Merger guidelines

NOVEMBER 2008
 Commonwealth of Australia 2011

This work is copyright. Apart from any use permitted by the Copyright
Act 1968, no part may be reproduced without permission of the
Australian Competition and Consumer Commission. Requests and
inquiries concerning reproduction and rights should be addressed
to the Director Publishing, Australian Competition and Consumer
Commission, GPO Box 3131, Canberra ACT 2601.

Important notice
This publication has been updated to refer to the Competition and
Consumer Act 2010 which replaces the Trade Practices Act 1974 on
1January 2011. For more information on the Australian Consumer Law
changes see www.consumerlaw.gov.au

ISBN 978 1 xxxxxx xx x

ACCC_11/10_23916_222

www.accc.gov.au
Contents
Foreword 1
1. Introduction 3
Section 50 of the Act 3
Types of s.50 merger assessments 4
Types of mergers 5
Purpose of these guidelines 6
Contact with the ACCC 7
2. Notification threshold 8
3. The competition test 10
Substantial lessening of competition 11
Competitive constraints and the merger factors 11
The forward-looking nature of the competition test 12
4. Market definition 15
The concept of a market 15
The ACCC approach to defining a market 16
Substitution 16
Substantial market in Australia, a state, territory or region of Australia 20
5. Unilateral effects 24
Horizontal mergers 24
Non-horizontal mergers 27
6. Coordinated effects 32
Coordinated conduct 32
Conditions facilitating coordinated conduct 33
7. Merger factors 35
Concentration and market shares 36
Height of barriers to entry 38
Actual and potential import competition 41
Availability of substitutes 43
Countervailing power 47
Dynamic characteristics of the market 48

Removal of a vigorous and effective competitor 49
Vertical integration 50
Ability to increase prices or profit margins 50
Other factors 51
Appendix 1: Relevant provisions of the Act 54

The substantive mergers test (s. 50) 54

Clearance processes and authorisations provisions 55
Enforcement and undertakings provisions 56
Appendix 2: Acquisitions subject to the Act 58

Territorial jurisdiction 58
Acquirers subject to the Act 58
Types of acquisitions 58
Exceptions 59
Partial shareholdings and minority interests 59
Appendix 3: Undertakings 62

General principles 62
Types of undertakings 63
Process 66
Enforcement 66
Glossary and shortened forms 67
Foreword
The Australian Competition and Consumer Commissions approach to merger assessment has evolved significantly
since the ACCC last published analytical guidelines in the area of mergers in 1999. The changes in the ACCCs approach
have been developed in line with international best practice, contemporary views on anti-trust analysis and the ACCCs
experience since 1999. These revised guidelines have benefited from valuable input from the business and trade practices
advisory community on an earlier draft, which was released for consultation in February 2008.
These revised guidelines outline the general principles underpinning the ACCCs merger analysis under s.50 of the
Competition and Consumer Act 2010 (the Act) formerly the Trade Practices Act 1974. It is important to note that the
approach taken in the revised guidelines is not radically different from the approach contained in the 1999 guidelines
the competition test is the same and analysis of the market and merger factors remains a vital element in merger
assessment.

However, the approach to merger assessment has been developed with an increased emphasis on the competitive
theories of harm and the effect of constraints, which facilitates a more integrated analysis. The changes to the guidelines
do not represent a new approach by the ACCC but are rather a better reflection of the approach being undertaken by the
ACCC to merger reviews.

The ACCC will continue to assess each merger on its merits according to the specific nature of the transaction, the
industry and the particular competitive impact likely to result in each case. The general principles set out in these
guidelines provide a framework within which mergers will be reviewed. Importantly, the application of those principles to
different facts and situations may give rise to different results.

It is not possible for these guidelines to cover every issue or circumstance that may arise in a merger review. In practice,
individual mergers involve a great variety of facts and situations, and the analysis of particular issues may need to be
tailored to the specific circumstances of a merger or deal with competition issues not specifically considered in these
guidelines. Therefore the ACCC proposes to apply the revised guidelines flexibly.

The ACCCs case-by-case approach to merger analysis is reflected in both the public competition assessments issued for
mergers considered to be of major public interest and in the shorter summaries of reasons for merger decisions, which
are available on the ACCC website for all public merger reviews. These guidelines, supplemented with the growing body
of public competition assessments and reasons for decisions, should provide an enhanced level of predictability and
certainty to merger parties, their advisers, the business community and the public.

Merger guidelines November 2008 1

1. Introduction
1.1. Mergers and acquisitions are important for the efficient functioning of the economy. They allow
firms to achieve efficiencies, such as economies of scale or scope, and diversify risk across a
range of activities. They also provide a mechanism to replace the managers of underperforming
firms.

1.2. In the vast majority of mergers, sufficient competitive tension remains after the merger to ensure
that consumers and suppliers are no worse off. Indeed, in many cases consumers or suppliers
benefit from mergers. In some cases, however, mergers have anti-competitive effects. By altering
the structure of markets and the incentives for firms to behave in a competitive manner, some
mergers can result in significant consumer detriment.

Section 50 of the Act

1.3. Section 50 of the Act prohibits mergers that would have the effect, or be likely to have the
effect, of substantially lessening competition in a market.

1.4. Section 50(3) requires the following non-exhaustive list of matters (ormerger factors) to be
taken into account when assessing whether a merger would be likely to substantially lessen
competition:
(a) the actual and potential level of import competition in the market
(b) the height of barriers to entry to the market
(c) the level of concentration in the market
(d) the degree of countervailing power in the market
(e) the likelihood that the acquisition would result in the acquirer being able to significantly
and sustainably increase prices or profit margins
(f) the extent to which substitutes are available in the market or are likely to be available in
the market
(g) the dynamic characteristics of the market, including growth, innovation and product
differentiation
(h) the likelihood that the acquisition would result in the removal from the market of a
vigorous and effective competitor
(i) the nature and extent of vertical integration in the market.

1.5. These matters or merger factors illuminate the policy intent underlying s.50.1 In particular,
they highlight key potential constraints on a merged firm (for example,new entry and imports)
and identify market characteristics that could potentially affect the impact of a merger on
competition (for example, growth in demand, innovation or the level of vertical integration).
Other factors not listed in s.50 may also be relevant to a merger assessment.

1 Australia, House of Representatives 1992, Debates, vol. HR186, p. 2406.

Merger guidelines November 2008 3

Types of s.50 merger assessments
1.6. Merger parties have three avenues available to have a merger considered and assessed2:
the ACCC assesses the merger on an informal basis
the ACCC assesses an application for formal clearance of a merger
the Australian Competition Tribunal (the Tribunal) assesses an application for authorisation of
a merger.

1.7. As merger parties are not legally required to notify the ACCC of a merger, they also have the
option of proceeding with the merger without seeking any regulatory consideration.3 However,
this will not prevent the ACCC from subsequently investigating the merger, including making
public inquiries to assist its investigation and, if necessary, taking legal action. Proceeding
without regulatory approval may put merger parties at risk of the ACCC or other interested
parties taking legal action on the basis that the merger would have the effect, or be likely to
have the effect, of substantially lessening competition in one or more substantial markets in
contravention of s.50.

Informal clearance
1.8. The informal clearance process enables merger parties to seek the ACCCs view on whether it will
seek an injunction under s.50 to stop a merger from proceeding. Information on the procedural
aspects of informal clearances can be found in the ACCCs Merger review process guidelines.

1.9. If the ACCC forms the view that a merger proposal is likely to contravene s.50, the merger
parties may decide either:
not to proceed with the merger
to provide a court enforceable undertaking to address ACCC concerns, or
to proceed and defend court action under s.50.

If the merger parties seek to proceed with the proposal, the ACCC can apply to the Federal Court
of Australia for an injunction to prevent the merger from proceeding, as well as divestiture or
penalties.4

Formal clearance
1.10. Application may be made to the ACCC for formal clearance. If granted, this will provide
merger parties with legal protection from court action under s.50. Formal clearance may
only be granted if the ACCC is satisfied that a merger would not have the effect, or be likely
to have the effect, of substantially lessening competition in a market (within the meaning of
s.50). Clearance may be granted by the ACCC with conditions (usually in the form of a court
enforceable undertaking).

1.11. If the ACCC denies clearance, the merger parties may apply to the Tribunal for review of the
ACCCs decision or face the same options available following an adverse informal review as
outlined in paragraph 1.9.

2 A reference to a merger in these guidelines includes a proposed merger, unless the context otherwise specifies.
3 Parties may also seek a declaration from the Federal Court that the acquisition will not contravene s.50.
4 Other parties (such as customers, competitors or other interested parties) may also apply to the Federal Court for a declaration (that
the acquisition will not contravene s.50) and/or divestiture, and any person suffering loss or damage as a result of a merger that
breaches s.50 can apply for damages.

4 Merger guidelines November 2008

 1.12. Information on the procedural aspects of formal clearances can be found in the ACCCs
Formalmerger review process guidelines.

Merger authorisation
1.13. Merger parties may also seek legal protection from court action under s.50 by applying to the
Tribunal for authorisation. The Tribunal may grant authorisation if it is satisfied that the proposed
merger is likely to result in such a benefit to the public that the merger should be allowed
to occur. Information on the procedural and analytical aspects of applications for merger
authorisation should be directed to the Tribunal (www.competitiontribunal.gov.au).

Types of mergers
1.14. As outlined in appendix 2, s.50 applies to a wide variety of mergers and acquisitions. A merger
involves the shareholders of two companies becoming the shareholders of a new merged
company. An acquisition occurs when one company acquires a shareholding in, or the assets
of, another company. Generally, when assessing its impact on competition, little turns on
whether a transaction is, strictly speaking, a merger or an acquisition. For convenience, these
guidelines refer to mergers and merger parties.

1.15. These guidelines discuss three types of mergerin each, the merger may involve firms that are
either actual or potential competitors:
horizontal mergersinvolving actual or potential suppliers of substitutable goods or services
vertical mergersinvolving firms operating or potentially operating at different functional
levels of the same vertical supply chain
conglomerate mergersinvolving firms that interact or potentially interact across several
separate markets and supply goods or services that are in some way related to each other,
for example, products that are complementary in either demand or supply.

1.16. Each type of merger has the potential to affect competition in a different way and will therefore
be analysed differently. While some competition issues and theories of competitive harm are
presented separately in these guidelines, the ACCC will adopt an approach tailored to the
particular nature of the merger.

Acquisition markets
1.17. These guidelines focus on potential competition concerns in supply markets into which the
merged firm supplies goods and services. However, there could also be competition concerns
in acquisition markets in which the merged firm acquires goods and services. In particular, the
merged firm may be able to depress the price paid for the inputs below their competitive price
by restricting its purchase of those inputs. The ACCC will apply an approach to acquisition
markets that is analogous to that set out in these guidelines for supply markets.

Merger guidelines November 2008 5

Purpose of these guidelines
1.18. These guidelines provide an outline of the broad analytical framework applied by the ACCC
when assessing whether a merger is likely to substantially lessen competition under s.50. These
guidelines have been developed by the ACCC in relation to its functions under s.50 and do not
purport to represent the analytical framework that would be applied by the Tribunal in relation
to its mergers functions.

1.19. These guidelines are designed to provide reliable, comprehensive and detailed information that
merger parties, the business community, their advisers and the public can draw on to:
assess the likely level of scrutiny a merger will receive from the ACCCin particular, guidance
is provided on when merger parties should notify the ACCC of a merger (the threshold for
notification is outlined in chapter2)
increase understanding of the application of s.50
assist in structuring (or restructuring) mergers to avoid raising competition concerns
identify the types of information that will assist the ACCC to reach a view on how a merger is
likely to affect competitionto make informed and timely decisions, the ACCC relies on the
cooperation of the merger parties, customers, competitors, suppliers and any other persons
or bodies holding relevant information
identify the ACCCs broad approach to remedying possible anti-competitive mergers through
undertakings (see appendix 3).

1.20. These guidelines do not have any legal force in determining whether a merger is likely to
contravene the Actfinal determination of the issues is a matter for the courts.

1.21. It is not possible for these guidelines to cover every issue or circumstance that may arise in a
merger review. In practice, individual mergers involve a great variety of facts and situations, and
the analysis of particular issues may need to be tailored to the specific circumstances of a merger
or deal with competition issues not specifically considered in these guidelines. Therefore the
ACCC will apply these guidelines flexibly and may adapt the framework to specific issues where
appropriate.

1.22. These guidelines are supplemented by public competition assessments published by the ACCC.
These competition assessments outline how the principles contained in the guidelines have been
applied to specific mergers.

1.23. These guidelines replace the 1999 Merger guidelines. They reflect the ACCCs analytical
approach at the time of publication and may be revised periodically, as necessary, on the basis
of new legal precedent, evolving insight and best practice. The latest version of the guidelines
will be the version published on the ACCC website. In developing these guidelines, the ACCC
has considered guidelines issued by overseas competition authorities and the work done by the
International Competition Network.

6 Merger guidelines November 2008

Contact with the ACCC
1.24. The Mergers and Acquisitions Group is responsible for assessing mergers under s.50 and
proposed mergers under s.95AC of the Act.

1.25. Any inquiries about the ACCCs administration and analysis of merger reviews should be
directedto:

Executive General Manager

Mergers and Acquisitions Group
Australian Competition and Consumer Commission
GPO Box 3131
Canberra ACT 2601

Email: mergers@accc.gov.au
Tel: (02) 6243 1368
Fax: (02) 6243 1212

Merger guidelines November 2008 7

2. Notification threshold
2.1. While there is no compulsory pre-notification requirement for mergers in Australia, it is
recommended that certain mergers that may be subject to the Act (see appendix 2) be
voluntarily notified to the ACCC for review, well in advance of completion.

2.2. To assist merger parties and their advisers to determine whether they should notify the ACCC,
the ACCC has developed a notification threshold, outlined below. This threshold has been
established by the ACCC to filter and thereby limit the merger reviews it conducts to those
mergers which, in its view, may potentially raise competition concerns. The notification threshold
is set at a level that reflects the ACCCs experience in determining which mergers are more likely
to raise competition concerns and therefore require further investigation.5

2.3. If merger parties believe their merger proposal will meet the notification threshold, they are
encouraged to approach the ACCC on a confidential and informal basis as soon as there is a real
likelihood that the merger may proceed to discuss possible competition issues and options for
having the matter considered.

2.4. Merger parties are also encouraged to approach the ACCC where the ACCC has indicated to a
firm or industry that notification of mergers by that firm or in that industry would be advisable.

2.5. Parties may choose to seek informal or formal clearance from the ACCC. The informal clearance
process provides flexibility in terms of timeframes, information requirements and confidentiality,
while the formal clearance process has mandated timeframes and information and transparency
requirements.

2.6. If mergers that raise competition concerns are not notified to the ACCC in adequate time for it
to conduct a review, the ACCC may seek to use its formal information-gathering powers and/
or injunctive relief, to enable it to properly consider such mergers to ensure no anti-competitive
harm arises.

2.7. Mergers that fall outside the notification threshold will rarely require investigation by the
ACCC. However, the notification threshold is indicative only. It is intended to provide a starting
point for identifying those mergers that may raise competition concerns and therefore require
investigation in accordance with these guidelines. Importantly, the notification threshold should
not be confused with the concentration threshold (set out in chapter 7) which the ACCC has
regard to as part of an overall assessment of whether a merger is likely to substantially lessen
competition under s.50.

2.8. As market shares are an imprecise indicator of likely competition effects, a merger that does not
meet the notification threshold may still raise competition concerns. The ACCC may therefore
investigate such mergers, even if they have not been notified to it.

5 The ACCC determined the level of the notification threshold based on an analysis of all previous merger reviews where the ACCC
released a statement of issues. A statement of issues is released by the ACCC where, after an initial assessment, it believes the merger
requires further detailed assessment. The notification threshold is based on the market shares of the merged firm in matters that
proceeded to this stage.

8 Merger guidelines November 2008

2.9. For simplicity, the notification threshold is based on market shares. The calculation of market
shares depends critically on market definition. If there is uncertainty as to the relevant market,
it is preferable that market shares be calculated on the basis of the market definition most likely
to raise competition concerns. This will usually mean adopting a conservative rather than broad
definition of the market, unless doing so would reduce or eliminate the overlap between the
merger parties.

Notification threshold
Merger parties are encouraged to notify the ACCC well in advance of completing a merger where both of
the following apply:
the products of the mergerperparties are either substitutes or complements
the merged firm will have a post-merger market share of greater than 20percent in the relevant
market/s.

Merger guidelines November 2008 9

3. The competition test
3.1. Competition is a state of ongoing rivalry between firmsrivalry in terms of price, service,
technology and quality. Market participants are mutually constrained in their pricing, output
and related commercial decisions to some extent by the activity of other market participants
(or potential market participants). In other words, the greater the degree of competition in a
market, the less market power each market participant will possess.

3.2. Mergers can alter the level of competition in a market. Some mergers enable the merged firm
to meet customer demand in a way that facilitates more intense competition. Many mergers do
not affect the level of competition at all because there are sufficient substitution possibilities to
effectively constrain the merged firm.

3.3. Other mergers, however, lessen competition by reducing or weakening the competitive
constraints or reducing the incentives for competitive rivalry.6 Mergers that increase the market
power of one or more market participants may be detrimental to consumers because they may
lead to an increase in price, or deterioration in some other aspect of the service offering (see the
text box below)the level of market power will be dependent on whether alternative actual or
potential supply options are available post-merger to effectively constrain the merged firm. If
market structure and circumstances mean that there is limited potential for alternative supply
options or substitution possibilities to constrain the merged firm, then it will be profitable for
the merged firm to raise prices despite the potential for lost sales to alternative suppliers.

3.4. Further, mergers that increase market power may decrease economic efficiency (because
transactions at the margin are deterred) thereby reducing gains from trade and total welfare.

Market power and increases in price

The most obvious and direct manifestation of an increase in market power is the ability of one or more
firms to profitably raise prices post-merger for a sustained period. Market power can, however, be
exercised in other ways. For example, a firm with market power may:
lower the quality of its products without a compensating reduction in price
reduce the range or variety of its products
lower customer service standards, and/or
change any other parameter relevant to how it competes in the market.

