Information Security Culture

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Part Two International Competition
Policy Implications for Managers. Prof. Simon
J. Evenett www.evenett.com 25/26 November 2005
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Organisation of this part of the course

• Brief recap What is competition law?
• Firms and cartel enforcement.
• Firms and merger review regimes.

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What is competition law?How is it different from
competition policy?
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Terminology

• Need to differentiate between the objectives and
  instruments of a policy or law.
• Need to differentiate between competition law,
  competition policy, and other state measures.
• Definitions are importantto clarify what is and
  what is not being talked about.

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Instruments of competition law and competition
policy

• The instruments of competition law are
  competition advocacy and five specific measures
  that relate to certain strategies of firms (see
  next slide).
• The instruments of competition policy are any
  state measure that affects the intensity of
  competition in a nations markets.
• Competition law instruments are also competition
  policy instruments, but the opposite is not true.

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Competition law Competition policy

• Rules on inter-firm agreements (horizontal,
  vertical, and on current and future products).
• Rules on exercise of market power.
• Rules on mergers.
• Rules on predatory pricing and related acts.

• Competition law.
• Barriers to entry.
• Trade policies.
• FDI policies.
• Deregulation policies.
• Price controls.
• Privatisation measures.

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Firms and cartel enforcement.
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Types of cartel

• Price fixing.
• Quantity setting.
• Allocating market shares.
• Bid-rigging.
• Cartels are typically secret conspiracies.
• Effects and firm membership need not be confined
  to one nations economy.

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Economics of cartelisation

• The incentive to cartelise raise prices further
  above marginal costs.
• Best possible outcome for the conspirators
  prices at level set by a joint monopoly.
• Overcoming the internal incentive problem
• Threats of price wars.
• Credibility of threats.
• Stiglers hypothesis.

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Sanctions for cartelisation
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Example The international vitamins cartel

• Worldwide cartel, 1989-1999.
• US Federal authorities took action in 1999.
• US fines exceeded 900 million EU fines of a
  similar magnitude.
• How large were the overcharges? For 90 countries,
  the total estimated overcharges during the 1990s
  was just under 2.75bn.

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Vitamins cartel targeted nations without active
cartel enforcement
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International cartels prosecuted since 1993

• Prevalence (at least) 39 cartels.
• Diverse membership 31 economies (including 8
  developing economies).
• Duration 24 cartels lasted at least 4 years.
• Overcharges on imports are not just the only
  adverse effect on national economies.
• Exports are reduced too.
• Technology transfer slowed down also.

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Effectiveness of national cartel enforcement
relevant factors.

• Recall that cartels are often secret conspiracies
  that involve a written agreement between firms.
• Political will and independence of the
  competition agency.
• Nature and strength of sanctions provided by law.
• Ease of information acquisition about the cartel.
• Search powers of enforcement body.
• Hidden evidence abroad.
• Leniency programmes.

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Leniency programmes major weapon of enforcement
agencies.

• Became a factor after USA changed its leniency
  programme in 1993.
• Goal provides strong incentives for a cartel
  member to report on illegal activities.
• First cartel member to give information and full
  cooperation to US agencies gets a full amnesty
  from federal sanctions (including from jail
  time).
• Creates a rush to the door dynamic.
• Leniency is not for freeit is not a panacea.

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2002 revisions to EC leniency programme

• See Joshua article in course outline for details.
• Provides two conditions under which full immunity
  will be granted to first eligible cartel member
• Provide evidence to enable EC to conduct a dawn
  raid.
• Provide evidence to enable EC to make a finding
  of cartelisation.
• Other conditions on leniency applicants.
• Reductions in fine available to applicants who
  are not first.
• Hold or fold dynamics strategies and
  conditioning factors.

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Effectiveness of national cartel enforcement in a
global economy

• Key is to identify spillovers across borders.
• Adequacy of sanctions from a global point of
  view.
• Deterrence and multi-market contact.
• Empagran case in the USA (extra-territoriality.)
• Information sharing by competition enforcement
  agencies and rules on confidential business
  information.
• Relationship to leniency programmes.
• Sadly, there are good reasons for believing that
  the deterrents to cartelisation are too weak.

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Three international initiatives on cartel
enforcement

• United Nations Conference on Trade and
  Development.
• The UN Set in 1980.
• Non-binding.
• Cover more than cartels.
• Abandoned proposals for multilateral disciplines
  on hard core cartels.
• OECD Recommendation on Hard Core Cartels.

