- Both proposed models would require greater ACCC analysis of ordinary acquisitions.
The Commonwealth Government has released a discussion paper about whether the Trade Practices Act 1974 (the TPA) should be amended to make it easier for the Australian Competition and Consumer to take action against so-called "creeping acquisitions".
"Creeping acquisitions" generally refers to the acquisitions of a number of individual assets or businesses over time which, individually, are unlikely to contravene the mergers test in the TPA, but which, when taken together, may have such an effect.
In these circumstances, it has been claimed that the ACCC cannot focus on a substantive consideration of any prior acquisitions and on the impact on which those acquisitions have cumulatively had on competition in the relevant market.
The Government's discussion paper sets out two possible models for addressing these concerns:
- the "aggregation " model and
- the "powerful acquirer" model.
Implementation of either of these models would represent a substantial expansion of the ACCC's powers over mergers and acquisitions in Australia, and may well result in far more transactions being reviewed and potentially prohibited than is currently the case.
The Government has put these models out for public discussion even though the ACCC has not so far identified any creeping acquisitions which it could not block under existing law.
The aggregation model
Under the aggregation model, a corporation would be prohibited from making any acquisition if, when combined with acquisitions made by the corporation within a specified prior period - for example, up to five to six years - the acquisitions would cumulatively be likely to substantially lessen competition in a market.
While the discussion paper does not state what the length of this accumulation period would be, Senator Fielding's Bill from 2007 proposed up to six years.
There are several features of the aggregation model which, if implemented, will potentially make the process of obtaining a merger clearance from the ACCC much harder, and more time-consuming, than is currently the case:
- the impact of an acquisition is measured by comparing the market to the hypothetical situation where the acquisition did not proceed. This technique will not work well with a long "look back" period accumulating two or more acquisitions- in practice, it will be very hard to undertake an objective and realistic analysis of a hypothetical market situation in which various acquisitions over the past few years are assumed not to have occurred;
- those prior acquisitions will inevitably need to be reassessed on the basis of market conditions and market dynamics that have changed in the intervening period; and
- it is not clear how this accumulation model will work if the acquisitions were in similar but different local markets, for example, in different regions or product sectors
Overall, the inherent uncertainties involved in applying the aggregation model to a particular transaction may well lead to protracted and complicated analysis and debate about whether the transaction should properly be allowed to proceed.
This is concerning because the TPA's merger provisions need to be capable of effective implementation within a limited timeframe - for example, the ACCC uses its informal clearance procedure to reach a view on whether it should object to a proposed acquisition within timeframes as short as three to four weeks in many cases. For small acquisitions, such as those valued under $5 million, commercial parties are unlikely to welcome a clearance process which is more protracted or complex than the current timeframes.
Yet the proposed reform would seem to require a much more complex investigation.
The powerful firm model
Under the powerful firm model, a corporation would be prohibited from making an acquisition if it already has a substantial degree of power in a market, and the acquisition would result in any lessening (as opposed to a substantial lessening) of competition in that market.
In practice this would mean that a firm with a substantial degree of market power could not make any further acquisitions in those markets, including those which are not of real anti-competitive concern (for example, because any increase in the firm's market power will be insignificant or transitory). Its market share would therefore be capped, save for organic growth.
This is particularly significant given it is possible for a firm to have a substantial degree of power in a market, even though its market share in that market is quite low, and there are other significant competitors in that market.
The model would also require a much more complex and wide-ranging analysis of relevant market conditions than is currently required.
It thus would represent a major departure from the current, and well established, approach to merger analysis in Australia - namely, that an acquisition should only be prohibited if it is likely to have a meaningful or relevant adverse effect on competition.
The closing date for making a submission to the Government about the issues raised in its discussion paper is 10 October 2008. All businesses should consider whether it would be in their interests to do so.
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