While the exact nature of competitive detriment caused by a merged firms increased market power will
vary depending on the particular circumstances of the matter, the ACCC often characterises an increase
in market power as the ability to raise prices. References to raising prices in these guidelines should
therefore be read as implicitly incorporating the exercise of market power in other non-price ways.

6 For convenience the guidelines refer to any increase in market power as accruing to sellers in a relevant market. A merger can also
lead to a substantial lessening of competition among buyers in a market. In such a situation, the increased market power of a buyer
may enable it to profitably reduce prices or otherwise engage in behaviour that is detrimental to suppliers.

10 Merger guidelines November 2008

Substantial lessening of competition
3.5. Not all mergers that lessen competition are prohibited by s.50 of the Act; only those that lessen
competition substantially are prohibited.7 The term substantial has been variously interpreted
as meaning real or of substance8, not merely discernible but material in a relative sense9 and
meaningful.10 The precise threshold between a lessening of competition and a substantial
lessening of competition is a matter of judgement and will always depend on the particular
facts of the merger under investigation. Generally, the ACCC takes the view that a lessening of
competition is substantial if it confers an increase in market power on the merged firm that
is significant and sustainable. For example, a merger will substantially lessen competition if it
results in the merged firm being able to significantly and sustainably increase prices.

3.6. The level at which an increase in market power is likely to become significant and sustainable
will vary from merger to merger. For example, an increase in price that is very small in magnitude
might also be significant. The ACCC considers that firms would generally be deterred from
instituting a price increase, or only be able to institute it for a transitory period, where effective
competitive constraints exist or where constraints are likely to become effective within a period
of one to two years.

3.7. In some markets, particular characteristics, such as the prevalence of certain types of long-term
contracts between buyers and sellers, may prevent a merged firm from exercising any market
power it gains through the merger until some point in the futurefor example, at contract
renewal. If the exercise of market power is likely to be delayed in this way, the ACCC will focus
on the period commencing at the point where market power would be exercised (for example,
at contract negotiations).

3.8. As outlined in chapter 4, a substantial lessening of competition must arise in a market to

contravene s.50. However, this does not imply that a lessening of competition must apply to the
entire market or to all aspects of competition in the relevant market.11

Competitive constraints and the merger factors

3.9. In assessing whether a merger is likely to result in a significant and sustainable increase in
market power, the ACCC must consider each of the merger factors set out in s.50(3) as well
as any other relevant factors (see paragraph 1.4). These merger factors provide insight as to
the likely competitive pressure the merged firm will face following the merger and the possible
competitive effects of the merger. The assessment of the competitive effects is based on the
theories of competitive harmnamely, unilateral and coordinated effects. Mergers result in
unilateral and/or coordinated effects when they weaken or remove the competitive pressure on
firms in a market. In cases where unilateral and/or coordinated effects amount to a significant
and sustainable increase in the market power of the merged firm and/or other firms in a market,
the merger is likely to substantially lessen competition in contravention of the Act.

7 Under s.4G, a lessening of competition includes, but is not limited to, preventing or hindering competition. Mergers likely to have
the effect of substantially preventing or hindering competition are therefore also prohibited by s.50.
8 Trade Practices Legislation Amendment Bill 1992, explanatory memorandum, paragraph 12.
9 Australia, Senate 1992, Debates, vol. S157, p. 4776.
10 Rural Press Limited v Australian Competition and Consumer Commission [2003] HCA 75 at 41.
11 Dandy Power Equipment Pty Ltd v Mercury Marine Pty Ltd (1982) ATPR 40315 at 43,888.

Merger guidelines November 2008 11

 3.10. The merger factors cover a broad range of possible actual and potential competitive constraints12
faced by the merged firmsome assist in identifying the presence of direct constraints13 while
others provide insight into less direct forms of constraint relating to either the structure and
characteristics of the market14 or the behaviour of actual and potential participants in a market.15

3.11. The ACCC recognises that competitive constraints are not static and strategic behaviour by
market participants can affect competition. The significance of the merger factors, and the
weight that is placed on them, will depend on the actual matter under investigation.

3.12. The likely presence of effective competitive constraints post-merger is a key indicator that
a merger is unlikely to result in a substantial lessening of competition. While all the merger
factors must be taken into consideration, it may not be necessary for all factors to indicate that
the merged firm would face effective competitive constraints. In some cases a single effective
constraint can be sufficient to prevent a significant and sustained increase in the market power
of the merged firm, while in other cases the collective effect of several constraints may be
required. Conversely, the absence of a single particular constraint is unlikely to be indicative of
an increase in market power as a result of a merger.

3.13. Unilateral and coordinated effects are discussed in chapters 5 and 6 of this guideline, while
chapter 7 sets out in more detail the relevance of each merger factor in deciding whether a
merger is likely to result in a substantial lessening of competition in a market.

The forward-looking nature of the competition test

3.14. Section 50 requires a forward-looking analysis into the effects or likely effects of a merger, since
analysis is generally conducted before the impact of a merger on competition can be observed.
The ACCC therefore focuses on the foreseeable future (generally within one to two years) when
considering market definition and each of the merger factors to determine whether a substantial
lessening of competition is likely to occur. This raises a number of issues.

Likely effect
3.15. Mergers are prohibited under s.50 if they would have the effect, or be likely to have the effect,
of substantially lessening competition. Clearly a substantial lessening of competition must
be more than speculation or a mere possibility for it to be likely, but it does not need to be a
certainty. Importantly, a substantial lessening of competition need not be more probable than
not, for the merger to contravene s.50. Mergers are prohibited when there is a real chance
that a substantial lessening of competition will occur. However, a mere possibility would be
insufficient.16 Ultimately, the determination of whether a substantial lessening of competition is
likely will depend on the facts of the particular matter.

12 In these guidelines, the term competitive constraints refers to both actual and potential competitive constraints.
13 For example, the level of actual and potential imports, the height of barriers to entry, the degree of countervailing power and the
availability of substitutes.
14 For example, the dynamic characteristics of the market, the level of concentration in the market, and the nature and extent of vertical
integration.
15 For example, the likelihood that the acquirer would be able to significantly and sustainably increase prices or profit margins, whether
the acquisition will result in the removal of a vigorous and effective competitor and other relevant factors.
16 Australian Gas Light Company (ACN 052 167 405) v Australian Competition and Consumer Commission (No 3) [2003] FCA 1525, at
[348].

12 Merger guidelines November 2008

With and without test
3.16. Merger analysis requires comparing likely future statesthe future with the merger and the
future without the merger. This comparison isolates the mergers impact on competition.
For this reason, the competition test in s.50 is sometimes referred to as a future with and
withouttest.17

3.17. The likely future state of competition without the merger (the counterfactual) will generally
be similar to the state of competition prevailing at the time of the merger. However, in some
cases taking the state of competition prevailing at the time of the merger as the benchmark for
analysis could risk attributing a change in the level of competition to a merger, when the real
cause is some other development that is unrelated to the merger and likely to occur regardless
of the merger. Focusing on the state of competition prevailing at the time of the merger might
also disguise a substantial lessening of competition in situations where a merger hinders or
prevents competition that would otherwise have emerged.

3.18. The ACCC therefore uses information about the state of competition prevailing at the time of
the merger to inform its assessment of the likely future state of competition without the merger.
This applies to market definition and all the merger factors outlined in chapter 7. It also applies
to likely developments involving the merger partiesin particular, mergers involving firms that
are likely to be more effective competitors in the future and those involving failing firms.

3.19. However, the ACCC will not take into account counterfactuals it considers have been
manipulated for the purposes of making clearance more likely. Signs that a counterfactual may
have been manipulated include:
a change of policy or intention by the merger parties that occurs after the merger is
proposed
any course of action by the merger parties which cannot be demonstrated to be profit
maximising and/or in the interests of shareholders (for example, refusing to sell the business
to a strong competitor if the proposed merger does not proceed).

Expected competition
3.20. The state of competition prevailing at the time of a merger will understate the future state
of competition without the merger in situations where the merger parties are not presently
constraining one another but would be likely to constrain one another in the foreseeable future.
For example, the target firm may be on the verge of entering the relevant market or may already
operate in the relevant market but be likely within the next one to two years to benefit from new
technology or intellectual property that would enhance its competitiveness with the acquiring
firm. Alternatively, if it can be established with strong and credible evidence that, in the absence
of the merger, a particular alternative firm would acquire the target, the relevant counterfactual
may involve a competitive outcome that differs from the status quo. The ACCC notes that such
circumstances are likely to be rare.

3.21. As specified in s.4G of the Act, a lessening of competition includes preventing or hindering
competition. Mergers likely to eliminate the prospect of more aggressive competition in the
future may therefore result in a substantial lessening of competition.

17 See, for example, Australian Gas Light Company (ACN 052 167 405) v Australian Competition and Consumer Commission (No 3)
[2003] FCA 1525, at [352].

Merger guidelines November 2008 13

 The following are examples of the types of information the ACCC may require to assess whether the
merger parties are likely to be effective competitors in the relevant market in the future:
board papers and internal plans demonstrating that the target firm has the capability and
intention to vigorously compete in the future
evidence of vigorous entry in the past that may be replicated on a broader scale
evidence of similar successful entry in other markets either in Australia or overseas.

The range and extent of information and documents required by the ACCC will be assessed on a
casebycase basis and will depend on the complexity of the matter and the potential competition
concerns raised.

Failing firms
3.22. The state of competition prevailing at the time of a merger will overstate the future state of
competition without the merger in situations where one of the merger parties is likely to exit
the market in the foreseeable future (generally within one to two years). In such situations, the
merger party that is likely to exit is referred to as a failing firm. Although the likely state of
competition with the merger may be substantially less than the state of competition prevailing
at the time of the merger, the relevant test is whether the future state of competition with the
merger would be substantially less than the future state of competition without the merger
(where the firm fails).

3.23. Mere speculation that the target firm will exit in the near future or evidence of a recent decline
in profitability is insufficient to establish that an absence of competition between the merger
parties is the counterfactual. In general, to demonstrate that a merger will not substantially
lessen competition due to the prospective failure of one of the merger parties, it is necessary to
show that:
the relevant firm is in imminent danger of failure and is unlikely to be successfully
restructured without the merger
in the absence of the merger, the assets associated with the relevant firm, including its
brands, will leave the industry
the likely state of competition with the merger would not be substantially less than the likely
state of competition after the target has exited and the targets customers have moved their
business to alternative sources of supply.

14 Merger guidelines November 2008

4. Market definition
4.1. Section 50 of the Act requires that a substantial lessening of competition occur in a substantial
market for goods and services in Australia, or a state, territory or region of Australia.18
Accordingly, in assessing whether a merger substantially lessens competition, the ACCC will
examine the competitive impact of the transaction in the context of the markets relevant to the
merger.

4.2. Market definition establishes the relevant field of inquiry for merger analysis, identifying those
sellers and buyers that may potentially constrain the commercial decisions of the merger parties
and the merged firm, and those participants, particularly customers, that may be affected if the
merger lessens competition.

4.3. While market definition is a useful tool for merger analysis, by itself it cannot determine
or establish a mergers impact on competition. Accordingly, market definition should not
obscure factors relevant to competition that fall outside the relevant markets. Similarly, there
is no presumption that other firms within a relevant market necessarily provide an effective
competitive constraint on the merged firm. Other factors also relevant to merger analysis are
outlined in chapters 5, 6 and 7.

4.4. It is rarely possible to draw a clear line around fields of rivalry. Indeed, it is often possible to
determine a mergers likely impact on competition without precisely defining the boundaries
of the relevant market. For example, if the consolidation of the merger parties activities is
unlikely to substantially lessen competition in a narrow product and geographic area, then it is
also unlikely to do so in a more broadly defined product and geographic area and, therefore, a
conclusive view on the relevant market may not be necessary. Similarly, when a merger is likely
to substantially lessen competition in any number of potential markets, it may be unnecessary to
define the precise market boundaries.

4.5. This chapter explains the concept of a market and the ACCCs approach to identifying and
defining the scope of markets that are relevant to assessing a merger under s.50 of the Act.

The concept of a market

4.6. A market is the product and geographic space in which rivalry and competition take place.

4.7. Section 4E of the Act provides that a market includes goods or services that are substitutable for,
or otherwise competitive with, the goods or services under analysis. Accordingly, substitution is
key to market definition.

4.8. The ACCC focuses on two key dimensions of substitution in characterising markets: the
product dimension19 and the geographic dimension. In some cases, market definition requires
close attention to the functional levels of the supply chain that are relevant to a merger or
the particular timeframe over which substitution possibilities should be assessed. Generally,
however, these functional and temporal considerations form part of the product and geographic
dimension analysis. Consistent with the forward-looking nature of merger analysis, the
ACCC focuses on the foreseeable future when considering the likely product and geographic
dimensions of a market.

18 Section 50(6).
19 The term product encompasses both goods and services for the purpose of discussion in these guidelines.

Merger guidelines November 2008 15

 4.9. Market definition is purposive, which means that the definition of a relevant market cannot be
separated from the particular merger under investigation. Market definition always depends on
the specific facts and circumstances of a merger, and current evidence from market participants
will often be critical. Decisions relating to market definition in previous, albeit similar, merger
inquiries will provide only limited guidance.

The ACCC approach to defining a market

4.10. The ACCCs starting point for delineating relevant markets to assess a merger under s.50 of
the Act is identifying the products and geographic regions actually or potentially supplied by
the merger parties.20 The ACCC then focuses on defining markets in areas of activity where
competitive harm could occur. This must be assessed on a case-by-case basis. Generally, the
ACCC focuses on overlaps between the products or geographic regions supplied by the merger
parties, or some other meaningful economic relationshipsuch as an actual or potential vertical
relationship or where the products supplied by the merger parties are complementary in nature.
It is not uncommon for more than one market to be identified in any particular merger review.

4.11. The ACCC then considers what other products and geographic regions, if any, constitute relevant
close substitutes in defining the market.21 Importantly, the ACCC defines markets by reference to
products and regions not by reference to the firms actually supplying those products or regions
at the time of the merger.

Substitution
4.12. As outlined above, identifying relevant substitutes is key to defining a market. Substitution
involves switching from one product to another in response to a change in the relative price,
service or quality of two products (holding unchanged all other relevant factors, such as
income, advertising or prices of third products). Market definition begins by selecting a product
supplied by one or both of the merger parties in a particular geographic area and incrementally
broadening the market to include the next closest substitute until all close substitutes for the
initial product are included.

4.13. There are two types of substitution: demand-side substitution, which involves customer-
switching; and supply-side substitution, which involves supplier-switching.

Demand-side substitution
4.14. Whether or not a product or region is a close substitute for a product supplied by one or more
of the merger parties, depends on likely switching behaviour in response to an increase in the
price, or decrease in the service or quality of that product. The likelihood that a product (or
group of products) will be a demand-side substitute for a product of one of the merger parties
will be assessed according to:
the characteristics or functions of the product (the product dimension of a market).
Comparable product characteristics and functionality will often be indicative but are not
sufficient to determine whether products are demand-side substitutes. Demand-side

20 There need not be trade in a product for a separate market to existthe potential for exchange can be sufficient. See, for example,
Queensland Wire Industries Pty. Ltd v The Broken Hill Proprietary Company Limited & Anor [1989] HCA 6; (1989) 167 CLR 177 F.C.
89/004; ATPR 40925, DeaneJ at p.50,013 (ATPR).
21 Note: there are some circumstances where the approach to market definition does not depend solely on the analysis of substitution
possibilities. Some of these circumstances are discussed in paragraphs4.41 to 4.44.

16 Merger guidelines November 2008

 substitution depends on the willingness of customers to switch from one product to another
in response to a price increase
the availability of the product for purchase, and use, at the present location of the merger
partys customers, or within a wider geographic area (the geographic dimension of a
market). Demand-side substitution depends on the willingness of customers to switch from
a product supplied in one location to the same product supplied in another location in
response to a price increase.

4.15. It will often be possible on the demand-side, in some degree, to substitute a wide variety of
products in various geographic regions for the products of the merger parties. Not all of these
substitutes will be included in the relevant market. For instance, some customers might view
seemingly remote products as substitutes under some circumstances. This simply illustrates that
an economy is essentially a network of substitution possibilities.22

4.16. On the other hand, substitution does not have to be complete or instantaneous, and products
do not have to be perfect substitutes to form part of the same market. To be included in the
relevant market, the ACCCs view is that a product in a particular geographic region (or a group
of products or regions) must be a close substitute in demand.

4.17. A product in a particular geographic region (or a group of products or regions) is a close
demand-side substitute if a significant proportion of sales would be likely to switch in response
to a small but significant increase in the price of the merger partys product, quickly and without
significant switching costs. In cases where only a small proportion of sales is likely to switch,
the ACCCs view is that the alternative product or geographic region (or group of alternative
products or regions) is not part of the relevant market.

4.18. Qualitative and quantitative information may be requested from the merger parties and market
participants to examine substitution possibilities. The ACCC draws on the conceptual framework
provided by the hypothetical monopolist test (HMT) to define the relevant markets, particularly
in relation to demand-side substitution.

The hypothetical monopolist test

4.19. The HMT determines the smallest area in product and geographic space within which a
hypothetical current and future profit-maximising monopolist could effectively exercise market
power. In general, the exercise of market power by the hypothetical monopolist is characterised
by the imposition of a small but significant and non-transitory increase in price (SSNIP) above
the price level that would prevail without the merger, assuming the terms of sale of all other
products are held constant.

4.20. The process of applying the HMT starts with one of the products and geographic areas supplied
by one or both of the merger parties. If a hypothetical monopolist supplier of this product
cannot profitably institute a SSNIP because of customers switching to alternative products, the
next closest demand substitute is added. If a hypothetical monopolist supplier of this extended
group of products cannot profitably institute such a price increase because of customers
switching to alternative products, the next best substitute is added. The collection of products is
expanded until a hypothetical monopoly supplier of all those products could profitably institute
a SSNIP.

