tomaso duso (humboldt university and wzb) klaus gugler ( university of vienna ) burcin yurtoglu

Duso-Gugler-YurtogluDuso-Gugler-Yurtoglu Effectivness of EU Merger ControlEffectivness of EU Merger Control 11

How Effective is EuropeanHow Effective is European Merger Control? Merger Control?

EC Competition Enforcement DataEC Competition Enforcement Data Amsterdam, April 9-10 2008

Tomaso DusoTomaso Duso(Humboldt University and WZB)

Klaus GuglerKlaus Gugler(University of Vienna)

Burcin YurtogluBurcin Yurtoglu(University of Vienna)


IntroductionIntroduction

Economic evaluation of EU merger control decisions.

Research questions: Did merger control achieve the objective of

restoring effective competition? Are remedies the best instrument?

We use stock market reactions as an (ex-ante) independent assessment

of the concentration as well as the merger control procedure.

Identification assumption: anti-competitive rents generated by the

merger should be dissipated by the commission’s decision, if this is

effective.

We apply this approach to a sample of 151 mergers scrutinized by the

European Commission between 1990 - 2002.


Measuring EffectivenessMeasuring EffectivenessIdea & MethodologyIdea & Methodology

Each merger has two possible effects:

Market power increase (positive for both merging firms and rivals).

Efficiency gains (positive for merging firms, negative for rivals).

An effective antitrust decisions should maintain the benefits to consumers generated by increased efficiency and, at the same time, reduce the market power effects of the merger, i.e. all rents generated by a market power increase should be reversed by an effective antitrust decision.

Hence, we measure antitrust effectiveness by:

1. Measuring the rents generated by the merger and by the antitrust decision.

2. Relate the two by means of regression analysis. We expect a negative relation between the two. This relation should change depending on the kind of decision.

Main results: Prohibitions perfectly restore competition. Remedies are not always effective.


1. Measuring Rent I 1. Measuring Rent I

We use information from the financial markets to measure the

profitability of a merger as well as the effect of the Commission’s

decision.

The event study methodology looks at how stock prices of firms

involved in the merger (merging firms and rivals) react to a particular

event (e.g. merger announcement, commission‘s decision etc.).

We measure abnormal returns as the exceptional returns (compared

to the market) that a firm realizes around a particular event. These

measures should capture the market’s valuation of the event’s effect.

Which events do we use?


1. Measuring Rent III1. Measuring Rent IIIThe EU Merger ControlThe EU Merger Control

EU Merger Control

Merger’s effectAntitrust decision’s effect


1. Measuring Rent II1. Measuring Rent II Correcting for ExpectationsCorrecting for Expectations

The observed abnormal returns entail the real merger/decision effect

but also the market’s prior/update about the antitrust action.

In a first step we estimate the probability of an action by using

observable mergers’ characteristics.

We then use these probabilities to correct the estimated abnormal

returns in order to obtain clean measures of the merger/decision

effect : :

effect ent)(announcemmerger Pr1*Aj

Aij

Aij Iaction

effect decision Pr1*Aj

Dij

Dij Iaction


Suppose the agency does not make mistakes. All anticompetitive rents

should be eliminated by an effective decision (rent reversion).

To measure policy effectiveness we run a basic linear regression of

announcement effect on decision effects for merging firms (i=M) and

rivals (i=R):

2. The Empirical Implementation2. The Empirical Implementation

ijjid

Aijjid

djid

Dij Xgdbda

jj

**

The a and b-coefficients measure the degree of market power

reversion due to the Commission’s decision.

ijjiAijjiB

Aijjis

Aijjio

AijjicjiBjisjiojic

Dij XgBbSbObCbBaSaOaCa *****

constant slope


2. Predictions: Rivals2. Predictions: Rivals

D*

A*

A1 A2

- (anticomp + efficiencies)- (anticomp)

- (anticomp)

(anticomp + efficiencies)

( 0) ( 0)

anticomp efficiencies

( 0) ( 0)

anticomp efficiencies

B2

R2

R1

BLOCK

REMEDIES = B1


2. Predictions: Summary2. Predictions: Summary

Effective Merger Control

Rivals Merging firms

a b a b

Blocking 0 -1 0 -1

Remedies(other remedies and structural)

<0 (-1,

0) 0 (-1, 0)

Clearance 0 0 0 0


The DataThe Data

151 mergers analyzed by the EU Commission between 1990 and

2002. We identify 544 different firms involved in these mergers

either as merging entities or rivals.

Almost all Phase II cases (71) and a random sample of Phase I cases

(80).

Sources:

– EU decisions (rivals, decisions and merger-specific information)

– Dow Jones Interactive (announcement date)

– Datastream (stock market reactions)

– Compustat Global (accounting data)


Results: Full SampleResults: Full Sample

1. Prohibitions restore on average effective competition (bRB=-0.88 for

rivals and bMB=-0.72 for merging firms, not statistically significantly

different from -1).

2. Blockings are a significant cost for merging firms (aMB=-0.21,

significant) .

