EU Merger Remedies: An Empirical Assessment

• Published date: 01 April 2007
• Pages: 303-348
• Date: 01 April 2007
• DOI: https://doi.org/10.1016/S0573-8555(06)82012-2
• Author: Tomaso Duso,Klaus Gugler,Burcin Yurtoglu

CHAPTER 12

EU Merger Remedies: An Empirical

Assessment

Tomaso Dusoa, Klaus Guglerband Burcin Yurtoglub

aHumboldt University, Berlin, and WZB, Germany

E-mail address: duso@wz-berlin.de

bUniversity of Vienna, Austria

E-mail addresses: klaus.gugler@univie.ac.at;burcin.yurtoglu@univie.ac.at

Abstract

Mergers that substantially lessen competition are challenged by antitrust author-

ities. Instead of blocking anticompetitive transitions straight away, authorities

might choose to negotiate with the merging parties and allow the transactions

to proceed with modifications that restore or preserve the competition in the in-

volved markets. We study a sample of 167 mergers that were under the European

Commission’s scrutiny from 1990 to 2002. We use an event study methodology

to identify the potential anticompetitive effects of mergers as well as the reme-

dial provisions on these transactions. Stock market reactions around the day of

the merger’s announcement provide information on the first question, whereas

the stock market reactions around the commission’s final decision day convey

information about the outcome of the bargaining process between the author-

ity and the merging parties. We first classify mergers according to their effects

on competition and then we develop hypotheses on the effects that remedies are

supposed to achieve depending on the merger’scompetitive outcome. We isolate

several stylized facts. First, we find that remedies were not always appropriately

imposed. Second, the market seems to be able to predict remedies’ effectiveness

when applied in phase I. Third, the market also seems able to produce a good

prior to phase II’s clearances and prohibitions, but not to remedies. This can be

due either to a measurement problem or related to the increased merging firms’

bargaining power during the second phase of the merger review.

Keywords: merger control, remedies, European Commission, event studies

JEL classifications: L4, K21, C12, C13

12.1. Introduction

Few major mergers are completed without some conditions being imposed by an

antitrust authority such as divestitures, provision of access, termination of agree-

CONTRIBUTIONS TO ECONOMIC ANALYSIS © 2007 ELSEVIER B.V.

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DOI: 10.1016/S0573-8555(06)82012-2

304 T. Dus o et al.

ments or other behavioral requirements. These conditions that seek to remedy

the competition concerns caused by the merger are an important instrument in

merger control, yet an under-researched topic in the economic literature. Look-

ing at the European experience (see Table 12.1), the economic importance of

merger remedies is evidenced by the fact that 191 of the 2,592 merger cases

(around 7%) notified to the European Commission (EC) until the end of 2004

have been decided as being compatible with the common market only with com-

mitments (either article 6.2 or 8.2).1More than half of phase II decisions (72

out of 121—59%) are compatible only with commitments, yet only 19 mergers

have been blocked since 1990. What is more, mergers that are cleared with com-

mitments are apparently the most important ones in terms of competition policy

concerns, since market power is most likely to increase due to the merger.

The situation is quite analogous in the USA. In its 1998 and 1999 fiscal years,

the Federal Trade Commission (FTC) challenged 63 mergers; of these 41 (65%)

involvednegotiated restructuring, 18 (29%) were abandoned, and only four (6%)

were litigated.

Despite their economic importance, remedies are an under-researched topic as

far as their economic effects are concerned. In particular, there is no systematic

econometric evidence on the question of whether ordered remedies achieve what

they are supposed to achieve, namely to assure that proposed mergersdo not lead

to an increase in the firms’ market power net of any efficiency gains. We review

the existing evidence in the next section.

This chapter answers these questions by analyzing the effects of remedies

in a sample of 167 mergers analyzed by the European Commission between

1990 and 2002. We use an event study methodology to identify the poten-

tial anticompetitive effects of mergers as well as the remedial provisions on

these transactions. Stock market reactions around the day of the merger’s an-

nouncement provide information on the first question, whereas the stock market

reactions around the day of the commission’s final decision convey informa-

tion about the outcome of the bargaining process between the authority and the

merging parties.

We isolate several stylized facts. First, we find that remedies were not always

appropriately imposed. That is, sometimes remedies were unduly imposed in

mergers that we found being efficiency increasing (type I errors), while some

other times remedies were not imposed in mergers that we found to increase

market power (type II errors). Second, judging from our results on abnormal

returns the market seems to believe that remedies are effective when applied in

phase I, since positive abnormal returns for rivals are decreased when remedies

are announced. Third, it appears that the market is able to produce a good prior

to phase II’s clearances and prohibitions, but not for remedies in phase II. We

suggest that information leakage between phase I and phase II decisions plays an

1See http://www.europa.eu.int/comm/competition/mergers/cases/stats.html for statistics on EU

merger control.

EU Merger Remedies: An Empirical Assessment 305

Table 12.1: Merger cases and European Commission’s decisions.

Article, kind of 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 All

decision

6.1.a 25945964611110054

6.1.b 5 47 43 49 78 90 109 118 207 236 293 299 240 203 220 2237

6.1.b remedies 0 3 4 0 2 3 0 2 12 19 28 13 10 11 12 119

(6.2)

9.3 0 1110374467139359

Tot. Phase I 7 55 57 54 86 102 118 131 229 260 328 320 264 151 235 2469

8.2 01112211303522226

8.2.remedies 0332233748121056472

8.3 01001231212500119

8.4 000000020000200 4

Tot. Phase II 5 4 3 5 7 7 11 9 10 17 20 9 6 7 121

Total final 7 60 61 57 91 109 125 142 238 270 345 340 273 157 242 2590

decisions

Source: European Commission, Directorate Competition.

Note: 6.1.a: Out of scope of merger legislation; 6.1.b: compatible; 6.1.b remedies (6.2): compatible with commitments; 9.3: referral to member

states; 8.2: compatible; 8.2 remedies: compatible with commitments; 8.3: prohibition; 8.4: restore effective competition.