22 Re Tooth & Co. Ltd (1978) ATPR 40-065, in Re Tooheys Ltd (1979), ATPR 40113, at pp. 18,19618,197.

Merger guidelines November 2008 17

 4.21. A SSNIP in the context of the HMT usually consists of a price rise for the foreseeable future of at
least 5percent above the price level that would prevail without the merger.

4.22. While the HMT is a useful tool for analysis, it is rarely strictly applied to factual circumstances in
a merger review because of its onerous data requirement. Consequently, the ACCC will generally
take a qualitative approach to market definition, using the HMT as an intellectual aid to focus
the exercise.23

Supply-side substitution
4.23. In defining the product and geographic dimensions of the market the ACCC will also consider
supply-side substitutes. A product (or group of products) may be a supply-side substitute for a
product of one of the merger parties if in response to an increase in the price of the product:
the production facilities and marketing efforts used for that product can be switched quickly
and without significant investment to supply a demand-side substitute for the product of the
merger party (the product dimension of the market)
the distribution network used by the product can be modified quickly and without significant
investment to supply the merger partys customers at their present location or within a
distance they would likely travel (the geographic dimension of a market)
it would be profitable for the current suppliers of the product to make these changes
that is, the profits earned on the assets in their current use would be less than if they were
switched to supply a demand-side substitute for the product of the merger party.

4.24. The ACCC will treat one product as a supply-side substitute for another in cases where all (or
virtually all) of the capacity for producing that product could profitably be switched to supply an
effective substitute to the other product quickly and without significant investment in response
to a price increase.

4.25. For some products, only a proportion of total supply capacity could feasibly be switched
quickly and at minimal cost (for example, because firms producing this product use different
technologies). In these cases, the capacity that could be switched will be considered as potential
new entry when conducting the competition analysis rather than included in the market
definition.

4.26. While a distinction is made between supply-side substitution and new entry for market definition
purposes, the relevant consideration in establishing a substantial lessening of competition is the
degree of competitive constraint imposed on the merged firm by either firms in the market or
new entrants.

23 Seven Network Limited v News Limited [2007] FCA 1062, at [1786].

18 Merger guidelines November 2008

Useful information in identifying demand-side and supply-side substitutes
4.27. The ACCC relies on information from the merger parties and third parties to identify and assess
the strength of substitution possibilities.
Identifying products that may be close substitutes
The following are examples of the types of information the ACCC may require to identify close substitutes
of the relevant product:
the function or end use of the product
physical and technical characteristics of the product
costs of switching purchases between the product and potential substitutes
views and past behaviour of buyers regarding the likelihood of substitution between products
evidence of buyers switching to other products in response to price increases in the recent past
evidence of producers redeploying their production capacity in response to price increases in the
recent past
costs of switching production and distribution systems from another product line to a product
that is closely substitutable with the relevant product
views, business records and past behaviour of suppliers of the relevant products regarding the
impact of price and marketing decisions by suppliers of potential substitute products on their
own pricing and marketing decisions
relative price levels and price movements of the product compared to potential substitutes.
In an informal merger review, providing a base level of information to the ACCC will, in non-controversial
cases, usually be sufficient to satisfy the ACCC of whether or not a substantial lessening of competition
is likely. Whether a wider range of information will be required by the ACCC will be assessed on a
casebycase basis and will depend on the complexity of the matter and the potential competition
concerns raised.

Identifying geographic regions that may be close substitutes

The following are examples of the types of information the ACCC may require to identify close substitutes
of the relevant geographic region:
the portability of the relevant product as determined by its perishability, weight, etc.
transportation costs to move the relevant product between regions (particularly the
transportation costs as a proportion of total value of the product)
the costs to customers of obtaining supply from alternative regions
any limitations on the ability of customers to access alternative sources of supply in alternative
regions
the costs of extending or switching production and distribution systems to supply the customers
in alternative regions
any regulatory or other practical constraints on suppliers selling to alternative regions
records relating to trade flows and the actual movement of customers and/or suppliers between
geographic regions, especially related to changes in relative prices across regions in the recent
past
views and business records of buyers and suppliers regarding the likelihood of switching between
geographic sources of supply
the relative price levels and price movements of different geographic sources of supply.
In an informal merger review, providing a base level of information will, in non-controversial cases,
usually be sufficient to satisfy the ACCC of whether or not a substantial lessening of competition is likely.
Whether a wider range of information will be required by the ACCC will be assessed on a case-by-case
basis and will depend on the complexity of the matter and the potential competition concerns raised.

Merger guidelines November 2008 19

Substantial market in Australia, a state, territory or region of
Australia
4.28. Section 50(6) of the Act states that market means a substantial market in Australia, or in a
state, a territory or a region of Australia.

4.29. The ACCCs view is that the substantiality criteria could be satisfied in many ways including by
reference to the size of the market in terms of number of customers, total sales or geographic
size. A market that is small in some sense may still be substantial.

4.30. In particular, substantiality of a market is not necessarily related to geographic size. A market
may be small geographically (for example, a local market) but may also be substantial within
the region in which it is located. Alternatively, a market for the supply of a product that is an
essential but small ingredient in the production of one or more other products sold in large
markets may be considered substantial.

4.31. Section 50(6) also states that market means a market for goods or services in Australia, or in
a state, a territory or region of Australia. In addition, s.4E specifies that market is a market in
Australia. The ACCCs view is that this does not preclude it from analysing a merger proposal in
the context of a geographically broader marketfor example, a trans-Tasman market or even a
global marketprovided that at least some part of it is located in Australia.24 In most cases the
ACCC will define the relevant market to be Australia or a part of Australia, and take full account
of any competitive constraint provided by suppliers located outside Australia when considering
import competition (as required by the merger factorssee paragraphs 7.33 to 7.37).

Issues that may arise in market definition

Asymmetric substitution

4.32. Substitution possibilities are not necessarily symmetric. Asymmetric demand-side substitution
occurs when substitution between two products only occurs in one direction. For example,
buyers of luxury cars may substitute to more standard cars in response to an increase in the
price of luxury cars, but the opposite may not be the case. Asymmetric supply-side substitution
may occur when one group of suppliers has the same production facilities as another group
of suppliers, but also has additional facilities for supplying a slightly different good or service.
For example, suppliers of scheduled travel services might be able to redeploy their facilities to
provide charter travel services, but suppliers of charter travel services might face significant
investment or obstacles to supply scheduled travel services (such as building terminal facilities).

Product differentiation

4.33. Market definition establishes the boundaries for competitive analysis but within those
boundaries the degree of substitution can vary. Indeed it is extremely rare for a uniform level
of substitution to exist across all products, services or regions within a relevant market. For
example, products that serve similar functions may be differentiated rather than homogenous.
Product differentiation often limits substitution at the margins because certain customers do not
view differentiated products as comparable. For example, brand loyalty may limit the extent of
both demand- and supply-side substitution. However, it is important to note that differentiated
products may still be part of the same market.

24 See, for example, Riverstone Computer Services Pty Limited v IBM Global Financing Australia Limited [2002] FCA 1608, at [21].

20 Merger guidelines November 2008

 4.34. The extent to which product differentiation affects the constraint provided by actual or potential
competitors in the market is taken into account when assessing the competitive effects of a
merger (often by reference to different segments of the market). While a substantial lessening
of competition must arise in a market to contravene s.50, this does not imply that the lessening
of competition must apply to the entire market or to all aspects of competition in the relevant
market.25

Discrimination and captive customers

4.35. In certain cases where substitution possibilities are not uniform across consumer groups, it
may be appropriate to define separate markets for different consumer groups. For example,
some consumers may view two products to be highly substitutable while other consumers may
consider the products to be, at best, weak substitutes. In such situations, the relative number
and importance of each customer class and the ability of suppliers (including the merger
parties) to discriminate between the customer classes will be important when determining the
appropriate product and/or geographic dimension of the market.

4.36. The ability of suppliers to discriminate between customer classes will depend on their ability to:
distinguish between those customers that have the option of substitution and those who
lack that option
prevent resale or arbitrage between the customer classes.

4.37. If suppliers can discriminate, a customer that has limited substitution possibilities receives
different terms and conditions from suppliers to a customer that has strong substitution
possibilities. In this situation it may be appropriate to consider two separate markets for merger
analysis. One market would include the relevant product and the alternative product, and would
focus on those consumers who have the option of substitution. The second market would not
include the alternative product and would focus on those consumers who are captive or do not
have the option of substitution.

4.38. If suppliers are unable to discriminate between customer classes, they will provide similar, if
not identical, prices and levels of service to each customer, regardless of their substitution
possibilities. In this situation, there are unlikely to be multiple markets based on different
customer classes. Customers that are unable to substitute to the alternative product would be
protected to the extent that suppliers cannot distinguish them from customers that are able to
switch.

Indirect substitution

4.39. In some limited circumstances, a relevant market may include products that are only indirect
substitutes for a product of one of the merger parties (that is, a substitute for a substitute of
the relevant product). Indirect substitution occurs when there is a chain of products in the
product dimension or a chain of regions in the geographic dimension. There are at least three
significant limitations on the extent to which an indirect substitute can provide an alternative to
the product or region under investigation and thereby be included in the relevant market:
chains of substitution often have a break such that products on one side of the break are
not close substitutes for those on the other side of the break (for example, breaks caused by
obstacles to travel)

25 Dandy Power Equipment Pty Ltd v Mercury Marine Pty Ltd (1982) ATPR 40315, at 43,888.

Merger guidelines November 2008 21

 as a chain of substitution expands, the proportion of customers that can switch to
neighbouring links in the chain (marginal customers) will tend to decrease and at some point
a hypothetical monopolist controlling the chain would find a SSNIP profitable regardless of
those switching customers
where price discrimination is possible, a market may be limited to the captive customers at
the centre of a chain or circle of substitution.

4.40. While analysis depends on the particular circumstances under examination, in general, the
further removed from the product or region under investigation, the less likely it is that an
indirect substitute will be included in the relevant market. The ACCC draws on whatever
quantitative and qualitative information is available to determine the boundary of a market
where chains of substitution exist.
26
Integration and aggregation

4.41. The purposive nature of market definition can require the product or geographic dimension of
a market to be extended beyond what can be substituted for products of the merger parties to
include other functional levels in the vertical supply chain or other products that are typically
purchased or supplied together with those of the merger parties.

4.42. Where merger parties are vertically integrated or compete against vertically integrated firms,
the ACCC must determine whether competition analysis is best conducted in the context of one
relevant market encompassing the whole vertical supply chain or a series of separate markets
each comprising one or more stages of the chain. This delineation depends on the economics
of integration. Importantly, there need not be trade between the relevant stages of the vertical
supply chain for there to be separate marketsthe potential for exchange can be sufficient.27
However, where there are overwhelming efficiencies of vertical integration between two or more
stages in the vertical supply chain, the ACCC will define one market encompassing all those
stages.

4.43. To define the relevant markets where vertical integration exists, the ACCC considers, among
other things:
the actual patterns of exchange between firms at different vertical levels
the split between internal transfers of each relevant product and third party transactions
the costs involved in trading the product between firms at different vertical levels
any obstacles to trade between firms at different vertical levels
any assets or specialisation required to supply each product within the vertical chain.

26 This includes considerations that have hitherto been categorised as the functional dimension of the market. In practice, issues
relating to integration and aggregation tend to inform the appropriate product and geographic characterisation of the market.
27 Queensland Wire Industries Pty. Ltd. v The Broken Hill Proprietary Company Limited & Anor [1989] HCA 6; (1989) 167 CLR 177 F.C.
89/004; ATPR 40925, DeaneJ at p. 50,013(ATPR).

22 Merger guidelines November 2008

4.44. In some cases, a product that the merger parties supply is part of a package of several distinct
products that are generally purchased or supplied together. Such products may belong to several
separate disaggregated markets and/or one aggregated market consisting of a suite of goods
and services generally supplied together (sometimes referred to as a cluster market). To define
the relevant markets in these cases, the ACCC considers, among other things:
the split between products purchased or supplied separately, and products purchased or
supplied together
the costs involved in purchasing or supplying the product separately
any obstacles to purchasing or supplying the product separately
any assets or specialisation required to supply each product.

Merger guidelines November 2008 23

5. Unilateral effects
5.1. One of the main ways in which mergers can lessen competition is through unilateral effects.
Mergers have unilateral effects when they remove or weaken competitive constraints in such
a way that the merged firms unilateral market power is increased. That is, as a result of the
merger the merged firm finds it profitable to raise prices, reduce output or otherwise exercise
market power it has gained, and can do so, even given the expected response of other market
participants to the resulting change in market conditions.28

5.2. Where unilateral effects occur, other market participants responses may vary. In some situations
other market participants may respond in a pro-competitive way and (at least partially) attempt
to offset the merged firms behaviour. Alternatively, it may be more profitable for other market
participants to simply support the merged firms conductfor example, if a merged firm
exercises unilateral market power by raising the price of its products, other firms supplying
substitutes may respond by also raising their prices, thereby exacerbating the competitive impact
of the unilateral exercise of market power. As this example illustrates, a unilateral exercise
of market power may make it profitable for both the merged firm and its competitors to
raiseprices.

5.3. In determining whether unilateral effects arise and whether they are likely to result in a
substantial lessening of competition, the ACCC considers all of the merger factors contained in
s.50(3) of the Act and any other relevant factors. In particular, it considers whether the broader
actual and potential competitive constraintssuch as new entrants, imports or countervailing
powerwill limit any increase in the unilateral market power of each remaining market
participant. These factors are discussed in more detail in chapter 7.

5.4. Although horizontal, vertical and conglomerate mergers can all potentially give rise to unilateral
effects, it is recognised that vertical and conglomerate mergers are generally less likely than
horizontal mergers to raise competition concerns. Since much of the general guidance on
horizontal mergers is also relevant to vertical and conglomerate mergers, this section also
identifies those competition issues that are specific to non-horizontal mergers that the ACCC
will take into account. Mergers that involve both horizontal and non-horizontal effects will be
assessed based on the combined horizontal and non-horizontal impact on competition.

Horizontal mergers
5.5. Horizontal mergers involve firms that operate in the same relevant market or markets. Horizontal
mergers may give rise to unilateral effects by eliminating the actual or potential competitive
constraint that the merger parties exerted on each other pre-merger. Two competing firms
may constrain each other, including via the (actual or potential) transfer of sales from one
to the other as customers switch, or threaten to switch, between them. If these two firms
merge, the merger internalises any such transfers within the merged firm, thereby removing
this constraining effect. Where there are limited effective constraints from other sources, this
unilateral effect can amount to a substantial lessening of competition.

28 This may be contrasted to coordinated effects arising from a merger where it may be profitable for the merged firm to raise prices,
reduce output or otherwise exercise market power because it considers that the responses of its rivals will be directly influenced by its
own actions. This may manifest as either tacit or explicit collusion (see chapter 6).

24 Merger guidelines November 2008

 5.6. Unilateral effects may arise in different ways depending on the characteristics of the market
some, but not all are outlined below. The most obvious way is when no rivals29 remain post-
merger (i.e. merger to monopoly). In the absence of effective competitive constraints from other
sources, such as future entrants, imports or countervailing power, a merger that leaves no rivals
to the merged firm will likely result in unilateral effects amounting to a substantial lessening of
competition.

5.7. Unilateral effects may also arise where a merger results in markets characterised by a single firm
with market power and numerous other smaller competitors that can supply only a small portion
of the total market demand because of factors limiting their ability to significantly expand
output. In these circumstances, consideration will be given to whether the merged firm would
have the ability and incentive to raise prices for the segment of the market that the smaller
competitors are unable to supplytaking into account, amongst other factors, the ability and
incentives of these smaller competitors to expand capacity.

5.8. In markets involving homogeneous products with no dominant firm, competition analysis will
focus on the strategic interaction between rivals competing on output or capacity. Unilateral
effects may arise where the merged firm sets its post-merger output level significantly below
the level of output that would have prevailed absent the merger and, despite the response of
competitors, brings about a higher price than would have prevailed absent the merger.

5.9. In contrast, in markets where competition between firms selling differentiated products is based
on price, unilateral effects may arise where a merger between firms previously supplying close
substitutes is able to increase the price of either or both of the close substitutes. In this case,
consideration will be given to the proportion of substitution that would occur.

5.10. Outlined below are some of the relevant factors that the ACCC will take into account, in addition
to those specified in s.50(3) of the Act, to determine whether unilateral effects are likely to arise
from a merger.

Significance of the merger parties to the competitive process

5.11. While some firms may be relatively small in terms of size and market share, they may
nevertheless have a significant influence on the competitiveness of the market. Mergers involving
such firms may result in unilateral effects by impeding or removing significant aspects of
competition, such as innovation or product development.

Closeness of merger parties

5.12. The ACCC will take into consideration the extent of competitive constraint that the merger
parties exert on each other pre-merger. Merger parties are more likely to be close competitors
and therefore provide each other with an effective constraint that may be lost post-mergerif
they differ from rivals in respect of characteristics such as:
product features and function
customer loyalty
production capacity
breadth of product line and level of specialisation
distribution channel coverage

29 In these guidelines, the term rival includes both actual and potential rivals, unless the context otherwise specifies.

Merger guidelines November 2008 25

 geographic presence
cost structures
level of vertical integration.

5.13. The degree of rivalry between the merger parties pre-merger can be an important factor in
the analysis of mergers in differentiated product markets. Mergers between firms supplying
competing differentiated products may result in unilateral effects when the merger parties are
considered close competitors by a sufficient number of customers, which thereby alters the
incentives of the merger parties. Merger parties are likely to have an incentive to increase the
price of one or both products if the sales lost due to the price increase would be recaptured
by an increase in sales of the other product. That is, the greater the number of customers that
regard the merger parties as particularly close competitors (for example, their first and second
choices), the greater the potential for the merger parties to impose a unilateral increase in price
post-merger. Unilateral effects may arise even where the merger parties are not one anothers
closest competitor pre-merger or would not be the dominant firm post-merger based on
market shares.