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OECD Recommendation on Hard Core Cartels

• Adopted in 1998 and non-binding in nature.
• Acknowledged a common interest in prosecuting
  cartels.
• Recommends that OECD nations
• Adopt effective sanctions to deter cartels.
• Adopt enforcement procedures and institutions
  with powers adequate to detect and remedy
  hardcore cartels.
• Encouraged non-OECD nations to join the
  initiative.
• Protection of confidential business information.
• Subject to plenty of monitoring and comment.

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Summary of implications for managers

• Many policymakers are taking cartelisation much
  more seriously. Sanctions are getting tougher.
• Businesses need to establish internal procedures
  to ensure that managers are not price-fixing etc.
• Role of compliance programmessee second Joshua
  article.
• Firms involved in a cartel must weigh the risks
  to them from leniency programmes. Can such firms
  be sure their cartel conspirators wont move
  first?
• When buying another firm it is important to
  carefully check whether they are involved in a
  cartel. Acquiring potentially sizeable legal
  liabilities.

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Firms and merger review regimes
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Focus on cross-border mergers and acquisitions

• Definition.
• Types
• Horizontal.
• Vertical.
• Conglomerate.
• Financing
• Cash.
• Bonds.
• Stock.

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Motivations for cross-border MA

• To enhance market power.
• To secure cost efficiencies.
• Economies of scale and scope.
• Cheapest means to enter a new market.
• Alternatives.
• Competing in global markets requires greater
  capital needs.
• Motivations imply that no clear-cut predictions
  of the effects of mergers are possible.

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Cross border MA wave of the late 1990s

• Began 1995 and peaked in 2000.
• More firms participated than in Anglo-US wave at
  the end of the 1980s.
• Reasons for the wave
• Privatisation, deregulation, fewer restrictions
  on foreign ownership.
• Cheap cost of capital to finance acquisitions and
  share swaps.
• Widespread view that global scale was needed to
  compete effectively.

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Cross border MA since 1995
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Multi-jurisdictional merger review

• Almost every major jurisdiction has a merger
  review procedure.
• Reviews differ in type
• Pre- versus post-notification.
• Mandatory versus optional.
• Reviews by sectoral regulators are possible too.
• Example PriceWaterhouse and Coopers merger in
  1997.
• Section II of the ICN report (in course outline)
  discusses the three types of cost and the
  uncertainty created by multi-jurisdictional
  merger review.

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In what ways can merger reviews affect a firms
interests? Merger reviews can

• Lead to the completion of a proposed transaction
  being prevented.
• Even if a proposed transaction is allowed,
• Each reviewing competition agency may seek
  divestitures.
• Each reviewing competition agency may seek
  behavioural remedies.
• There can be a substantial time delay, legal
  expenses, and uncertainty.
• How can firms manage this risk?

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A comparison of US and EC merger review rules
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EC merger review procedure

• Pre-notification.
• Phase I preliminary investigation.
• Phase II extensive investigation.
• Statement of objections.
• Oral hearing.
• Decision by European Commission.
• Judicial review
• Court of First Instance (fast track procedure).
• European Court of Justice (slow).

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Disagreements between competition agencies over
merger reviews

• Need not be fatal to a transaction.
• Disputes between the EC and US.
• GE-Honeywell (2001).
• Boeing-McDonnell Douglas (1997).
• Role of rival firms differs across jurisdictions.
• Discussions of convergence of merger review
  techniques.
• Role of judicial review in EC and changes to
  European Commission merger reviews.
• Commissioner Kroes new proposals.

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Strategic matters raised by merger reviews

• Re-evaluating the decision to buy or merge.
• Risks associated with the review (outcomes, time
  of the most senior executives.)
• Value in waiting for divestitures.
• Re-evaluating the price paid for another firm.
• What is the firm worth after an adverse merger
  review?
• Competition expertise is needed at valuation
  stage.
• Contingency of financing.
• Skeletons in the cupboard previous
  anti-competitive acts of acquired firm or
  potential merger partner.

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Strategic matters raised by merger reviews

• Options available to fight a rivals proposed
  merger or acquisition
• Take advantage of the ability to supply
  information to the EC.
• Mobilise other rival firms.
• Tie up rival in red tape for a considerable
  period of time.
• Add to vulnerability of CEO, whose prestige will
  be hurt if the merger/acquisition fails.