The foreign M&A domino effect

Business Standard, June 03, 2011

By Pradeep S Mehta

The CCI should be proactive in analysing mergers of international companies that have Indian subsidiaries to check anticompetitive practices

As the Competition Commission of India (CCI) gears up to implement merger regulations from June 1, it should also take a close look at international mergers that can have a potential impact on the Indian market. These mergers may not be happening in India but as a consequence their subsidiaries in India would need to merge because their parents have already married . India is a huge growing economy and thus many international mergers are bound to have an impact on the country.

For instance, in April 2011, the media were awash with news that the US Department of Justice(DoJ) – one of the two competition authorities in the US, the other being the Federal Trade Commission – had approved the acquisition of ITA Software Inc by Google, subject to a few conditions. First, that Google should continue developing ITA’s software products and license them to travel vendors on reasonable terms. Second, to build an internal firewall to prevent Google from gaining access to commercially-sensitive information of travel vendors licensing ITA’s products. And third, it should refrain from entering agreements with airlines that would deprive travel vendors of flight information. These conditions were imposed after the DoJ noted that several competition concerns could arise in the US market if Google takes advantage of its ownership of ITA to engage in anticompetitive behaviour.

Though the US market was protected by the DoJ conditionalities, services for Google and ITA are also offered to Indian customers. Unfortunately, the DoJ prescription cannot prevent Indian consumers from being abused. ITA Software technology is widely used by domestic and international airlines, online and traditional travel agents including those in India. Besides, Indian consumers also travel to the US. This is done in competition with several other agents who can easily find themselves out of business if Google were to unleash its supremacy to force other travel agents, in India and elsewhere, out of business. Indian players thus also need to be protected by the CCI.

Like many competition authorities around the world, the CCI, too, is empowered to take action on mergers that are consummated in other countries, but have effects in India. Section 32 of the Competition Act, 2002 has empowered the CCI to regulate such mergers. The competition authorities were mostly given this power under a concept known as the “effects doctrine”, which acknowledges that anticompetitive outcomes can emanate from behaviour that has its roots outside a country’s borders, hence the need to protect consumers against their likely harmful effects.

Such powers have already been used by other competition authorities to protect domestic consumers from abusive conduct emanating from mergers beyond the geography of focus. In 1997, two US-based aircraft manufacturers – Boeing and McDonnell Douglas – that had obtained approval by the US Department of Justice were informed by the European Commission that they could only go ahead with the merger if some conditions were followed. This despite the fact that the companies were based in the US, outside the European Union (EU). Following the merger, airlines had a choice of only two aircraft manufacturers, the other being the European Airbus Industrie. Like all other countries in the world, India, too, has a limited choice in the range of aircraft that can offer big airplanes.

Similarly, there are many cases in which the CCI could have taken action if it had been operational and willing to use its extraterritorial reach. In 2006, Adidas (the German athletic apparel and the world’s second-largest sports goods maker after Nike) acquired Reebok International (headquartered in the US) in a $3.1 billion deal. Although the transaction was analysed and approved in the EU, there are many countries like India where the two players had some presence through subsidiaries. Conseqently, the market situation became distorted. This was clearly a case of two companies, that were competitors, coming together to reduce the number of players in the market and enhancing market power as well as a possibility for its abuse. Thus the potential anticompetitive effect of this merger in the Indian market was not analysed because the two companies cornered a market they were previously competing for.

In April this year, two pharma giants Alcon and Novartis merged. Although Alcon’s headquarters is in the US, and Novartis is headquartered in Basel, Switzerland, both companies have a presence in India through subsidiaries. It would have been ideal for the CCI to also join in the analysis of this merger while it was being consummated at the parent level, but the merger provisions in India were not in force.

Earlier this year, there were reports that DuPont Denmark Holdings, a subsidiary of DuPont, US had acquired Danisco (headquartered in Copenhagen, Denmark), with the approval of the competition authorities. This was also a merger that the CCI had every right to investigate into using the effects doctrine, given that both companies have subsidiaries in India. In August 2010, the merger between a French oil and gas technology company, Schlumberger International and US-based Smith International was completed. Although the potential for anticompetitive practices were reviewed and the merger was approved by the US and European competition authorities, India was also affected because the two companies had a presence here. Under the effects doctrine, the CCI could have used its extraterritoriality provisions to ensure that potential anticompetitive practices arising from this marriage were analysed, but it was still fighting for notification of its merger provisions.

Although in some cases local subsidiaries could notify the CCI once the parent companies merged, it would be difficult to stop that merger since the companies would already be under the control of a globally-merged entity. This implies that competition authorities have to exercise the extraterritoriality provisions of their law ex ante to deal with a merger while the parent companies are merging rather than dealing with the fated merger of their subsidiaries at a local level. For example, although competition authorities in Malawi, Zambia and Zimbabwe found themselves investigating the Coca Cola Company and Cadbury-Schweppes and the Total and Mobil mergers, confined only to their local level the competition authorities lacked the ability to stop them since their parent companies had already married. They could only impose a few conditions that are still troublesome in some countries.

Although the CCI is yet to launch its merger analysis activity at the local level, there is nothing that can stop it from exercising its mandate in challenging mergers at the global level. Therefore, the CCI should be proactive and exercise vigilance by guarding against global mergers that are likely to impact Indian consumers adversely, and join other competition authorities in investigating these mergers rather than waiting for their local subsidiaries to notify them.

Pradeep S Mehta Secretary General, CUTS International and Cornelius Dube of CUTS contributed to this article

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