5.14. Competitors supplying the relevant market with products that are less likely to be substituted
for, or repositioned to compete with, the merger parties products may only be able to offer a
competitive alternative to marginal customers; the loss of such marginal customers would not
prevent the merged firms actions being profitable. Such competitors may also decide to simply
follow the merged firms price increase to profit from the less competitive environment.

Rivals responses
5.15. Unilateral effects are unlikely if rivals have the incentive and ability to respond to a price increase
by the merged firm such that they are able to capture sales and replace competition lost by the
merger.

5.16. In some cases, rivals in differentiated product markets that are less direct competitors at the
time of a merger may potentially overcome differences between themselves and the merged
firm to become closer competitors. This may occur where rivals have the ability and incentive to
reposition or extend their product range relatively easily and without significant cost in response
to the merged firm increasing its prices. If the competition lost through the merger would likely
be replaced by other rivals in the market or new entrants within a one- to two-year period, a
merger is less likely to result in an increase in unilateral market power.

5.17. In non-differentiated product markets, other factors that may influence the abilities and
incentives of rivals to constrain the merged firm from unilaterally increasing prices post-merger
include whether:
rival firms have sufficient capacity or are able to profitably expand capacity
the merged firm is able to hinder entry or expansion by rivals through various means (for
example, by controlling inputs, distribution channels and patents/other IP and access to, or
pricing of, different platforms)
the relevant products are sold under terms and conditions likely to limit or curtail the ability
of rivals to compete effectively for the customers of the merged firm post-merger
customers are constrained in their ability to switch to rival suppliers of the merged firm
postmerger.

26 Merger guidelines November 2008

Non-horizontal mergers
5.18. Non-horizontal mergers include vertical mergers and conglomerate mergers.

5.19. Vertical mergers involve combining firms that operate at different stages of a single vertical
supply chainthat is, a merger between an upstream firm and a downstream firm (for
example, an upstream manufacturer and a downstream distributor) where the upstream firm is
an actual or potential supplier of an input into the production process of the downstream firm.
It is often the case that vertical mergers will promote efficiency by combining complementary
assets/services which may benefit consumers.

5.20. Conglomerate mergers involve firms that interact across several separate markets and supply
products that are typically in some way related to each otherfor example, products that are in
neighbouring markets or products that are complementary in either demand or supply, such as
staples and staplers.30 Often, conglomerate mergers will allow firms to achieve efficiencies and
result in better integration, increased convenience and reduced transaction costs.

5.21. In the majority of cases, non-horizontal mergers will raise no competition concerns. However,
where insufficient competitive constraints remain in the relevant market post-merger, some
non-horizontal mergers will raise competition concerns when the merged firm is able to
increase its unilateral market power. One way in which this can occur is through the merged
firm foreclosing rivals, but non-horizontal mergers can also increase unilateral market power
in other ways. In some cases, a non-horizontal transaction, either alone or in conjunction with a
horizontal transaction, may amount to a substantial lessening of competition in a market.

Foreclosure
5.22. Recognising that not all forms of foreclosure are anti-competitive, the ACCC is only concerned
with non-horizontal mergers where the merged firm has the ability and incentive to use its
position in one market to anti-competitively foreclose rivals in another market in a way that
lessens competition.

5.23. In determining whether foreclosure is likely to increase the unilateral market power of the
merged firm, the ACCC will consider the following three issues:
the merged firms ability to foreclose
any incentive the merged firm may have to foreclose
the likely effect of any such foreclosure.

Vertical mergers

5.24. The particular anti-competitive foreclosure strategies that a vertically integrated merged firm
might adopt will depend on the circumstances of each case, but some examples include:
charging a higher price for an important input into the production processes of downstream
(non-integrated) rivals
limiting31, or denying access by, downstream (non-integrated) rivals to important inputs
(thereby forcing them, for example, to use more expensive or inferior quality alternatives)

30 Conglomerate mergers may also arise in markets that are unrelated or independent of one another.
31 Limiting access may involve reducing the quality of the good or service supplied.

Merger guidelines November 2008 27

 limiting, or denying access by, upstream (non-integrated) rivals to a sufficient customer base
raising the cost of access by upstream (non-integrated) rivals to a sufficient customer base.

Conglomerate mergers

5.25. Conglomerate mergers provide a merged firm with the opportunity to bundle or tie products in
related or independent markets. The practice of bundling or tying product offerings is common
and is undertaken by firms for a variety reasons, often with no anti-competitive consequences
under s.50.32

5.26. However, in some cases conglomerate mergers can raise competition concerns where they
enable the merged firm to alter its operations or product offerings in a way that forecloses
the merged firms rivals and ultimately reduces the competitive constraint they provide. For
example, the merged firms rivals may be foreclosed if the merged firm chooses to bundle or tie
complementary products, such that:
no product can be purchased or used separately
at least one product cannot be purchased or used separately, or
customers receive additional benefits when they purchase or use the merged firms products
together (for example, due to discounts, rebates or design features).

5.27. The adoption of such strategies can limit or raise the cost of rival firms access to a sufficient
customer base and in some circumstances deny rival firms access to customers altogether.

Ability to foreclose

5.28. An integrated or conglomerate firm will generally only be able to engage in foreclosure if it has
sufficient market power at one or more functional levels within the vertical supply chain, or in
one or more of the related markets post-acquisition.

5.29. The ACCC will determine whether an integrated or conglomerate firm has market power in the
relevant markets by assessing whether there are effective competitive constraints, such as those
discussed in chapter 7.

Vertical mergers

5.30. An integrated merged firm would only be able to engage in foreclosure strategies against rival
downstream firms if it had sufficient market power in the upstream marketthat is, where its
downstream rivals faced insufficient viable supply alternatives. This might occur for a variety
of reasons including capacity constraints faced by rival upstream suppliers, barriers to entry or
product differentiation between the products and/or services offered by the integrated firm and
its rivals.

5.31. Similarly, an integrated merged firm would only be able to engage in foreclosure strategies
against rival upstream firms if it had sufficient market power in the downstream marketthat
is, where its upstream rivals lacked sufficient actual or potential economic alternatives in the
downstream market to sell their output. The ability of upstream rivals to sell their output is
especially likely to be prevented or impeded where the downstream division of the merged firm
is an important customer in that market and where there are significant economies of scale or
scope in the input market.

32 Tying or bundling may however raise competition concerns under other provisions of the Act.

28 Merger guidelines November 2008

Conglomerate mergers

5.32. In the context of conglomerate mergers, market power may arise where products are considered
by customers to be especially important or a must have because of factors such as superior
functionality (product differentiation) or brand loyalty. Where the merged firm supplies
customers that on-sell its products to end customers, the market power of the merged firm
may be reflected in its ability to influence the product-stocking decisions of its customers. This
will depend on the specifics of the industry, but can include supplier involvement in category
management and the supply of in-store distribution assets to retailers on condition of certain
stocking requirements.

Incentive to foreclose

5.33. While possession of market power by the merged firm in one or more of the relevant markets
is a necessary consideration, it is not determinative in itself. Even if a vertically integrated or
conglomerate firm has the ability, it may not have the economic incentive to foreclose rivals. A
firm is unlikely to exercise its ability to foreclose unless it is profitable to do so, which will depend
on the nature of competition in each of the relevant markets and the particular means available
to the firm to foreclose rivals.33

5.34. An integrated or conglomerate firm will only have an incentive to engage in foreclosure
strategies with rivals if the benefit it receives from doing so outweighs potential lost sales
resulting from the foreclosure. In assessing whether the merged firm has the incentive to engage
in foreclosure, the ACCC will weigh likely short-term costs against likely gains and the relative
size and importance of each market to the merged firm.

5.35. For example, in vertical mergers foreclosing independent downstream rivals may simply close off
a good source of upstream revenue without providing any significant boost to the integrated
merged firms own downstream sales or other benefits. Similarly, an integrated firm will only
have an incentive to limit the downstream sales of its non-integrated upstream rivals if it
receives sufficient benefits to offset any increased costs or decreased custom associated with the
foreclosure.

5.36. In conglomerate mergers, the merged firm may be able to take advantage of economies of scale
in a market by increasing sales in that market and, where there is commonality in operations
(such as in manufacturing, distribution and/or marketing), may also be able to gain economies
in a related market.

5.37. In assessing the merged firms likely incentives, the ACCC will take into account a range of
quantitative and qualitative information.

Likely effect of foreclosure

5.38. The ability and incentive of the merged firm to foreclose rivals may not of itself increase the
merged firms unilateral market power to the extent that there is a substantial lessening of
competition. Consideration must also be given to the effect of foreclosure on competition in the
relevant market/s.

33 For example, a conglomerate firm implementing a tie may involve risking the loss of customers that are not interested in purchasing
the bundle, depending on the closeness of the products in question. In addition, the profitability of discounting a bundle may depend
on the relative value of the products being united and the value of the markets in which they are supplied.

Merger guidelines November 2008 29

 5.39. Foreclosure need not result in rivals being forced to exit the market to have a detrimental effect
on competition. Actual rivals may simply be forced to use more expensive alternatives to those
offered by the merged firm or may be discouraged from expanding their operations. Potential
rivals may be discouraged from entering the market. Foreclosure lessens competition when the
merged firmand, in some cases, certain of its rivalsfinds it profitable to increase the price
charged to intermediate and end consumers or decrease the price paid to upstream suppliers
below competitive levels.

5.40. In determining whether a merger is likely to result in a substantial lessening of competition,

the ACCC considers all the merger factors contained in s.50(3) of the Act and other relevant
factors. In particular, the following factors inform the ACCCs assessment as to whether the
merged firms unilateral market power is likely to increase to the extent that there is a substantial
lessening of competition:
the proportion and significance of the firms that are foreclosed as a result of the merger
the proportion and significance of other firms still able to provide a constraint over the
merged firm
the potential for the merger to raise barriers to entry by foreclosure or the threat of
foreclosure to rivals in related markets.

5.41. Two further factors that may be relevant in the context of vertical mergers are:
the significance of the input to the production process of downstream rivals
the presence of countervailing power, particularly the ability of firms to integrate to avoid
foreclosure.

5.42. An additional factor that may be relevant in the context of conglomerate mergers is the
proportion of customers likely to purchase the relevant products from the merged firm. This
must be sufficiently large to cause independent rivals to face a significant decline in sales,
resulting in increased costs. The level of competitive constraint imposed by rivals may be
detrimentally affected where economies of scale or network effects34 are important features
of the relevant markets, since foreclosure may prevent the merged firms rivals from achieving
minimum efficient scale.

5.43. However, where a significant proportion of customers continue to purchase products from
independent rivals, a conglomerate firm is likely to continue to be constrained post-merger.
For example, where rivals are able to replicate the merged firms offering through assembly of
their own competing bundle, and therefore reap similar cost savings and/or retain economies
of scale or scope, they may be able to avoid or minimise foreclosure and thereby continue
to constrain the merged firm. This may be through organic growth, counter-merger or joint
supply arrangements with suppliers of the related product. Depending on the nature of the
merged firms market power, however, it may be difficult or impossible for rivals to replicate the
merged firms bundle. If rivals are able to avoid foreclosure by supplying a competitive bundle, a
conglomerate merger is unlikely to substantially lessen competition.

34 Network effects arise when a product becomes more valuable as the number of customers consuming it increases, thus providing an
advantage to firms that have an existing customer base over rivals and prospective entrants that do not.

30 Merger guidelines November 2008

Other unilateral effects
5.44. Other unilateral effects that may arise from vertical mergers and conglomerate mergers
include raising structural and/or strategic barriers to entry and access to commercially sensitive
information.

Barriers to entry

5.45. A vertical merger may raise barriers to entry if, as a result of the merger, new entrants would
have to enter at multiple stages of the vertical supply chain instead of just one. In some cases,
the increase in unilateral market power accruing to the merged firm as a result of increased
barriers to entry constitutes a substantial lessening of competition.

5.46. By creating strategic links between related products, a conglomerate merger may result in
formerly separate markets becoming part of one integrated market in which suppliers must offer
the full range of complementary products to compete. Future entry may therefore require an
offering of the full range of products, potentially increasing the sunk costs associated with entry
or exit.

Access to commercially sensitive information

5.47. A vertical merger may also result in unilateral effects if the integrated merged firm would,
through its supply of an input or distribution services to firms that are otherwise rivals, obtain
competitively sensitive information such as costs or planned product launches. This may distort
the dynamics of competition.

Merger guidelines November 2008 31

6. Coordinated effects
6.1. In addition to unilateral effects, mergers can lessen competition through coordinated effects.
Mergers have coordinated effects when they assist firms in the market in implicitly or explicitly
coordinating their pricing, output or related commercial decisions. A merger may do so simply
by reducing the number of firms among which to coordinate, by removing or weakening
competitive constraints or by altering certain market conditions that make coordination more
likely. Coordinated effects may occur in addition to unilateral effects so that the merged firm is
able to achieve even higher prices than it would on its own. In some cases, coordinated effects,
either alone or in conjunction with unilateral effects, may amount to a substantial lessening of
competition.

6.2. Horizontal, vertical and conglomerate mergers may give rise to coordinated effects in a number
of different ways. Some of these are discussed below, but coordinated effects may also arise
in ways that are not discussed here. Competitive constraints and other factors relevant to
coordinated effects are discussed in chapter 7. Rather than presenting horizontal, vertical and
conglomerate mergers separately, this section discusses the issues that the ACCC considers
relevant across all three types of merger.

Coordinated conduct
6.3. Mergers have coordinated effects when they alter the nature of interdependence between
rivals such that coordinated conduct is more likely, more complete or more sustainable.
Interdependence arises when a market is characterised by a small number of firms (an oligopoly
or a duopoly), with each firm anticipating the response of the other firms and devising their
commercial strategies accordingly. If the oligopolistic structure of a market persists over time
for instance, because barriers to entry and expansion shield incumbents from new competitors
the repeated nature of the competitive interaction can result in a range of coordinated conduct,
from muted competition through to tacit or explicit agreement between firms not to compete.
Although firms may have the ability to engage in effective competition, they may not have
the incentive if they recognise that any short-term benefits from competing will likely be
eroded by lost sales once other firms respond. Coordinated conduct can in some cases involve
contravention of other provisions of the Act.

6.4. In some cases, a change in the nature of the interdependence among competitors may lead
to an implicit agreement among them to refrain from competing. This behaviour is sometimes
referred to as tacit collusion, since it involves active coordination but no explicit agreement
between firms. Firms may signal to each other that they will not compete on price, output,
customer allocation or indeed any other parameter of competition. Where the products are
relatively homogenous, coordinated terms are more likely to be based on price or output
in markets, whereas differentiated products may be more conducive to division of a market
by customer type or region. In certain circumstances, interdependence may result in explicit
collusion between firms, whereby firms explicitly agree to refrain from competing.

32 Merger guidelines November 2008

Conditions facilitating coordinated conduct
6.5. When assessing whether a merger is likely to give rise to coordinated effects, the ACCC first
assesses whether conditions in the relevant market are likely to be conducive to coordinated
conduct. Generally, the potential for sustainable coordination is greatest where:
firms have the ability and incentive to settle on terms35 that are profitable for all
firms can detect deviations from the consensus
the threat of retaliation from other firms involved is sufficiently costly to act as a deterrent to
deviation
the consensus is not undermined by competitive constraints in the market (discussed further
in chapter 7).

6.6. It is impossible to be prescriptive about the conditions in which coordinated conduct is likely
to arise or the types of mergers that would increase the likelihood of coordinated conduct.
However, settling on and maintaining a profitable consensus will often be easier where certain
conditions exist post-merger. Some of these conditions are discussed below. The non-existence
of one or more of these conditions may not necessarily make coordinated effects less likely and
there may be other factors not discussed here which are relevant.

6.7. Importantly, a merger will only result in coordinated effects if it increases the likelihood of
coordinated conduct, or it results in more complete or sustainable coordination post-merger. As
noted above, a merger may do this by reducing the number of firms among which to coordinate
(thereby reducing the likelihood of deviation from the consensus), by removing or weakening
competitive constraints or by altering certain market conditions that make coordination more
likely.

Observing other firms

6.8. Each firm must be aware of the behaviour of other firms for coordinated conduct to arise. This is
easiest when the number of firms in the market is small (that is, concentration is high) and firms
can quickly and readily observe other firms activities and general market conditions. Information
may be readily available if, for example, firms actively publish their prices to consumers, firms
hold cross-shareholdings in each other, or trade associations collate and publish recent market
information. Markets need not be fully transparent for coordinated conduct to arise, but firms
must have some mechanism for detecting the behaviour of their competitors.

6.9. In addition, where product innovation or fluctuations in costs or demand are common, it
may be difficult for firms to know whether a change in their rivals pricing arises from such a
fluctuation or constitutes a deviation from the settled terms. Market stability therefore facilitates
coordination.

35 In these guidelines, settle on terms and consensus do not necessarily involve communication or active coordination but are
intended to reflect muted competition, tacit collusion and explicit collusion.

Merger guidelines November 2008 33

Retaliation and incentives
6.10. Coordinated effects are more likely when firms are likely to interact regularly post-merger, either in the
relevant market where coordination could occur or in other separate markets, and for a considerable
period. The sustainability of coordination rests upon repeated interaction, since the prospect of future
retaliation discourages firms from pursuing more competitive strategies.

6.11. Firms in a market will have an incentive to deviate from the consensus unless they fear
punishment that would outweigh the potential short-term gains from cheating on the terms of
coordination. Punishment may simply involve a return to competitive conditions or, for example,
a price war. The incentive to cheat is increased if the imposition of punishment is likely to be
significantly delayed (for example, because market transactions are infrequent). The credible
threat of effective punishment alone may be sufficient to deter cheating.

6.12. The ability of coordinating firms to punish deviations is often increased where:
firms have similar cost structureslow-cost firms may not fear retaliation by higher cost
firms
firms compete against each other in more than one marketthis provides additional markets
in which to punish deviating firms
some firms have excess capacity, which enables them to increase output and reduce prices in
response to a deviation from the terms of coordination.

