A behind the curtain look at CCI’s analysis of M&A

July 06, 2021 2:08 PM

Within a decade of starting operations, the CCI is being globally recognised as a mature and world class regulator.

Observing that the inquiry initiated by the CCI cannot be crushed at the initial stage, the HC on July 23 had described the approach of both the e-commerce firms as ‘an attempt to ensure that the inquiry does not attain finality’.Observing that the inquiry initiated by the CCI cannot be crushed at the initial stage, the HC on July 23 had described the approach of both the e-commerce firms as ‘an attempt to ensure that the inquiry does not attain finality’.

By Dhanendra Kumar and Ram Tamara

An earlier article on the completion of a decade of M&A review by the CCI highlighted that it has cleared 98.8% of M&A filings within 20 days on average, without blocking any. Additionally, it recently introduced the innovative “green channel” that allows parties to file for automatic approval if they are convinced, based on their self-assessment, that the transaction would not raise any competition concerns. Under this route, 30 cases have been approved. Within a decade of starting operations, the CCI is being globally recognised as a mature and world class regulator.

So, what happens at the CCI before a decision is made? Behind the scenes, the CCI undertakes rigorous economic analysis to assess the likely competition impacts of the transaction in addition to understanding the characteristics of the market. Unlike anti-trust enforcement, where the focus is on the economic impact of conduct that is alleged to have already taken place (ex-post), economic analysis is ex-ante in merger control, like crystal ball gazing!

There are well-defined economic analyses to define the contours of the market for assessment, assess pre and post-merger market power – ability of a firm to act unilaterally unconstrained by its competitors – and the likely conduct of the newly merged entity. These include, the hypothetical monopolist (SSNIP test), to assess whether the parties can increase prices by a small but significant amount (usually 5%) without losing revenues, for market definition; the Herfindal Hirschmann Index (HHI) for market concentration; merger simulations and upward pricing power indices (UPPI) – which measures whether the merged entity can increase prices – to assess impact of post-merger conduct.

In terms of market definition, CCI has used accepted methodologies, following the advanced competition law jurisdictions – it used, the Elzinga-Hogarty shipments test – that considers the movement of the product in question from and into a market/region – to define geographic markets in the Holcim-Lafarge merger; defined geographic markets in the Jet-Etihad transaction based on origin-destination airport pairs; used catchment area analysis – distance consumers were willing to travel to access watch movies – to define the geographic market in PVR’s acquisition of certain DT multiplexes; defined geographic markets based on administrative/regulatory circles in the Vodafone-Idea merger; used substitution among active pharmaceutical ingredients to define product markets in the Sun-Ranbaxy merger.

The CCI has similarly kept pace with the advanced jurisdictions in market definition for new and evolving digital markets – search engines, social media, fintech, e-commerce, etc. recognizing that network effects and innovation drive market evolution.

To assess market concentration in the defined relevant product and geographic markets, the CCI uses the HHI – which is the sum of the squared market shares of the firms in the relevant market. While the U.S and the EU provide HHI thresholds for concentrated, moderately concentrated and not-concentrated markets, CCI does not provide any. One can however infer these thresholds from the approximate market shares of parties in transactions where structural or behavioural remedies have been imposed by the CCI.

Pre and post market shares and HHI, can guide parties on the type of notification – Form I or Form II -and remedies to address high post transaction market shares and concentration. Pre-filing consultation (PFC) with CCI can also help in this regard.

The Competition Act sets out various criteria to assess market power of the merged entity, including whether the transaction will erect barriers to entry, reduce buyers’ bargaining power, result in coordination among the firms in the market, result in unilateral action, etc. While some of these are qualitative assessments, merger simulation and UPPI quantify the likely impact of the transaction on prices and output.

If it is determined that the transaction would likely have appreciable adverse effect on competition, remedies can be put in place to reduce such concerns. Remedies can be structural – usually divestment of certain assets of the merged entity to reduce market shares – or behavioral –curbs on certain behavior relating to prices, output, or contractual arrangements with suppliers or customers. CCI approved the Holcim-Lafarge merger subject to Lafarge divesting its plants in Jojobera (Jharkhand) and Sonadih (Chattisgarh), and instructed behavioral remedies in PVR/DT relating to commitments for non-expansion in key geographies such as Noida, Gurgaon, and South Delhi for a specified period.

In the last ten years, the CCI has through its orders conveyed the process and the economic logic it follows while assessing M&A. Its track record on approvals, has created regulatory certainty that is crucial to foster an enabling business environment and new investments.

(The above is for general information only, for specific needs, professional guidance must be sought)

(Kumar was the first chairperson of CCI and Tamara is vice president at Nathan Associates, a consulting firm. The views expressed are personal and do not represent that of the organisations or Financial Express Online)

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