Fabienne Ilzkovitz and Roderick Meiklejohn (editors), European Merger Control – Do we need an efficiency defence?

Edward Elgar Publishing Limited, Cheltenham, UK, 2006

ISBN-13: 978 1 84542 491 6

EU ISBN: 92-894-3486-4

Reviewed by Pál Béla Szilágyi

Visiting lecturer at the Pázmány Péter Catholic University, Faculty of Law and Political Sciences, Doctoral student

Copyright © Pál Béla Szilágyi 2006. First published in Web Journal of Current Legal Issues.

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If someone takes the book in his hands for the first time and has some knowledge about mergers and acquisitions, than it is apparent that he or she has come across a very interesting book.  This is apparent for two reasons. The first is the topic itself. Since one of the most controversial areas of merger control is the efficiency defence, having been written within such a short time after the European merger regulations were amended (actually replaced) the value of the book is clear. A second reason, is the list of the contributors; it having been edited by two persons from the European Commission. The additional contributors were Lars-Hendrik Röller, Johan Stennek, Frank Verboven, Jrissy Motis, Damien Neven and Paul Seabright. The foreword was written by Mario Monti. It is apparent from the above list that the book has a very strong line of economics and it is not the usual book about the legal aspects of efficiencies.

The volume contains five different studies, two from officials of the Commission, three from academic consultants who have carried out their studies on behalf of the Commission. All of the contributions have had a great influence on the adoption of the new merger regulation.

The first study looks at mergers and acquisitions carried out between 1991 and 2004. The conclusion of the authors is that there is a marked difference between countries in the intensity of mergers and acquisitions and these differences are not easy to explain. It is very interesting to see the trends and merger waves not only regarding old member states, but also the new member states of the European Union and the trends in the United States. The conclusions of the chapter are very interesting. As the author stresses, the analysis helps one to understand the motivation behind mergers or merger waves. As also discussed in later chapters, it is very important to try to look at the motivation behind mergers, since these help to determine whether a merger should be allowed or not, and whether efficiency claims are trustworthy or not. It is also noteworthy that the author of the chapter – Roderick Meiklejohn – takes an outlook on the new member states, where the merger activity was strongly influenced by the fact that in most of the new member states the transition to capitalism had just begun at the beginning of the evaluation period.

By examining the decisions of the European Commission, it turned out that the merger regulation does not place a very heavy burden on business, nor is the Commission exceptionally severe in the application of the regulation. This is an important statement, since undertakings often complain about high burdens and about decisions or decisional practices which have a chilling effect on the markets.

The second study bears the name of the book – European merger control: do we need an efficiency defence? – and was written by the editors. The fact that the authors are working in the Directorate-General for Economic and Financial Affairs – and not in DG Comp – promises a challenging approach. As mentioned above, this issue was one of the most controversial issues of merger control. Although the European Commission has clearly expressed in regard of the application of the old regulation that there is no possibility for an efficiency defence, this was not that clear in practice.

The chapter aims to discuss two questions: (1) should a merger control system take into account efficiency gains from mergers? and, (2) how should a system be designed to balance the efficiency gains against the anti-competitive effects? The authors examine first the reasons for an efficiency defence starting from economic reasons and ending with political reasons. Next we find a short comparison of the most important legislation and a discussion about the appropriate welfare standard. The end of the chapter is forward looking – since later chapters deal with the same questions in a more detailed way – and considers the pros and cons of the different approaches to an efficiency defence and some controversial issues such as the burden of proof or measurement of efficiencies.

The authors are clearly in favour of an explicit efficiency defence for a number of reasons, but I would like to stress only one. In the history of the European merger regulation and its application one can observe that there was always uncertainty whether one could use efficiency arguments, and, if so, whether they could amount to justification for an otherwise anti-competitive concentration. Therefore, it was very important to include a clear statement about efficiency defences. Many arguments are generally in favour of an efficiency defence, so including explicit efficiency considerations within the merger regulation would “improve the clarity and transparency of the decision-making process”.

The third study examines the efficiency gains of mergers. (Just to note, the chapter is accessible for free from the webpage of the European Commission.) The two questions for which the study tries to find an answer are the same as in chapter two. But unlike most of the studies for or against an efficiency defence, the authors think that “the final choice necessarily involves value judgement. For this reason, this report cannot come to a definite answer to the above questions.” The chapter includes a very detailed analysis about most of the issues related to an efficiency defence. This chapter is the most difficult to read for non-economists, since it contains a number of economic formulas and references to case studies. Although it would be understandable to those who are familiar with antitrust economics, it is not recommended for those who lack a deep understanding of the underlying theories. The study covers theoretical and empirical questions, examines the important dimensions that must be considered and draws a framework for a merger analysis. It covers almost every important issue that is related to an efficiency defence.

The fourth study has some parts in common with the third Chapter, but is more concerned about empirical analysis. The title of the chapter is “merger control and enterprise competitiveness: empirical analysis and policy recommendations.” It stresses the importance of the efficiency considerations and is clearly in favour of an efficiency defence. It also deals in depth with the pass-on requirement and what lies behind this generally accepted condition. The study also has a detailed analysis of scale economies. The authors express themselves in a very structured way and lead the reader to the conclusion that an efficiency defence is needed, but the same level of economic awareness is required by the reader than in the case of the earlier chapters.

The last study – “efficiency in merger control” – is devoted to the question of synergies and how they should be evaluated. The authors stress that beyond the more commonly examined aspects of mergers, the competition authorities should try to explore the motivations behind mergers, since this would help to reduce both types of errors made by the authorities; such as the prohibition of pro-competitive mergers and allowance of anti-competitive mergers.

Although the new European merger regulation takes a much clearer approach towards efficiency defences, the book is a very important contribution to the academic debate about mergers and acquisitions and merger control. Many more studies and books will certainly be needed in Europe in this field in the future. It is a constantly repeated comment by the authors that most of the case studies and empirical evidence is either from the United States and/or are very old. The results of the earlier studies may not be upheld any more, since industries have changed significantly in recent years and new methods and economic theories have been emerging. Hopefully the book is just the beginning of a line of other studies and books which will evaluate mergers and their effects.

The book is not recommended for those who want to start dealing with competition law or merger control. Similarly, it is not recommended for those who lack, at least, a medium level of economic knowledge. It is recommended for those who whish to have an advanced knowledge and understanding of efficiency considerations, the theory behind them and the empirical evidence available to date.