6.13. Interdependence and coordination may therefore be facilitated by a merger that creates
firms with similar market shares, cost structures, production capacities and levels of vertical
integration. Where there is firm asymmetry, smaller firms or firms with lower cost structures
may have more to gain from competing rather than refraining from competition. In this regard,
a vigorous and effective competitor may be instrumental in disrupting interdependence and
ensuring effective competition (see paragraph 7.56).

Competitive constraints
6.14. Coordination is unlikely to be sustained if it induces new entry or expansion by firms in the
relevant market that are not engaging in coordination. Such competitive constraints are
discussed further in chapter 7.

6.15. Generally, assessing whether a merger is likely to give rise to coordinated effects requires a
close examination of the conditions prevailing in the relevant market and the likely effect of the
merger on these conditions. This generally requires a detailed qualitative assessment of a range
of factors (including those noted above), some of which may suggest conflicting conclusions.
For example, a merger may decrease the number of firms in a market, while increasing the level
of asymmetry between firms (or it might increase the level of symmetry). Given the potential
complexity of the assessment required, evidence of prior coordinated conduct between firms
in the relevant market may be highly relevant, particularly if the merger is likely to reduce the
number of participants without undermining the conditions that facilitate coordinated conduct.

34 Merger guidelines November 2008

7. Merger factors
7.1. Mergers result in unilateral and/or coordinated effects when they weaken or remove the
competitive pressure on firms in a market. Where unilateral and/or coordinated effects amount
to a significant and sustainable increase in the market power of the merged firm and/or other
firms in a market, the merger is likely to substantially lessen competition in contravention of
theAct.

7.2. In assessing whether a merger is likely to result in a significant and sustainable increase in market
power, the ACCC must consider each of the merger factors set out in s.50(3) as well as any
other relevant factors (see paragraph 1.4). These merger factors provide insight about the likely
competitive constraints that the merged firm will face post-merger. The merger factors cover
a broad range of possible competitive constraints faced by the merged firmsome assist in
identifying the presence of direct constraints36, while others provide insight into less direct forms
of constraint relating to either the structure and characteristics of the market37 or the behaviour
of actual and potential participants in the market.38

7.3. The ACCC recognises that competitive constraints are not static and strategic behaviour by
market participants can affect competition. The significance of the merger factors and the
weight placed on them will depend on the actual matter under investigation.

7.4. The likely presence of effective competitive constraints post-merger is a key indicator that a
merger is unlikely to result in a substantial lessening of competition. While all the merger factors
must be taken into consideration, it may not be necessary for all factors to indicate that the
merged firm would face effective competitive constraints. In some cases a single constraint can
be sufficient to prevent a significant and sustainable increase in the market power of the merged
firm while in other cases the collective effect of several constraints may be required. Conversely,
the absence of a single particular constraint is unlikely to be indicative of an increase in market
power as a result of the merger.

7.5. The order in which the merger factors and other sources of constraint are considered below
reflects the order in which the ACCC generally undertakes its analysis and does not reflect the
priority or weight given to any particular factor. Indeed, many of the factors are interrelated
and the ACCC adopts an integrated approach, taking into account all potential competitive
constraints.

36 For example, the level of actual and potential imports, height of barriers to entry, degree of countervailing power and the availability
of substitutes.
37 For example, the dynamic characteristics of the market, level of concentration in the market and nature and extent of vertical
integration.
38 For example, the likelihood that the acquirer would be able to significantly and sustainably increase prices or profit margins, whether
the acquisition will result in the removal of a vigorous and effective competitor and other relevant factors.

Merger guidelines November 2008 35

Concentration and market shares 39

7.6. Market concentration refers to the number and size of participants in the market. It provides
a snapshot of market structure as well as an approximation of the size of the merger parties,
which can assist when considering the other merger factors. Changes in market concentration
over time can also reveal the frequency of new entry and provide insight into the ability of new
entrants and smaller competitors to attract custom and expand.

7.7. However, market concentration is not determinative in itself. For example, firms can gain a high
market share by adopting more efficient technology, lowering costs and reducing prices. In such
cases, high levels of market concentration are not necessarily reflective of a non-competitive
market. Measures of concentration in markets characterised by product differentiation may also
obscure the closeness of competitors.

7.8. Notwithstanding these limitations, market concentration can help to determine whether
a merger is likely to result in unilateral and/or coordinated effects. It is the link between
concentration and the strength of competition that is important for merger analysis and this
ultimately requires consideration of all relevant factors before a final conclusion can be reached.

Measuring market concentration

7.9. The ACCC typically measures concentration with reference to market shares, concentration ratios
and the Herfindahl-Hirschman Index (HHI).

Market shares

7.10. Market shares are a key input when determining concentration. The ACCC will generally
calculate market shares according to sales, volume and capacity using information from a variety
of sources, such as:
the merger parties
competitors
customers
suppliers
trade associations
market research reports.

7.11. Consistent with the forward-looking nature of the competition test, the ACCC considers
the extent to which current market shares are likely to accurately reflect future market share
patterns. For example, there may be evidence that substantial new capacity is due to come on-
stream in a manufactured product market, new licences are about to be issued in a broadcasting
market or some firms are running out of reserves in a primary product market. Where such
evidence exists, the ACCC adapts current market shares accordingly.

39 Refers to the merger factor contained in s.50(3)(c).

36 Merger guidelines November 2008

 Concentration and market shares
The ACCC will generally require information from the merger parties to calculate market shares based on
the most appropriate measure from one of the following:
sales by volume (for each competitor) in at least three recent annual periods
sales by value (for each competitor) in those periods
capacity (for each competitor) over the previous three years.
In some cases the ACCC may request additional information to calculate market shares based on an
alternative measure to that provided by the merger parties. Whether a wider range of information will be
required by the ACCC will be assessed on a case-by-case basis.
Market share information should be supported by details of how the data was compiled, the source of
the estimates and any assumptions used. Where actual figures are not available, best estimates will be
consideredfor example, where there are a number of smaller firms in the market, an approximation
may be appropriate.
In markets where actual or potential imports are relevant, these should be clearly identified (indicating
whether these imports are independent of the merger parties) and included in the market share
and concentration metric calculations. Similarly, supply-side substitutes should be included in these
calculations.

Measures of concentration
7.12. In assessing market concentration, the ACCC takes into account the pre- and post-merger
market shares of the merged firm and its rivals and the actual increase in concentration, as well
as the level of symmetry between rival firms market shares. Concentration metrics such as the
HHI and the x-firm concentration ratio (CRx) may provide useful summary statistics by combining
some or all of the market share data for individual firms. Different concentration metrics may
highlight different aspects of the market share data.

7.13. The HHI is calculated by adding the sum of the squares of the post-merger market share of
the merged firm and each rival firm in the relevant market, thereby giving greater weight
to the market shares of the larger firms. The HHI therefore requires the market shares, or
estimates of them, for all the participants in the relevant market. The HHI indicates the level
of market concentration while the change in the HHI (or delta) reflects the change in market
concentration as a result of the merger.

HHI threshold

7.14. As part of its overall assessment of a merger, the ACCC will take into account the HHI, as a
preliminary indicator of the likelihood that the merger will raise competition concerns requiring
more extensive analysis. The ACCC will generally be less likely to identify horizontal competition
concerns when the post-merger HHI is:
less than 2000, or
greater than 2000 with a delta less than 100.

Merger guidelines November 2008 37

 7.15. These HHI levels should not be taken to imply a presumption as to whether or not a merger
will be likely to result in a substantial lessening of competition. Only by considering the merger
factors can this assessment be made. To illustrate this point, a merger that falls below the HHI
threshold may still raise competition concerns if any of the following are relevant:
a substantial number of customers consider the products of the merger parties to be
particularly close substitutesfor example, the merger parties represent their first and
second choices
the target firm has shown a recent rapid increase in market share, has driven innovation or
has tended to charge lower prices than its competitors in one or more markets (properly
defined) in which the merged firm would operate.

7.16. The HHI threshold is not interchangeable with, or a substitute for, the notification threshold,
(see chapter 2). Mergers that meet the notification threshold should be notified to the ACCC
regardless of the specific HHI and delta.

Height of barriers to entry 40

7.17. The entry of new firms into a market can provide an important source of competitive constraint
on incumbents. If new entrants are able to offer customers an appropriate alternative source
of supply at the right time, any attempt by incumbents to exercise market power will be
unsustainable since their customers will simply switch to the new entrants. A credible threat of
new entry alone may prevent any attempt to exercise market power in the first place.

7.18. If there is a high likelihood of timely and sufficient entry in all relevant markets post-merger,
the merged firm is unlikely to have market power either pre- or post-merger and therefore the
merger is unlikely to result in a substantial lessening of competition. In some markets, however,
there are barriers to entry that either prevent firms from entering the market altogether or delay
and impede entry to such a degree that the merged firm is sheltered from competitive constraint
for a significant period.41 A barrier to entry is any factor that prevents or hinders effective new
entry that would otherwise be capable of defeating a price increase caused by a merger.42

7.19. The ACCC takes the view that new entry must be timely, likely and sufficient in scope and
nature to be effective. This test will be based on an assessment of the height of barriers to entry
taking into account whether actual or threatened entry post-merger is both possible and likely
in response to an attempted exercise of market power by the merged firmthis will generally
depend on the profitability of entering the market.

7.20. It is not necessary for a merger to increase barriers to entry for it to be anti-competitiveonly
that significant barriers exist and provide the merged firm with discretion over its pricing and
other conduct. If the merger also increases barriers to entry, the effect on competition is likely
to be more severe because new entry that may have been possible before the merger is likely
to be prevented or impeded post-mergerthat is, the gap between the future states with and
without the merger will be widened.

40 Refers to the merger factor contained in s.50(3)(b).

41 The analysis would apply in matters involving unilateral effects and also matters involving coordinated effects (in particular the
possibility of new entry constraining the ability and incentive of a small group of firms to engage in coordinated conduct).
42 Note that some barriers to entry may technically be barriers to exit. Nevertheless, the effect is the same if such barriers to exit increase
the risk to prospective entrants and ultimately discourage entry.

38 Merger guidelines November 2008

Timeliness of entry
7.21. When considering the degree of competitive constraint provided by new entry, it is necessary
to assess the time it would take a new firm to enter the relevant market and offer customers
a competitive alternative to the merged firm. The evaluation of whether entry will be timely
necessarily varies with each specific merger and the dynamics of the market.

7.22. Entry will generally provide an effective competitive constraint post-merger if actual or
threatened entry would occur in an appropriate time to deter or defeat any non-transitory
exercise of increased market power by the merged firm. While the ACCCs starting point for
timely entry is entry within one to two years, the appropriate timeframe will depend on the
particular market under consideration.

7.23. When determining whether potential entry is likely to be timely the ACCC considers the barriers
outlined in paragraphs 7.30 to 7.32, as well as factors such as the frequency of transactions, the
nature and duration of contracts between buyers and sellers, lead times for production and the
time required to achieve the necessary scale.

Likelihood of entry
7.24. The ACCC needs to be satisfied that actual or threatened entry post-merger is not just possible
but likely in response to an attempted exercise of market power by the merged firm. The
likelihood of entry generally depends on the profitability of entering the market. The ACCC
will assess whether a new entrant could expect to make a commercial return on its investment
taking into account the price effects the additional output may have on the market and the likely
responses of the incumbent firms and other costs/risks associated with entry.

7.25. Factors likely to affect the profitability of entry include the examples of barriers outlined in
paragraphs 7.30 to 7.32. Evidence of the past success or failure of new entrants in establishing
themselves as effective competitors in the relevant market may also provide insight into the
profitability of entry into particular markets but will not necessarily indicate ease of entry. To
test the likelihood of entry where it is not possible to identify potential new entrants, the ACCC
requires identification of the likely categories of entrants that could potentially enter.

Sufficiency of entry
7.26. Entry must be of sufficient scale with a sufficient range of products to provide an effective
competitive constraint. In differentiated product markets, the sufficiency of entry will critically
depend on the ability and incentive43 of entrants to supply a sufficiently close substitute to that
of the merged firm. Entry at the fringe of the market is unlikely to constrain any attempted
exercise of market power by incumbents if incumbents are unlikely to lose significant sales to
those fringe entrants. Therefore individual entry that is small-scale, localised or targeted at niche
segments is unlikely to be an effective constraint post-merger.

7.27. Sufficiency does not require in all circumstances that one new entrant alone duplicates the scale
and all the relevant activities of the merged firm. Timely entry by multiple firms may be sufficient
if the combined effect of their entry would defeat or deter the exercise of increased market
power by the merged firm.

43 The ACCC will take into account a range of factors including whether new entry that targets the products of the merged firm would
be profitable.

Merger guidelines November 2008 39

 7.28. The ACCCs assessment of the timeliness, likelihood and sufficiency of entry will depend on the
circumstances of each particular merger under consideration. However, the underlying test is
always whether the potential for entry provides an effective competitive constraint that would
prevent a significant and sustainable increase in the market power of market participants post-
merger.

Types of barriers to entry

7.29. In assessing the potential for entry to act as a competitive constraint, the ACCC considers the
costs of entry and incumbency advantages under the following categories:

7.30. Legal or regulatory barriers, including but not limited to:

licensing conditions, tariffs, explicit restrictions on the number of market participants and
other government regulations
legally enforceable intellectual property rights
environmental regulations that raise the costs of entry or limit the ability for customers to
switch suppliers.

7.31. Structural or technological barriers, including but not limited to:

the existence of sunk costs, which increase the risks of, and costs associated with, failed
entry and include factors such as product development, advertising or promotion to establish
a sufficient reputation in the market and construction of specialised facilitiesthe high risk
and costs associated with failed entry may deter new entry
substantial economies of scale, which may limit the viability of entry below a certain
minimum efficient scale
high customer switching costs, such as search costs, transaction costs and market specific
behaviour (including customer inertia to switching suppliers)
mature markets or markets with declining levels of demand growth
access to key production or supply assets, important technologies or distribution channels
the existence of significant network effects.

7.32. Strategic barriers that arise because of actions or threatened actions by incumbents to deter
new entry, including but not limited to:
risk of retaliatory action by incumbents against new entry, such as price wars or temporarily
pricing below cost
creation and maintenance of excess capacity by incumbents that can be deployed against
new entry
creation of strategic customer switching costs through contracting, such as exclusive
longterm contracts and termination fees
brand proliferation by incumbents, which may crowd out the product space leaving
insufficient opportunities for new firms to recover any sunk entry costs.

40 Merger guidelines November 2008

 Height of barriers to entry
The following are examples of the types of information the ACCC may require to assess the height of any
barriers to entry:
the ability of producers that are not current competitors to switch production to competing
products or services
the market conditions that may affect the ability of existing firms to expand
the size and extent of any investment, particularly sunk investment, that producers would need
to make to either enter the relevant market/s or to expand production significantly in these
market/s
the extent of brand loyalty in the relevant market/s
the existence and nature of any long-term supply contracts in the relevant market/s
any relevant switching costs (such as product compatibility issues, product bundling, contract
termination charges) that may prevent buyers in the relevant market/s from changing suppliers or
sellers in the relevant market/s from changing buyers, in the short to medium term
evidence of any growth or decline in the relevant market/s.
In an informal merger review, providing a base level of information to the ACCC will, in non-controversial
cases, usually be sufficient to satisfy the ACCC of whether or not a substantial lessening of competition
is likely. Whether a wider range of information will be required by the ACCC will be assessed on a
caseby-case basis and will depend on the complexity of the matter and the potential competition
concernsraised.

Actual and potential import competition 44

7.33. Actual or potential direct competition from imported goods or services can provide an
important competitive discipline on domestic firms. Where the ACCC can be satisfied that
import competitionor the potential for import competitionprovides an effective constraint
on domestic suppliers, it is unlikely that a merger would result in a substantial lessening of
competition.

7.34. While the current or historic levels of imports may indicate the competitive role of imports in the
relevant market, the ACCC will consider the potential for imports to expand if the merged firm45
attempted to exercise increased market power post-merger.

7.35. Imports are most likely to provide an effective and direct competitive constraint in circumstances
where all of the following conditions are met:
independent imports (that is, imports distributed by parties that are independent of the
merger parties) represent at least 10percent of total sales in each of the previous three
years
there are no barriers to the quantity of independent imports rapidly increasing that would
prevent suppliers of the imported product from competing effectively against the merged
firm within a period of one to two years (for example, government regulations, the likelihood
and impact of anti-dumping applications on imports, customer-switching costs or the need
to establish or expand distribution networks)

44 Refers to the merger factor contained in s.50(3)(a).

45 The analysis would apply in matters involving unilateral effects and also matters involving coordinated effects (in particular the
possibility of import competition constraining the ability and incentive of a small number of firms to engage in coordinated conduct).

Merger guidelines November 2008 41

 the (actual or potential) imported product is a strong substitute in all respects (that is,
quality, range, price, etc.) for the relevant product of the merged firm, taking into account
factors including the need to meet any relevant Australian or industry standards, any increase
in the complexity of customers logistical arrangements, increased transport times and costs,
and the risk of adverse currency exchange rate fluctuations
the price of actual or potential landed imports, including any tariffs or other import-specific
taxes and charges, (that is, the import parity price) is close to the domestic price of the
relevant product that would prevail in the absence of the merger
importers are able to readily increase the supply volume of the product they import with
minimal or no increase in the price paid
the merged firm and other major domestic suppliers do not have a direct interest in, are not
controlled by, and do not otherwise interact with, actual or potential import suppliers.

Barriers to import expansion

7.36. The ability of imports to expand (import supply elasticity) will be a key consideration in the
ACCCs competition analysis. If the supply of imports is either unable to respond, or only able
to respond slowly, to an increase in demand by Australian consumers, imports are unlikely to
effectively counteract any increased market power of the merged firm. For example, where there
are production capacity or supply constraints, or where imports targeted to niche segments
would not be profitable on a wider scale given their cost structures, import competition is
unlikely to be sufficient to prevent a substantial lessening of competition.