3. We cannot reject the hypothesis of full profit reversion for blocking

decisions: This constitutes a consistency check for our approach.

4. On average, remedies are not completely successful in restoring

effective competition. Our predictions for the merging firms are met,

yet they are only partially met for rivals.


Results: QualificationResults: Qualification

1. Remedies are, though only partially, effective when they are applied in phase 1.

2. In phase 2, remedies seem less effective. Structural remedies might be seen as a rent transfer from merging firms to rivals.

3. Anticompetitive mergers that are cleared in phase 1 are good news for the rivals. There is no effect for merging firms: Type II errors benefit rivals and don’t hurt merging firms.

4. (Structural) remedies (correctly) applied to anticompetitive mergers have a strong and significantly negative effect on rivals are more effective

5. Remedies applied in pro-competitive mergers have negative and significant effect on merging firms and no effect on rivals: (weak) type I error constitute a cost for merging firms


Results: RobustnessResults: Robustness

1. The results remain qualitatively the same also excluding mergers with vertical and/or conglomerate effects.

2. The results are robust to merger wave arguments (1990-96 vs. 1996-2002, merger wave industries vs. non merger wave industries).

3. The remedies’ effectiveness is substantially increased in remedies-intensive industries. This suggests that the Commission has learnt over time and in certain industries to implement effective remedies.


Results: Robustness IIIResults: Robustness IIIEx-Post EvaluationEx-Post Evaluation

We use balance-sheet data and compare actual profit levels two years

after the merger with a counterfactual given by the development of

profits in the same 3-digit industry as the merging firms or their rivals

(Gugler et al., 2003).

We find a significantly positive relationship between the ex post profit

effects and the announcement CAARs and total CAARs.

We then relate the profit effects for the rivals to the merging firms’

profit effects. We do not find a significant relation between the two

effects for mergers cleared unconditionally or blocked. We find a

significant positive relation for those mergers that were cleared with

commitments.


ConclusionsConclusions

Financial market information (event studies) are useful to assess competition policy effectiveness:

They allow to measure both the merger’s and antitrust decision’s effects separately.

They are easy to implement and require a limited amount of information.

Important to correct for the market’s prior about the antitrust action.

Crucial is to look how these effects are related.

Methodology produces consistent and robust results:

Blockings indeed restore the pre-merger situation.

Remedies are on average only partially effective.

Remedies are more effective when applied in phase 1 and when applied to anticompetitive mergers

Our results are robust to several sub-sampling and they are supported by an alternative methodology based on ex-post evaluation methods.


Back-up slides


Correcting for Market ExpectationsCorrecting for Market Expectations

• The observed abnormal return around the announcement day (ΠA)

entails the real merger effect times the market’s prior about the

probability of clearance:

.Pr | ***

Aj

AijA

ijADij

Aij

Aij

IclearIE

• The observed abnormal return around the decision day is the

market update of the expected value of the Commission’s action:

• In a first step we estimate the probabilities of clearance and action

by using observable mergers’ characteristics.

.Pr1 ***

Aj

DijD

ijADij

Dij

Dij

IactionIE


Predictions: Merging firmsPredictions: Merging firms

D*

A*

A1 A2

- (anticomp + efficiencies)

- (anticomp)

- (anticomp)

(anticomp + efficiencies)

B2

R2

R1

BLOCK

REMEDIES

B1

-(anticomp + efficiencies)


The Main VariablesThe Main Variables

Ai Long run (50 days) cumulative abnormal returns around

the merger’s announcement day.

Di Sum of the cumulative abnormal returns around the Phase

I and Phase II decisions (50 days for Phase II and 5 days

for Phase I).

Decision: Clearance, Divestitures, Other remedies, Block.

Controls: Year and industry dummies, conglomerate and

foreclosure dummies.

Anticompetitive: dummy equals 1 if the rivals’ CAARs around

the announcement are positive (Duso, Neven, and Röller, 2007).


Results: Full SampleResults: Full Sample

Dependent var.:CARs at decision A

Rivals Merging firms

Coeff St.Err. Coeff St.Err.

CLEAR 0.042 0.061 -0.020 0.093

OTHER REMEDIES 0.013 0.037 -0.095 0.056

STURUCTURAL 0.049 0.028 -0.033 0.045

BLOCK -0.061 0.041 -0.213 0.063

CLEAR * A 0.274 0.076 0.007 0.090

OTHER REMEDIES * A -0.116 0.093 -0.341 0.172

STURUCTURAL * A -0.105 0.091 -0.165 0.077BLOCK * A -0.875 0.100 -0.718 -0.136


Results: Phase IResults: Phase I


Results: Phase IIResults: Phase II


Results: Pro- vs. Anti-competitiveResults: Pro- vs. Anti-competitive


Results: Remedy-Intensive IndustriesResults: Remedy-Intensive Industries

tomaso duso (humboldt university and wzb) klaus gugler ( university of vienna ) burcin yurtoglu

Documents

merger announcement

merger merging firms

european merger control

merger control procedure

decision effects

commissions decision

effective antitrust

effective competition