are a complete immunity from review, rather than simply a first port of call. More importantly, merger analysis has become more sophisticated and market share indicators while being a useful first guide, are always subject to the product and geographic market having been properly delineated and the analysis of market dynamics applying to a particular merger, such as barriers to entry to the market and the level of imports.

While perhaps well intentioned, some commentators have pointed to the removal of safe harbours as potentially paving the way to more discretion in merger scrutiny by the ACCC. A more pertinent issue is whether the draft guidelines become less straightforward and lose some of their utility for business people.

Revised measures of market share and concentration as guidance

The ACCC has moved away from the safe harbour thresholds in favour of a United States type analysis based on the Herfindahl-Hirschman Index (HHI) rather than the CR4 analysis The ACCC has indicated it will seek to review a merger based on a range of factors, rather than a more simplistic CR4 ratio. The refined analysis is based on whether:

• the properly defined market is concentrated - HHI of greater than 2000 - (where the HHI is calculated by summing the squares of the market shares of each supplier); or
• the merged firm’s products are close substitutes - for example where customers consider the products of the merger parties are their first and second choices; or
• the target firm has been aggressive in terms of share growth, or pricing or has been particularly dynamic in terms of innovation; or
• the ACCC has indicated to a firm involved in the merger, or the industry in the past, that notification of mergers would be “advisable”.

Naturally, there will be some debate as to how much “guidance” these factors actually provide.

ACCC concerns over post-merger divestitures

While not going into detail in the new draft guidelines, the ACCC’s recent experiences on post merger divestitures has also led to a refinement of the ACCC’s approach to divestitures in concentrated markets or where the assets to be divested have particular characteristics. For example, issues have arisen with assets such as intellectual property rights or access slots, where the nature of the purchaser may be paramount as to the resultant level of competition post divestiture. In these situations the guidelines suggest that the ACCC is more likely to require an upfront purchaser to provide a sufficient level of certainty as to the level of resulting competition post completion of the merger. This may be problematic in obtaining the required degree of certainty when seeking confidential informal clearances from the ACCC or in public company takeovers and seeking guidance as to the ACCC’s likely approach. It is hoped the ACCC will apply a pragmatic case by case approach.

What do the new analytical merger guidelines mean for your business?

The removal of indicative market concentration thresholds from the current guidelines and greater focus on market dynamics may mean it is more difficult to anticipate the level of scrutiny a proposed merger is likely to receive from the ACCC - the prudent course of early advice on prospects and strategy is brought to the forefront.

Merger participants, particularly those involved in company takeovers in concentrated industries, should be aware that the ACCC is expected to intensify merger scrutiny and seek more upfront divestitures in the future to ensure that divestitures actually achieve the requisite level of post merger competition.

Going forward

The ACCC has invited written submissions on its Draft Merger Guidelines 2008, which must be received by Friday 28 March 2008.