7.37. The barriers to import expansion that the ACCC considers when assessing the supply elasticity of
imports include:
the existence of capacity constraints overseas and the resulting impact on the potential for
expansion of imports into Australia
the level and impact of transport costs and logistics (particularly the impact of transport
costs as a percentage of the value of the good or service being imported)
the cost and delay associated with the need to establish or expand effective distribution
networks
the cost and delay associated with any specialised facilities required by importers to supply
domestic customers
the level and effect of tariffs, quotas and other government regulations (both in Australia
and the country of origin)
the likelihood and impact of anti-dumping applications on imports
the presence of exclusive licensing arrangements on imports
the existence of impediments to customers choosing imports rather than the domestic
product post-merger, such as switching costs, lock-in contracts, compatibility problems,
importance of an Australian agent and local service and supply, or consistency and timeliness
of supply.

42 Merger guidelines November 2008

 Actual and potential import competition
The following are examples of the types of information the ACCC may require to determine the
competitive constraint provided by imports:
which products are imported into the relevant market/s
who undertakes the importation and their relative share of the market/s
estimates of the actual and potential level of import competition in the market/s
historical importation figures
details of any barriers to entry to importing, including access to distribution facilities, transport
costs and customs restrictions
details of the price of imports as opposed to domestic production in the relevant market/s and
an explanation of any divergence in these prices
the extent to which imports provide a constraint on domestic suppliers, including the merger
parties, in the relevant market/s post-merger.
In an informal merger review, providing a base level of information to the ACCC will, in non-controversial
cases, usually be sufficient to satisfy the ACCC of whether or not a substantial lessening of competition
is likely. Whether a wider range of information will be required by the ACCC will be assessed on a
casebycase basis and will depend on the complexity of the matter and the potential competition
concerns raised.

Availability of substitutes 46

7.38. In assessing the competitive implications of a merger, the ACCC considers both the range of
available or potentially available substitutes in each relevant market and the relative intensity
of rivalry between different products within those markets. The existence of comparable
alternatives to the merged firm that are available in plentiful supply to the entire market can,
in the absence of coordinated effects, indicate that a merger is unlikely to substantially lessen
competition.

7.39. The analysis of the likely competitive constraints provided by alternatives focuses on two issues:
rivalry within the market, given the likely closeness of rivalry between the merger parties and
between the merged firm and its rivals
barriers to expansion (elasticity of supply).

Rivalry within the market

7.40. When analysing the competitive effects of a merger, the ACCC assesses the closeness of rivalry
between the merger parties and between the merger parties and other market participants. This
analysis goes beyond the process of defining the market based on whether products are close
substitutesit also considers the relative degree of substitution or rivalry between alternative
suppliers of products in the relevant market and the merged firm.

46 Refers to the merger factor contained in s.50(3)(f).

Merger guidelines November 2008 43

 7.41. As discussed in chapter 5, unilateral effects in differentiated product markets are more likely if
the merger parties are relatively close competitors pre-merger and other market participants,
while providing alternatives to consumers, are relatively more distant competitors for the
products of the merged firm. The ACCC therefore considers the extent of product differentiation
by assessing whether the merger parties differ from rivals in terms of:
product features and function
customer loyalty
brand loyalty
whether a substantial number of customers consider the products of the merger parties to
be particularly close substitutesfor example, the merger parties represent their first and
second choices
production capacity
breadth of product line and level of specialisation
distribution channel coverage
geographic presence
cost structures
the level of vertical integration.

7.42. If, for a significant number of customers, the merger parties are each others closest competitor
and there would be no close competitors to the merged firm in one or more relevant markets,
the ACCC then explores the ability and incentives of rivals in the relevant market/s to move into
the merged firms product or geographic space post-merger. This analysis involves considering
any barriers to mobility across the product or geographic space within a market and taking
into account relevant factors such as those listed below in the context of barriers to expansion.
Impediments may include the costs of altering the mix of products, the costs of introducing a
new type of product, brand loyalty to the relevant products, the profitability of entry targeting
the products of the merged firm or the costs of establishing or expanding distribution channels
for the relevant types of product.

7.43. Conversely, if the merger parties are relatively distant competitors in the relevant market
premerger, and several of the merged firms remaining rivals would be close competitors to
the merged firm, the merger is less likely to result in a substantial lessening of competition in
thatmarket.

44 Merger guidelines November 2008

Barriers to expansion
7.44. The degree of competitive constraint provided by rivals to the merged firm also depends on
their ability to profitably increase production in the event that the merged firm attempts to
exercise market power (the elasticity of supply).47 The ability of rivals to expand depends on the
existence of any features of the market that either prevent firms from expanding altogether or
delay or impede expansion to such a degree that rivals are unable to expand in an appropriate
time to defer or defeat any non-transitory exercise of increased market power by the merged
firm. While the ACCCs starting point for timely expansion is within one to two years, the
appropriate timeframe will depend on the particular matter under consideration. For example,
the appropriate timeframe may be longer than one to two years in industries where supply
arrangements are subject to long-term contracts.

7.45. The abilities and incentives of the merged firms rivals to increase output and sales if the merged
firm attempts to exercise increased market power post-merger depend on, among other things:
the level of excess capacity that non-merger parties could deploy to take sales away from the
merged firm
the cost to non-merger parties of expanding their output
the ability of non-merger parties to source increased inputs and their ability to distribute
increased output to customers
the level of excess capacity held by the merged firm that could be deployed to prevent non-
merger parties from capturing sales.

7.46. The ACCC will consider similar factors to those set out in paragraphs 7.30 to 7.32 in relation to
new entry. For example, if non-merger parties face difficulties in distributing increased output
because of logistical bottlenecks, the availability of substitutes may be limited post-merger.
However, the costs of expansion can sometimes differ significantly from the costs of new entry.

7.47. If non-merger parties are capacity constrained post-merger, they will have a reduced ability to
steal customers from the merged firm if it attempts to exercise market power. As a result, if non-
merger parties in the relevant market are capacity constrained, the merger is more likely to result
in a substantial lessening of competition.

47 The analysis would apply in matters involving unilateral effects and also matters involving coordinated effects (in particular the
possibility of smaller rivals expanding production in response to coordinated conduct).

Merger guidelines November 2008 45

 The availability of substitutes
The following are examples of the types of information the ACCC may require to assess the relative
degree of rivalry both between the merger parties themselves and between the merger parties and other
market participants:
internal company strategy, marketing and sales documents
information about advertising campaigns and other information that highlights how firms in the
market perceive the competitive constraint created by other market participants
past history of customers switching between suppliers
whether market features exist that prevent or hinder customers changing suppliers
for example, switching costs resulting from the use of exclusive long-term contracts and
termination fees
studies and information regarding consumer preferences
estimates of cross elasticities of supply and demandi
the diversion ratios between the merger partiesii
estimates of the own-price elasticity of supply of non-merger partiesiii
the production capacity of firms in the market, including any capacity constraints or excess
capacity
the costs to rival firms of expanding their output
impediments to firms altering or expanding their product mix to compete more closely with the
products of the merged firm
whether the merged firm controls inputs/distribution channels, patents/other IP and access to, or
pricing of, different platforms
the degree of homogeneity of products.
In an informal merger review, providing a base level of information to the ACCC will, in non-controversial
cases, usually be sufficient to satisfy the ACCC of whether or not a substantial lessening of competition
is likely. Whether a wider range of information will be required by the ACCC will be assessed on a
casebycase basis and will depend on the complexity of the matter and the potential competition
concerns raised.

i The cross-elasticity of supply (demand) is the percentage change in the supply (demand) for one firms output in
response to a 1percent change in the price of the product sold by a second firm.
ii A diversion ratio measures the proportion of consumers that switch to another firms product if a particular firm
increases the price of its product.
iii The own-price elasticity of supply of a firm is the percentage change in the firms output in response to a 1percent
change in the price the firm sells its product for.

46 Merger guidelines November 2008

Countervailing power 48

7.48. In addition to considering supply-side sources of competitive constraint, the ACCC also considers
whether one or more buyers would have sufficient countervailing power to constrain any
attempted increase in market power by a supplier.49 Countervailing power exists when buyers
have special characteristics that enable them to credibly threaten to bypass the merged firm50,
such as by vertically integrating into the upstream market, establishing importing operations or
sponsoring new entry.

7.49. Countervailing power is more than the ability of buyers to switch to alternative domestic or
imported products. As discussed above, the availability of substitutes and import competition
are important considerations in assessing whether a merger is likely to result in a substantial
lessening of competition. The availability of effective alternatives to the merged firm provides all
buyers with a means of bypassing the merged firm. Countervailing power, however, exists when
the specific characteristics of a buyersuch as its size, its commercial significance to suppliers or
the manner in which it purchases from suppliersprovide the buyer with additional negotiating
leverage. In some cases, a buyer may have countervailing power because they have market
power.51

7.50. Importantly, the size and commercial significance of customers (sometimes referred to as buyer
power) is not sufficient to constitute countervailing power. A large buyer that accounts for a
significant proportion of the merged firms sales may be able to negotiate favourable terms and
price relative to other buyers in the market. However, buyers need more than size to constrain
the exercise of market power by a supplier. For example, if the suppliers product is an essential
input for the buyer, the only way the buyer can defeat any attempted increase in market power
is if it can credibly threaten to bypass the supplier.

7.51. In assessing whether countervailing power is likely to prevent a substantial lessening of

competition by constraining any attempt by the merged firm to increase market power, the
ACCC considers the following factors, among others:
Whether the threat to bypass is credible on commercial grounds Evidence of this
will often include the size of the buyers purchases and the efficient scale of production of
the product. For sponsored entry to be commercially viable, the entrant will have to operate
at an efficient scale of production. If the purchases of the sponsoring firm are insufficient to
underpin such a production scale, the ACCC needs to be convinced that the entrant could
readily find other sales in the relevant market.

48 Refers to the merger factor contained in s.50(3)(d).

49 In a merger between buyers, countervailing power may also be exerted by one or more suppliers if they are able to bypass the merged
firm and establish alternative supply channels. In line with the approach adopted throughout these guidelines, consideration is
directed towards the case where the merged firm is a seller in the relevant market under analysis. As previously noted, all guidance
provided here needs to be appropriately adjusted when merger analysis involves a merger of competing purchasers.
50 The analysis would apply in matters involving unilateral effects and also matters involving coordinated effects (in particular the
possibility of countervailing power constraining the ability and incentive of a small number of firms to engage in coordinated
conduct).
51 The existence of buyer market power may offset the merged firms market power on the supply side (see the Trade Practices
Legislation Amendment Bill 1992, explanatory memorandum, paragraph23). However, the ACCC notes that the outcomes of mergers
that pit market power against market power are difficult to determine. When firms in both markets have market power, a broad
range of prices and price structures are possible and there is a risk that the merger will result in monopoly prices being charged
for both the input (in the upstream market) and the final output (in the downstream market). Such a double-monopoly can be
particularly damaging to consumers.

Merger guidelines November 2008 47

 Whether the buyer is likely to bypass the supplier Evidence of this could include
plans or other documents suggesting such a strategy is commercial, as well as instances
and circumstances when the buyer or other buyers of the relevant input have previously
sponsored entry or vertically integrated. The ACCC places greater weight on evidence that
such strategies form part of the firms business model. Also, if the relevant input does not
account for a significant proportion of the buyers total input costs, sponsored entry or
backward integration may be less likely.
The proportion of the downstream market able to wield a credible threat
For the countervailing power to offset or limit any market power arising from a merger, it
will usually not be sufficient if only one buyer or category of customers is able to bypass
the merged firm post-merger. For example, the merged firm may be able to increase prices
charged to smaller buyers that are unable to bypass the supplier while larger buyers with
countervailing power are able to avoid the increase. A significant proportion of customers
must be shielded from the effects of market power if countervailing power is to prevent a
substantial lessening of competition in the relevant market/s.

Countervailing power
The following are examples of the types of information the ACCC may require to ascertain the degree of
countervailing power in the relevant market/s:
the relative strength of bargaining power possessed by customers of the products in the relevant
market/s
the extent to which it is possible for customers to bypass the merger parties by importing or
producing the product themselves, vertically integrating, or using an alternative supplier.
In an informal merger review, providing a base level of information to the ACCC will, in non-controversial
cases, usually be sufficient to satisfy the ACCC of whether or not a substantial lessening of competition
is likely. Whether a wider range of information will be required by the ACCC will be assessed on a
casebycase basis and will depend on the complexity of the matter and the potential competition
concerns raised.

Dynamic characteristics of the market 52

7.52. The forward-looking nature of merger analysis means that the ACCC, when analysing the
competitive effect of a merger, must take into account the changing nature of the market in
the future. Dynamic changes may result from a range of factors including market growth,
innovation, product differentiation and technological changes. The analysis of the effects
of dynamic changes in the market is closely linked with analysis of the other merger factors
discussed in this chapter. The changes in the market will be considered from two perspectives:
the extent to which the dynamic features of the market affect the likely competitive impact
of the merger
whether the merger itself impacts on the dynamic features of the market.

7.53. Whether a market is growing or declining can have significant implications for the
competitiveness of the market in the future. Markets that are growing rapidly may offer both
greater scope for new entry and the erosion of market shares over time. Similarly, markets that
are characterised by rapid product innovation may be unstable so that any increased market
power gained through a merger is transitory.

52 Refers to the merger factor contained in s.50(3)(g).

48 Merger guidelines November 2008

 7.54. In general, a merger is less likely to substantially lessen competition in a market that is rapidly
evolving.

7.55. When considering how a merger will influence future competition in a dynamic market, the
ACCC places more weight on robust evidence about likely future developments in the relevant
market. The ACCC will give significantly less weight to predictions about the future state of
competition that are speculative or have little chance of developing for some considerable time
in the future.

Dynamic characteristics of the market

The ACCC may require information on dynamic characteristics such as growth, innovation and product
and/or service differentiation. In an informal merger review, providing a base level of information to
the ACCC will, in non-controversial cases, usually be sufficient to satisfy the ACCC of whether or not a
substantial lessening of competition is likely. Whether a wider range of information will be required by
the ACCC will be assessed on a case-by-case basis and will depend on the complexity of the matter and
the potential competition concerns raised.

Removal of a vigorous and effective competitor 53

7.56. Mergers involving a vigorous and effective competitor (sometimes referred to as a maverick firm)
are more likely to result in a significant and sustainable increase in the unilateral market power
of the merged firm or increase the ability and incentive of a small number of firms to engage
in coordinated conduct. Vigorous and effective competitors may drive significant aspects of
competition, such as pricing, innovation or product development, even though their own market
share may be modest. These firms tend to be less predictable in their behaviour and deliver
benefits to consumers beyond their own immediate supply, by forcing other market participants
to deliver better and cheaper products. They also tend to undermine attempts to coordinate the
exercise of market power.

7.57. A merger that removes a vigorous and effective competitor may therefore remove one of the
most effective competitive constraints on market participants and thereby result in a substantial
lessening of competition.

Removal of a vigorous and effective competitor

The following are examples of the types of information the ACCC may require to ascertain the extent
to which each party to the transaction would separately be considered as a vigorous and effective
competitor in the relevant market/s:
evidence of past competitive pricing behaviour, for example discounting and promotions
levels of point-of-sale service (for example opening hours and store format) and after-sales service
past and expected innovation, for example in design or production technology
past evidence of leadership in non-price competition, for example product quality and loyalty
programs.
In an informal merger review, providing a base level of information to the ACCC will, in non-controversial
cases, usually be sufficient to satisfy the ACCC of whether or not a substantial lessening of competition
is likely. Whether a wider range of information will be required by the ACCC will be assessed on a
casebycase basis and will depend on the complexity of the matter and the potential competition
concerns raised.

53 Refers to the merger factor contained in s.50(3)(h).

Merger guidelines November 2008 49

Vertical integration 54

7.58. It is recognised that some horizontal mergers can be affected by vertical integration or vertical
relationships in the marketfor example, horizontal competition issues may be exacerbated by
vertical aspects of a merger and vice versa. Where a merger involves both horizontal and vertical
competition issues, the ACCC will assess the merger based on the combined horizontal and
vertical impact on competition.

7.59. The nature and extent of vertical relationships between firms in separate areas of activity along
a vertical supply chain can affect the competitive implications of consolidation in any one of
those areas. For example, a horizontal merger can increase the likelihood of coordination in
cases where downstream integration increases the visibility of pricing. Generally, horizontal
mergers involving a vertically integrated firm are unlikely to lessen competition provided effective
competition remains at all levels of the vertical supply chain post-merger.

Vertical integration
The following are examples of the types of information the ACCC may require to ascertain whether
vertical integration is likely to be relevant to the competition assessment:
whether the merger will result in vertical integration between firms involved at different
functional levels of the relevant market/s
whether the merger is likely to increase the risk of limiting the supply of inputs or access to
distribution, such that downstream or upstream rivals face higher costs post-merger or risks of
full or partial foreclosure of key inputs or distribution channels
the extent of existing vertical integration, noting in particular where either merger party currently
operates as a customer or supplier to competitors in the relevant market/s.
In an informal merger review, providing a base level of information to the ACCC will, in non-controversial
cases, usually be sufficient to satisfy the ACCC of whether or not a substantial lessening of competition
is likely. Whether a wider range of information will be required by the ACCC will be assessed on a
casebycase basis and will depend on the complexity of the matter and the potential competition
concerns raised.

Ability to increase prices or profit margins 55

7.60. As discussed in paragraph 3.5, a merger that results in the merged firm56 being able to
significantly and sustainably increase prices (or exercise market power in other non-price
ways) will substantially lessen competition. In general, an increase in price will result in a
corresponding increase in profit margins. In some cases, the merged firms ability to significantly
and sustainably increase profit margins may also indicate a substantial lessening of competition.
For example, following a vertical merger that achieves control over essential inputs, the merged
firm may be able to raise the prices at which it sells to competitors in intermediate markets,
thereby increasing its revenue and accordingly its profit margins, while raising the input costs
of its competitors above its own.57 However, several factors influence profit margins and the
ACCC recognises that increased profitability may not be a conclusive indicator of a substantial
lessening of competition. Assessing the likelihood of a significant and sustainable increase in
prices or profit margins requires an analysis of all sources of competitive constraint.

54 Refers to the merger factor contained in s.50(3)(i).

55 Refers to the merger factor contained in s.50(3)(e).
56 The analysis would apply in matters involving unilateral effects and also matters involving coordinated effects (in particular whether a
small number of firms could significantly and sustainably increase prices post-merger
57 Trade Practices Legislation Amendment Bill 1992, explanatory memorandum, paragraph 26.

50 Merger guidelines November 2008

 7.61. The ACCC considers both qualitative and quantitative evidence relating to the likelihood that the
merger will lead to a significant and sustainable increase in prices or profit margins. Qualitative
evidence may include relevant internal firm documents, industry studies and other information
provided by market participants, including the merging parties.

Ability to increase prices or profit margins

The following are examples of the types of information the ACCC may require to determine the extent to
which merger parties may be able to increase prices or profit margins:
details of recent and current levels of pricing in the relevant market/s, including the use of
rebates and discounts
details of supply costs of goods and services supplied by the merger parties including
manufacturing, marketing and distribution costs in the relevant market/s
a description of any competitive constraints likely to prevent the merger parties from significantly
and sustainably increasing the prices paid by their customers, or lowering the prices paid to their
suppliers post-merger in the relevant market/s
a description of the likely effect of the merger on the profit margins of the merger parties post-
merger and the expected cause of any change.
In an informal merger review, providing a base level of information to the ACCC will, in non-controversial
cases, usually be sufficient to satisfy the ACCC of whether or not a substantial lessening of competition is
likely. Whether a wider range of information will be required by the ACCC will be assessed on a case-
by-case basis and will depend on the complexity of the matter and the potential competition concerns
raised.nd on the complexity of the matter and the potential competition concerns raised.

Other factors
7.62. The list of merger factors contained in s.50(3) is not exhaustive. Particular mergers may involve
other factors that affect the likely competitive outcome of the merger. It is not possible in
these guidelines to foresee every possible factor that may be relevant in a particular merger
assessment, but other factors such as merger-related efficiencies, effect of export markets and
government regulation may be relevant.

Efficiencies
7.63. The potential for improved efficiency is a common motivation for firms to merge. Merger-
related efficiencies include greater economies of scale and scope from combining production,
distribution and marketing activities, greater innovation yields from combining investment
in research and development and reduced transaction costs.58 The ACCC recognises that a
reduction in marginal costs post-merger may increase competitive tension. However, the
ACCCs focus in s.50 merger analyses is the effect of the merger on competition, competitive
constraints and the efficiency of markets, rather than the efficiency of individual firms. A merger
that removes or weakens competitive constraints to the extent that a substantial lessening of
competition results, will (unless authorised) contravene s.50even if the merger results in a
more efficient firm with a lower cost structure.

58 Larger firms also typically achieve lower input prices because of enhanced bargaining power and bulk discounts. Such cost reductions
are pecuniary benefits, not efficiency gains. In some cases a merger of two significant acquirers of an input can substantially lessen
competition for the acquisition of that input. The ACCC will explore such issues separately from the impact of efficiencies on
competitive constraints in the relevant supply market.

Merger guidelines November 2008 51

 7.64. While competitive constraints are generally external to a firm, the likely internal cost structure
of a firm (which, for a merged firm, is in part determined by the efficiencies it has gained
through merging) is often relevant to competition. For instance, the cost structure of firms in
a duopoly or oligopoly market is one of many factors relevant to the likelihood of coordinated
conduct. Symmetry between firms may be conducive to coordinated conduct and strategic
interdependence, whereas the presence of a firm with a lower cost structure than that of its
rivals might cause coordination to break down. Similarly, changes in the level of excess capacity
in a market may alter the intensity of competition. The competitive impact of a merged firms
likely cost structure depends on the circumstances of the merger.

7.65. If efficiencies are likely to result in lower (or not significantly higher) prices, increased output
and/or higher quality goods or services, the merger may not substantially lessen competition.
The ACCC generally only considers merger-related efficiencies to be relevant to s.50 merger
analyses when it involves a significant reduction in the marginal production cost of the merged
firm and there is clear and compelling evidence that the resulting efficiencies directly affect the
level of competition in a market and these efficiencies will not be dissipated post-merger.

7.66. In cases where a merger is likely to achieve significant efficiencies, but the efficiencies do not
prevent a substantial lessening of competition, the merger may only proceed if authorised by the
Tribunal. The Tribunal may consider whether gains in efficiency constitute a public benefit that
outweighs the public detriment from the substantial lessening of competition.

Potential effect of exports on domestic markets

7.67. While competition in overseas markets may prevent the merged firm from raising its export
prices, the ACCC generally focuses on whether the merged firm59 is able to significantly and
sustainably raise prices in a market in Australia post-merger.60 Generally, the merged firms
export operations do not limit its ability to exercise market power in a market in Australia. In
some limited circumstances, however, exports can play a similar role in constraining the market
power of domestic suppliers to the role played by imports in constraining the market power of
domestic suppliers.

7.68. The merged firm may be constrained in its domestic activities by competition in export markets
if:
the merged firms foreign sales (exports) represent a significant proportion of the merged
firms total sales and
the merged firm is unable to discriminate in price (or other characteristics) between foreign
and domestic sales.

7.69. Under these circumstances, the merged firm may be limited in its ability to exercise market
power in the relevant market in Australia without losing export sales. Any increased profit from
the domestic market may be offset by the fall in profits from export sales.

59 Either unilaterally or in conjunction with other suppliers.

60 Exports may provide a competitive constraint when a merger involves firms that are buyers in the relevant market. In line with the
approach adopted throughout these guidelines, consideration is directed towards the case where the merged firm is a seller in the
relevant market under analysis. As previously noted, all guidance provided here needs to be appropriately adjusted when merger
analysis involves a merger of competing purchasers.

52 Merger guidelines November 2008

Government regulation
7.70. The ACCC considers the effect of any state or federal government regulation that affects
competition. For example, firms may be restricted in the range or features of products they
can supply, or a price cap might prevent increases in price. However, the ACCC does not regard
speculation about future alterations to the regulatory environment, or the mere ability of
government to regulate, as an effective competitive constraint.

Merger guidelines November 2008 53

Appendix 1: Relevant provisions of the Act
1. The merger and acquisition provisions are part of the competition provisions of Part IV of the Act.
Some of the relevant provisions of the Act are summarised below for ease of reading. However, the
Act is complex legislation and, while the ACCC believes such summaries are accurate, the nature of
the Act requires the actual provisions to be consulted in specific cases.

The substantive mergers test (s. 50)

2. Section 50 of the Act prohibits acquisitions that would have the effect, or be likely to have the
effect, of substantially lessening competition in a substantial market in Australia or a state, territory
or region of Australia.

3. Section 50 of the Act provides that:

(1) A corporation must not directly or indirectly:
(a) acquire shares in the capital of a body corporate, or
(b) acquire assets of a person

if the acquisition would have the effect, or be likely to have the effect, of substantially lessening
competition in a market.
(2) A person must not directly or indirectly:
(a) acquire shares in the capital of a corporation, or
(b) acquire any assets of a corporation
if the acquisition would have the effect, or be likely to have the effect, of substantially
lessening competition in a market.
(3) Without limiting the matters that may be taken into account for the purposes of subsections
(1) and (2) in determining whether the acquisition would have the effect, or be likely to have
the effect, of substantially lessening competition in a market, the following matters must be
taken into account:
(a) the actual and potential level of import competition in the market
(b) the height of barriers to entry to the market
(c) the level of concentration in the market
(d) the degree of countervailing power in the market
(e) the likelihood that the acquisition would result in the acquirer being able to
significantly and sustainably increase prices or profit margins
(f) the extent to which substitutes are available in the market or are likely to be available
in the market
(g) the dynamic characteristics of the market, including growth, innovation and product
differentiation
(h) the likelihood that the acquisition would result in the removal from the market of a
vigorous and effective competitor
(i) the nature and extent of vertical integration in the market.

54 Merger guidelines November 2008

4. Foreign acquisitions for which an acquirer is not considered to be carrying on a business within
Australia may fall under s.50A of the Act for consideration.

5. Section 4G provides:
For the purposes of this Act, references to the lessening of competition shall be
read as including references to preventing or hindering competition.

6. Section 4E of the Act provides:

For the purposes of this Act, unless the contrary intention appears, market
means a market in Australia and, when used in relation to any goods or services,
includes a market for those goods or services and other goods or services that
are substitutable for, or otherwise competitive with, the first mentioned goods or
services.

7. Sections 50 and 50A relate only to substantial markets for goods and services in Australia, a state, a
territory or a region (ss. 50(6) and 50A(9)).

8. The terms substantial lessening of competition, market and substantial market are discussed in
paragraphs 3.5, 4.6 and 4.28 respectively.

Clearance processes and authorisations provisions

9. The ACCC investigates and reviews those mergers it becomes aware of that have the potential to
raise concerns under s.50 of the Act. The ACCCs approach to informal merger reviews is contained
in its Merger review process guidelines (available at www.accc.gov.au/mergers).

10. Alternatively, parties may seek to apply to the ACCC for a formal clearance of a proposed merger. In
such cases, the clearance process is governed by ss.95AC to 95AS of the Act.

11. Sections 95AC to 95AS of the Act provide for the ACCC, upon application by the acquirer, to grant
formal clearance for a proposed merger on the basis that it would not have the effect, or be likely to
have the effect, of substantially lessening competition (within the meaning of s.50). Further details
about the ACCCs consideration of applications for formal clearance may be found in the ACCCs
Formal merger review process guidelines (available at www.accc.gov.au/mergers). If formal clearance
is granted, the merger parties will be protected from legal action under s.50 (s. 95AC).

12. Sections 95AT to 95AZM of the Act allow application to be made to the Tribunal for authorisation
on the basis that the merger would result, or is likely to result, in such a benefit to the public that
it should be allowed to take place. If authorisation is granted, the merger parties will be protected
from legal action under s.50 (s. 95AT).

Merger guidelines November 2008 55

Enforcement and undertakings provisions
13. Under s.87B of the Act, the ACCC may accept a written undertaking in connection with a matter
in relation to which it has a power or function under the Act, except Part X. If the undertaking is
breached, the ACCC may seek orders from the court directing compliance with the undertaking,
the giving up of any financial benefit gained from the breach, compensation for any other loss or
damage as a result of the breach, or any other appropriate orders. Section 87B provides:
(1) The ACCC may accept a written undertaking given by a person for the purposes of this
section in connection with a matter in relation to which the ACCC has a power or function
under this Act (other than Part X).
(2) The person may withdraw or vary the undertaking at any time, but only with the consent of
the ACCC.
(3) If the ACCC considers that the person who gave the undertaking has breached any of its
terms, the ACCC may apply to the court for an order under subsection (4).
(4) If the court is satisfied that the person has breached a term of the undertaking, the court
may make all or any of the following orders:
(a) an order directing the person to comply with that term of the undertaking;
(b) an order directing the person to pay to the Commonwealth an amount up to the
amount of any financial benefit that the person has obtained directly or indirectly and
that is reasonably attributable to the breach;
(c) any order that the court considers appropriate directing the person to compensate
any other person who has suffered loss or damage as a result of the breach;
(d) any other order that the court considers appropriate.

14. Under s.80 of the Act, only the ACCC may seek injunctive relief from the Federal Court to prevent a
merger from proceeding (s. 80(1A)). Other persons may institute declaration proceedings in respect
of an acquisition (s. 163A) but may not seek an injunction.

15. Under s.81 (1) of the Act, the court may, on the application of the ACCC or any other person, if it
finds or has in another proceeding under the Act found that a person has contravened s.50, give
directions to secure disposal of all or any of the shares or assets acquired in contravention of s.50.
Under s.81(1A) the court may declare such an acquisition void where it finds that the vendor was
involved in the contravention. Section 81(1C) provides for the court to accept as an alternative
an undertaking from the person to dispose of other shares or assets owned by the person. An
application under s.81(1) or 81(1A) may be made at any time within three years after the date on
which the contravention occurred.

16. In certain circumstances, as provided for in ss.76(1A) and 76(1B) of the Act, the court may impose
a penalty for a contravention of s.50 of up to $500 000 for an individual and, for a corporation, up
to the greatest of:
$10 million
three times the value of the benefit to the corporation that is reasonably attributable to the
contravention
10percent of the corporations annual turnover.

56 Merger guidelines November 2008

17. In summary, the provisions of the Act relevant to mergers include:
mergers and acquisitionss.50
extraterritorial operations.5(1)
overseas share acquisitionss.50A
anti-competitive agreementss.45
definition of acquisition of shares or assetss.4(4)
market definitions.4E
lessening of competition includes preventing or hinderings.4G
determination of an application for formal clearancess.95AC to 95AS
determination of an application for authorisationss.95AT to 95AZM
injunctionss.80
divestiture and setting aside acquisitionss.81
pecuniary penaltys.76
enforceable undertakingss.87B.

Merger guidelines November 2008 57

Appendix 2: Acquisitions subject to the Act
1. The following provides guidance about the types of transactions that are subject to the Act.
Nevertheless, the Act is complex legislation, and parties should consult the actual provisions of the
Act to determine whether a particular transaction falls within the scope of the Act.

Territorial jurisdiction
2. The Act applies to the following acquisitions:
(a) acquisitions of property within Australia are covered by virtue of s.50, including (but not
limited to):
shares in Australian companies, wherever the transaction is entered into, as the shares are
domestically situated
domestic businesses
local intellectual property such as trademarks
local plant and equipment.
(b) acquisitions of property wherever situated are covered by virtue of ss.50 and 5(1) if the
acquirer is:
incorporated in Australia
carries on business in Australia
an Australian citizen, or
ordinarily resident in Australia.
(c) if (a) and (b) above do not apply, acquisitions of a controlling interest (presumably shares in
almost all cases) in a body corporate where that body corporate has a controlling interest in
a corporation are covered by virtue of s.50A.

Acquirers subject to the Act

3. Section 50 of the Act applies to corporations (s. 50(1)) and persons (s. 50(2)).

4. Acquisitions involving both incorporated and non-incorporated entities are subject to the Act
through Part XIA (the Competition Code). Each Australian state and territory government has,
under clause 5 of the Conduct Code Agreement between the Australian Government and state and
territory governments, passed legislation implementing the Competition Code.

5. The merger provisions of the Act also apply to the Commonwealth and to the state and territory
governments insofar as they are carrying on business (ss. 2A and 2B respectively). Pecuniary
penalties do not, however, apply to activities of the Crown.

Types of acquisitions
6. The Act applies to both direct and indirect acquisitions. Section 4(1) of the Act makes it clear that
acquire is not limited to acquisition by way of purchase but also includes exchange, lease, hire or
hire purchase.

58 Merger guidelines November 2008

7. Section 4(4) of the Act provides that joint acquisitions and acquisitions of equitable as well as legal
interests are acquisitions subject to s.5061, but that in the case of assets, an acquisition by way of
a charge and an acquisition in the ordinary course of business are not acquisitions to which s.50
applies.

Exceptions
8. Section 51(1) of the Act provides for exceptions from s.50 and s.50A for conduct that is specified
in and specifically authorised by Commonwealth legislation. As with all exceptions under s.51,
the relevant Commonwealth law must specify the excepted acquisition and specifically authorise
it (s.51(1)(a)(i)). Acquisitions cannot be exempted from s.50 and s.50A by state or territory laws
(s.51(1C)(b)).

Partial shareholdings and minority interests

9. Mergers often involve one or more firms being completely subsumed by another firm. However,
mergers and acquisitions may also involve parties acquiring a partial shareholding in another firm.
There is no threshold shareholding for the purposes of s.50 and all acquisitions are therefore
subject to the Act.

10. For the purposes of competition analysis, acquisition by one company of a controlling interest
in another company will be treated in the same way as an acquisition of all the shares of the
target company. While a majority shareholding would in many cases ensure control, much lower
shareholdings with or without other non-shareholding interests might also be sufficient. Factors
that the ACCC takes into account when considering whether a shareholding and/or other interest is
sufficient to deliver control of a company include, among other things:
the ownership distribution of the remaining shares and securities, including ordinary and
preference shares and any special shares
the distribution of voting rights, including any special voting rights
whether other shareholders are active or passive participants at company meetings
any restrictive covenants or special benefits attaching to shares
any pre-emption rights in relation to the sale of shares or assets
any other contracts or arrangements between the parties
the rights and influence of any significant debt holders
the composition of the board of directors
the companys constitution.

11. In any event, a level of ownership less than a controlling interest that nevertheless alters the
incentives of all parties may give rise to a contravention of s.50 of the Act. The Act does not refer
to control but rather to the effect on competition. The following are some of the potential anti-
competitive effects of shareholdings below a level delivering control:
horizontal acquisitions may increase interdependence between rivals and lead to muted
competition or coordinated conduct (see chapter 6)
joint acquisitions of assets by rivals may have coordinated effects

61 In Trade Practices Commission v Arnotts Ltd & Ors (1990) ATPR 41002, at 51,044, creation of an option over shares was found to
create an equitable interest in those shares and therefore constituted an acquisition subject to s.50.

Merger guidelines November 2008 59

 vertical or conglomerate acquisitions may increase the acquirers incentive to foreclose rival
suppliers
acquisitions may provide access to commercially sensitive information in relation to
competitors
acquisitions may block potentially pro-competitive mergers and rationalisation.

Horizontal minority acquisitions

12. If a firm has a significant shareholding in a rival firm, it may be less inclined to compete head-to-
head with that firm, since to do so would result in a transfer of revenue between commonly held
assets and would likely reduce overall profitability. Refraining from competition to maximise joint
profits becomes more attractive. Where the incentives lie in particular circumstances depends on
the relative value of the assets as well as the percentage shareholding. Partial shareholdings and
directorships may result in coordinated effects by reducing the incentives for cheating, making
departures from the consensus harder to conceal and facilitating the exchange of information
between firms.

Third party minority acquisitions

13. Two parties that compete in one market may acquire shares in a company or participate in a joint
venture in another market. This may result in coordinated effects in the first market.

14. Minority interests may raise competition concerns when the same party has an interest in a number
of otherwise independent competitors. For example, if a party acquires a minority interest in two
competitors, that acquisition may substantially lessen competition if it results in coordinated effects.
Such coordination need not be explicit but may simply reflect the mutual benefits to be gained
by the relevant firms in limiting competition, together with the requirement for each competitors
directors to act in the interests of the company as a whole. In such circumstances, the ACCC may
also consider whether overlapping directorships create opportunities to limit competition between
rivals.

Vertical minority acquisitions

15. Minority interests may also raise competition concerns when the same party has an interest in
vertically related firms or firms supplying complementary products. If an acquisition creates a
relationship between a firm with significant market power in one market and another firm operating
in a market upstream or downstream, the acquisition may create an incentive for the firm with
market power to discriminate in favour of the related firm.

16. In addition to analysing the effect that the acquisition of the minority interest will have on the
incentives of the relevant firms, the ACCC will take into consideration the legal responsibilities of
company directors under the Corporations Act 2001 and at common law.

60 Merger guidelines November 2008

Minority acquisitions and information flows
17. Firms could gain access to commercially sensitive information about their rivals through either
horizontal or vertical acquisitions. Debt holders may also have access to significant information.
Information such as costs, revenues, bids, contracts, forward supply estimates, marketing campaigns
and new product plans may be available. The level of available information depends on the nature
and level of the shareholding. If the shareholding is sufficient to secure a position on the board of
directors, more information is likely to be available.

Blocking stakes
18. A shareholding of over 10percent in a company is sufficient to block the compulsory acquisition
of all the shares by another party. This in turn may allow the minority shareholder to prevent
rationalisation of two weak rivals and the creation of a more competitive firm, thereby hindering or
preventing competition.

ACCCs assessment
19. The framework for competition analysis set out in these guidelines is relevant for all share
acquisitions, whether or not they deliver control of the target firm. Where share acquisitions do not
deliver control, the ACCC will take into consideration inter-company relationships, directors duties,
and a range of other factors including:
the actual ownership share of the minority interest
the existence of any contractual or other arrangements that may enhance the influence of
the minority interest
the size, concentration, dispersion and rights of the remaining ownership shares
the board representation and voting rights of the minority interests.

Merger guidelines November 2008 61

Appendix 3: Undertakings
1. During the course of its competition assessment, the ACCC may identify competition concerns that
support the view that an acquisition is likely to substantially lessen competition in contravention of
the Act. If these competition concerns cannot be resolved and the merger parties continue to pursue
the acquisition, the ACCC will, along with other orders, seek an injunction in the Federal Court to
stop the merger proceeding.

2. In some cases, however, merger parties can provide the ACCC with a court enforceable undertaking
under s.87B of the Act to implement structural, behavioural or other measures that assuage the
competition concerns identified by the ACCC.62 Undertakings of this type are also referred to
as remedies. If the ACCC is satisfied that the proposed measures will address the competition
concerns identified, it may accept the undertaking and allow the merger to proceed. Merger parties
therefore have strong incentives for proposing effective and enforceable remedies in the form of
s.87B undertakings to remedy identified competition concerns.

3. Undertakings that remedy a likely contravention of the Act prevent the detriment that would
otherwise result from the transaction, while at the same time allowing any benefits arising from
the transaction to be realised. In the merger context, undertakings can address the competition
concerns while at the same time permitting the realisation of merger benefits, such as efficiencies
or improvements in management. In this context, s.87B undertakings are a flexible alternative to
simply opposing an acquisition when the ACCC believes that a merger or acquisition is likely to
substantially lessen competition.

4. The provision of undertakings is at the discretion of the party giving the undertaking. The structure
and content of undertakings offered to the ACCC will therefore be a matter for the party offering
the undertaking to determine. However, the ACCC will not accept undertakings if it is not satisfied
they address its competition concerns. The ACCC encourages merger parties to carefully consider
ACCC feedback on the form and content of proposed undertakings.

General principles
5. The ACCCs approach to the substance of s.87B undertakings will depend on the merits and
circumstances of each matter. However, it is possible to identify certain general principles that
underpin effective undertakings.

6. In accepting an undertaking the ACCC does not seek to improve competition beyond the pre-merger
level of competition, but the remedy needs to adequately address the potential harm identified.
There will be instances when only an outright rejection of the merger can address the ACCCs
competition concerns.

7. To determine whether the undertaking is acceptable, the ACCC will consider a range of factorsin
particular the effectiveness of the remedy to address the ACCCs competition concerns, how difficult
the proposal will be to administer, the ability of the merged firm to deliver the required outcomes,
monitoring and compliance costs and any risk to competition associated with the implementation of
the undertaking (or failure to do so).

62 In some circumstances, the ACCC may seek an undertaking from merger parties not to proceed until the ACCC has completed an
informal merger review. This is distinct from the enforceable undertakings under discussion in this appendix 3.

62 Merger guidelines November 2008

8. Before accepting an undertaking, the ACCC will need to be satisfied that:
the proposed undertaking is customised to the particular nature of the relevant merger, the
competition concerns raised, and the industry or industries involved
the core obligations in the proposed undertaking (for example, a divesture) specifically,
comprehensively and effectively address the ACCCs competition concerns
the proposed undertaking would impose clear and unambiguous obligations on the party
giving the undertaking, including clear delineation of assets and businesses covered by the
remedy, the terms under which the remedy is to be carried out, timeframes for actions to be
completed, and the consequences of non-performance within those timeframes
the party offering the undertaking is capable of meeting its obligations as set out in the
undertaking, and the remedy cannot be frustrated by the actions (or inaction) of third
parties (for example, there may be matters where minority shareholders remain following the
acquisition of a firm, who may be able to prevent the acquirer from meeting its obligations
under a proposed undertaking)
for international mergers involving firms operating in jurisdictions other than Australia, any
remedies provided to the ACCC are capable of being enforced by the ACCC and coordinated
with any of the other relevant jurisdictions involved.

9. Importantly, the ACCC will be unlikely to accept an undertaking when, in its view:
there are risks that the undertaking will not be effective in preventing a substantial lessening
of competition as a result of the merger, and/or
there are risks that the undertaking cannot be implemented in practice and (where
necessary) properly monitored and/or enforced.

Types of undertakings
10. Undertaking remedies are conventionally classified as either structural or behavioural. Structural
remedies generally change the structure of the merged firm and/or the market, typically through
divestiture of part or all of a business, and, in satisfying the ACCCs competition concerns,
are generally aimed at restoring or maintaining the level of competition prevailing before the
acquisition. Behavioural remedies are normally ongoing remedies designed to modify or constrain
the behaviour of the merged firms, by mandating the price, quality or output of the merged firms
goods or services, or otherwise modifying their dealings with other firms.

11. The ACCC has a strong preference for structural undertakingsthat is, undertakings to divest part
of the merged firm to address competition concerns. Structural undertakings provide an enduring
remedy with relatively low monitoring and compliance costs.

12. On occasion, behavioural undertakingsthat is, undertakings by the merged firm to do, or not
do, certain acts (for example, meet specified service levels)may be appropriate as an adjunct to a
structural remedy. Behavioural remedies are rarely appropriate on their own to address competition
concerns.

Merger guidelines November 2008 63

Structural undertakingsdivestitures
13. Divestiture is generally the most common form of structural remedy accepted by the ACCC. In
essence, a divestiture seeks to remedy the competitive detriments of a merger by either:
creating a new source of competition through the disposal of shares, interests, a business or a
set of assets to a new, competitive market participant, or

strengthening an existing source of competition through disposal to an existing market

participant independent of the merging parties.

14. As a general rule, divestiture undertakings aim to ensure that the ultimate purchaser of the
divestiture assets will be a viable, long-term, independent and effective competitor to the merged
firm, in a way that addresses the ACCCs competition concerns with the merger.

15. Key elements of a divestiture are the scope of the divestiture package, the purchaser selection and
the disposal process. While merger parties will generally seek to offer divestiture remedies that
satisfy the ACCCs requirements so that the merger is not opposed, they may have a conflicting
incentive to undermine the future competitive effect of any divested assets and businesses where
those divested assets or business will compete against the merged firm post-merger. Each of the key
aspects of the divestiture may be susceptible to a number of risks such as:
composition risksthe scope of the divestiture package may not be appropriately configured
(or sufficiently wide, say, in product range) to attract a suitable purchaser or allow a suitable
purchaser to operate effectively
purchaser risksa suitable purchaser may not be available or the merging firms may attempt
to dispose of assets to a weak or otherwise inappropriate purchaser
asset risksthe competitive capability of a divestiture package may deteriorate significantly
before completion of a divestment, for example through loss of customers or key members
of staff, or there may be some impediment to sale such as third party approvals, or minority
shareholder actions.

16. The ACCC closely examines the nature and extent of the undertakings offered against such risks in
any individual case.

17. Generally, for a structural undertaking to be acceptable to the ACCC, all of the following
requirements should be satisfied:
the divestiture remedy should be proportionate to the competition concerns or detriments
and be effective in restoring or maintaining competition
the assets must be sold to a viable, effective and long-term competitor. That is, the part of
the merged firm to be divested (for example, a subsidiary or a suite of assets) must facilitate
the maintenance or creation of an independent and effective long-term competitor in the
market. There should be no need for continuing supply or other arrangements between the
merged firm and the purchaser of the divested business
there must be procedures for the purchaser to be approved by the ACCC. Generally,
purchasers should be independent of the merged firm and possess the necessary expertise,
experience and resources to be an effective long-term competitor in the market. The
purchasers acquisition of the divestiture business must not itself raise competition concerns
in any market

64 Merger guidelines November 2008

 the value and integrity of the divestiture package must be preserved and independently
maintained and operated as a going concern, pending divestiture. Wherever practicable,
divestiture should occur on or before the completion date of the merger, particularly in cases
where there are risks in identifying a (suitable) purchaser or asset-deterioration risks. There
will be some specific circumstances where, if the remedy cannot be implemented on or
before completion of the main transaction to address the identified competition concerns,
no remedy will be acceptable to the ACCC
appropriate provisions will apply, should firms fail in their core obligations. For example, an
undertaking should provide for the merged firm to appoint an ACCC-approved sales agent
to divest the business to an ACCC-approved purchaser if the firm fails to sell the divestiture
business itself within the requisite period
appropriate provisions will apply to enable the ACCC to monitor and investigate compliance
with the undertakings and enforce the provisions if necessary. For example, an undertaking
may require the appointment of an ACCC-approved independent auditor or other
independent expert to monitor certain aspects of the undertakings, contain provisions that
require periodic reporting by the undertaking parties or an auditor, and contain provisions to
enable the ACCC to obtain information about compliance with the undertakings
remedies will also be required to be implemented in a timely manner.

18. In each case the specific measures and provisions needed to achieve these requirements (and
further requirements if appropriate) may differ, in accordance with the circumstances of each case.
Examples of specific provisions found to be acceptable to the ACCC in previous matters and that
may assist merger party/parties in developing undertakings proposals can be found on the ACCC
website (www.accc.gov.au).

Behavioural undertakings
19. The nature of effective behavioural undertakings will depend on the particular competition concerns
they seek to address and the likely future state of competition in the relevant markets. It is therefore
difficult to provide clear guidance as to whether behavioural undertakings will be appropriate to
remedy the competition issues in any given matter.

20. Generally, behavioural undertakings are only likely to address the ACCCs competition concerns
if they foster the development or maintenance of enduring and effective competitive constraints
within a short and pre-specified period of time. It is particularly rare for the ACCC to accept
behavioural remedies that apply on a permanent basis due to the inherent risk to competition
combined with the monitoring and enforcement burden such remedies create.

21. An effective behavioural undertaking must contain an effective mechanism for the on-going
monitoring and compliance and investigation of suspected breaches of the undertaking by the
merged firm. Commonly, behavioural undertakings provide for the appointment of an ACCC-
approved auditor to monitor compliance and report back to the ACCC.

Merger guidelines November 2008 65

Process
22. The Merger review process guidelines and Formal merger review process guidelines explain the
ACCCs processes when considering a proposed undertaking.

23. To the greatest extent possible, subject to the legitimate confidentiality concerns of the parties, the
ACCC will seek to ensure that the reasons for accepting an undertaking are publicly available and
that undertakings accepted for one merger are broadly consistent with the undertakings accepted in
other merger cases.

24. A party to an undertaking may withdraw or vary their undertaking at any time but only with the
consent of the ACCC.

Enforcement
25. The ACCC considers that s.87B undertakings play a critical role in administering and enforcing s.50
of the Act. Accordingly, the ACCC carefully monitors compliance with all undertakings it accepts
and will investigate if it identifies any potential non-compliance. The ACCC will not hesitate to take
enforcement action if it considers that an undertaking has been breached, and that court action is
the appropriate response in the circumstances.

26. In the event of non-compliance with an undertaking the ACCC may make an application to the
Federal Court for an order under s.87B(4), and the court may, if it is satisfied that the party to the
undertaking has contravened a term of the undertaking, make all or any of the following orders:
an order directing the person to comply with that term of the undertaking
an order directing the person to pay to the Commonwealth an amount up to the amount of
any financial benefit that the person has obtained directly or indirectly and that is reasonably
attributable to the breach
any order that the court considers appropriate directing the person to compensate any other
person who has suffered loss or damage as a result of the breach
any other order that the court considers appropriate.

27. Further, the ACCC will generally not cede the legal right to take action in an undertaking. An
undertaking accepted by the ACCC does not preclude the ACCC from taking legal action under
s.50, particularly if the undertaking is not properly implemented or the decision to accept the
undertaking was based on inaccurate information.

66 Merger guidelines November 2008

Glossary and shortened forms
Note: in these guidelines, the term product encompasses both goods and services.
ACCC Australian Competition and Consumer Commission

Act (the) Competition and Consumer Act 2010 (Cwlth) formerly the Trade Practices Act 1974

behavioural undertakings An undertaking that prescribes conduct to be carried out, directed or avoided by the
merged firm on an ongoing basis to minimise its ability to exercise anti-competitive
market power.

complementary products Products are complementary in either demand or supply where a change in the
demand for one generates demand for the other. If the price of one product rises,
demand for both products may fall. Similarly, if the price of one product falls, demand
for both products may increase.

conglomerate mergers Mergers involving firms that interact or potentially interact across several separate
markets and supply products that are in some way related to each otherfor example,
products that are complementary in either demand or supply.

court (the) Federal Court of Australia

CRx The x firm concentration ratio. This ratio is the fraction of market shares possessed by
the x largest firms in a given market. The higher the concentration ratio, the greater
the level of concentration in that market.

differentiation Differences in the features of a range of products that all serve the same function.

economies of scale The economic principle whereby a firms long-run average total cost of production is
decreased as the quantity of that firms output is increased.

economies of scope The economic principle whereby a firms long-run average total cost of production is
decreased as the quantity of different goods produced by that firm is increased.

failing firm A firm that is likely to exit a particular market in the foreseeable future (generally
within one to two years) with its productive capacity leaving the marketthat is, not
simply a change in ownership.

foreclosure Refers to when a firm prevents or impedes a rival firm from competing.

guidelines (the) Merger guidelines, Australian Competition and Consumer Commission (2008)

HHI Herfindahl-Hirschman Indexa metric used to estimate the post-merger level of

concentration of markets, as well as changes in the concentration of markets as a
result of a merger. The HHI is calculated by adding the sum of the squares of the
market share of each firm in a particular market.

HMT Hypothetical monopolist testthe HMT identifies the smallest area in product and
geographic space within which a hypothetical current and future profit-maximising
monopolist could effectively exercise market power.

horizontal mergers The merging of firms operating in the same market or markets.

ICN International Competition Network

Merger guidelines November 2008 67

market participant A firm that operates in a particular market or markets, such as a supplier or customer.

maverick firm A firm with a relatively small market share in a particular industry that is considered
a vigorous and effective competitor and which generally drive significant aspects of
competition, such as pricing, innovation and/or product development.

merger factors The non-exhaustive list of factors set out in s.50(3) of the Act that must be taken into
account when assessing whether a merger will contravene the Act, as well as any other
factors relevant to the effect of a merger on competition.

minimum efficient scale The minimum size (typically in terms of output, capacity or customer base) that a firm
requires to compete effectively with incumbent suppliers in a market.

niche segment Refers to a portion of a differentiated market serviced by small, specialised suppliers
and often involving products that are in some way distinct from the products of larger
suppliers.

notification threshold The threshold established by the ACCC to identify mergers that should be notified to it
(see chapter 2 of these guidelines).

public competition assessment This outlines the basis for the ACCC reaching its final conclusion on a merger when:
the merger is rejected; the merger is subject to enforceable undertakings; the merger
parties seek such disclosure; or the merger is approved but raises important issues that
the ACCC considers should be made public (published at www.accc.gov.au/mergers/
register).

section 87B undertaking A court enforceable undertaking under s.87B of the Act that may be accepted by the
ACCC to assuage any competition concerns identified.

SSNIP A small but significant and non-transitory increase in price

statement of issues This provides the ACCCs preliminary views on a merger which raises competition
concerns requiring further investigation.

structural undertakings An undertakings that provides for one-off actions that alter the entry conditions,
or the vertical or the horizontal relationships in a particular industry. Structural
undertakings will typically involve the divestment of part of a merged firm.

sunk costs Costs that have already been committed by a firm to its business and cannot be
recovered on exiting the market.

supply elasticity This is a measure of how much the quantity of product supplied by a firm responds
to specific changes in its particular market (for example, a change in the price of the
product, a fall in input prices, or an improvement in production technology).

switching cost Refers to the cost for customers to switch suppliers (for example, including search
costs, transaction costs and market specific behaviour).

Tribunal (the) Australian Competition Tribunal

undertaking see section 87B undertaking

vertical mergers A merger involving firms operating or potentially operating at different functional
levels of the same vertical supply chain.

68 Merger guidelines November 2008