The Treatment of Efficiencies in Merger Review: An International Comparison

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2 Australia

2.1 General Background

Competition law in Australia is provided for in the federal Trade Practices Act 1974 (hereafter, in this chapter, the "Act") which applies in all Australian states and territories. In broad terms, the Act covers anti-competitive and unfair market practices, mergers or acquisitions of companies, product safety/liability, and third party access to facilities of national significance.

The Australian Competition and Consumer Commission (the ACCC) was formed on 6 November 1995 by the merger of the Trade Practices Commission (TPC) and the Prices Surveillance Authority.³⁶ As an independent statutory authority the ACCC administers the Act³⁷ which applies to virtually all businesses in Australia. The ACCC is the only national agency dealing generally with competition matters and the only agency with responsibility for enforcement of the Trade Practices Act.

The review of mergers in Australia is provided for in s. 50 of the Act, which prohibits mergers that "would have the effect, or be likely to have the effect, of substantially lessening competition in the market". Therefore, as is the case in the United States and Canada, the Act provides for an SLC test in merger review. While there is no explicit provision for the incorporation of efficiency considerations in the Act, these can come up (and do come up) as part of a public benefits test under an application for authorization. Parties to a merger may seek authorization from the ACCC to proceed with their merger (under s. 88 of the Act) notwithstanding that there may be an adverse effect on competition, but the ACCC may not grant that authorization "unless it is satisfied that the proposed acquisition would result, or be likely to result, in such a benefit to the public that the acquisition should be allowed to take place." pursuant to s. 90(9) of the Act.

The ACCC's decisions regarding authorizations can be appealed before the Australian Competition Tribunal (the Tribunal), which is located under the Federal Court of Australia.³⁸ The Tribunal is a review body. A review by the Tribunal is a re-hearing or a re-consideration of a matter and it may perform all the functions and exercise all the powers of the original decision-maker for the purposes of review. It can affirm, set aside or vary the decision.

2.2 Merger Review Process

There is no formal requirement that parties prenotify their intentions, however, parties commonly advise the ACCC prior to entering into agreements of proposed acquisitions and mergers. There is certainly some risk if the parties proceed with a merger that is found to violate the Act - penalties under s. 76(1) of the Act can reach up to A$500,000 for an individual and A$10 million for a corporation.³⁹

In effect, there are three ways a merger can be reviewed under the Act in Australia;⁴⁰ (i) through an informal review process with the ACCC; (ii) through an application by the parties (to the ACCC) for authorization; or (iii) by contested proceedings (when the parties to a merger have not received an authorization) in which the ACCC can seek an injunction or (if completed) a divestiture. These three approaches for treating mergers will be explained separately below.

2.2.1 Steps in the Assessment

The assessment process that the ACCC initiates whether for an informal consideration, in a case of a potential breach of s. 50 and in the assessment of an application of authorization, is set out in chapter 5 of the Merger Guidelines. The Merger Guidelines has set up a 5-stage review:⁴¹

1. Market definition - The relevant market must be defined with regards to product, functional, geographic and time dimensions. Information on defining markets is found in paragraph 5.34-5.86 of the Merger Guidelines 1999. If the market is deemed to be substantial, a further analysis is needed, but if the market is not substantial, the merger will be allowed to proceed. Substantiality has not been considered by the courts in this connection, but in other contexts it has been determined to mean 'real or of substance'. Essentially, the concept of substantiality is a matter of assuring that de minimis matters are disregarded.

2. Market concentration is the next stage. As in Canada, the mere fact that the merger's concentration level is above the threshold does not mean that there is an automatic inference of a substantial lessening of competition. If an acquisition is above the thresholds given, a need for further quantitative analysis will be conducted. The Australian thresholds are as follows:

(a) If a merger results in a post-merger combined market share of the four largest firms (CR4) of 75% or more and the merged firm will supply at least 15% of the relevant market, further investigation will be initiated, or;

(b) If the merged firm will supply 40% or more of the relevant market.

The two thresholds are designed to capture both mergers that have the potential of creating coordinated market power as well as unilateral market power. If a merger does not come within the thresholds it can proceed as proposed.

3. Insufficient import competition to ensure effective competition as a discipline on the merged firm will be considered. If such competition is not present, the ACCC will conduct further investigation into the market structure. Where import competition is sufficient the merger can proceed.

4. The likelihood of new entrants along with the existence of barriers to entry will be analyzed. If new entry to the market is likely, and the barriers to entry are low, the merger is not likely to lessen competition substantially. In absence of likely entry to the market, other factors must be considered.

5. If the ACCC concludes that a merger is likely to substantially lessen competition, it will consider other factors, which might alleviate the impact on competition. Where appropriate it will accept effective enforceable undertakings.

2.2.2 Informal Clearances

Parties to a merger are encouraged to engage in informal discussions with the ACCC as early in the process as possible. Discussions can be on a confidential as well as public level, although the ACCC cannot give final and binding views until market participants have been consulted. The parties must provide the ACCC with background information on the parties; the structure of the market, including relevant information on other major participants; the commercial rationale for the merger; and an analysis of the proposed acquisition in light of the factors in s. 50 (3) of the Act.⁴²

According to Williams and Woodbridge (forthcoming), the ACCC conducts these informal reviews in such a manner so as "to consider the matters a court would consider under s. 50."⁴³ Where the acquisition appears to be likely to breach the Act, the ACCC will require the firms to provide additional information, and the ACCC can use its powers under s. 155 to secure information if the firms are uncooperative. The ACCC will be gathering information from, and consulting with, other participants in the market, such as competitors, suppliers, customers, industry associations, government agencies and departments, overseas agencies, consumer groups, and trade unions.⁴⁴

Most mergers do not raise competitive concerns and are dealt with by the Merger Review Committee, which then reports its findings to the ACCC. Mergers that raise concerns are handled by the full ACCC.

For informal inquiries in confidentiality, the ACCC usually gives a response within 2-3 weeks. Where market inquiries are necessary for the ACCC to give a response the timelines can stretch up to 8 weeks, depending on the complexity of the matter.⁴⁵

The parties have a number of options after receiving an informal response from the ACCC. Most informal considerations are cleared with a declaration that the merger does not breach the Act, in which case the parties can proceed with the merger. If the ACCC opposes the merger the parties have four options. First, the parties can choose to abandon the proposed merger. Second, the parties can modify the proposal to address any of the likely anti-competitive issues, formally or informally by way of undertakings, s. 87B of the Act, subject to approval by the ACCC. Third, the parties can apply for an authorization if they consider themselves able to establish that the merger will result in a net public benefit, s. 90(9). Or fourth, seek to complete the acquisition without the ACCCs informal approval, which puts them at risk for a s. 50 litigation process.

If the ACCC and the parties cannot agree on appropriate undertakings to remedy a merger problem, the ACCC will seek to stop the acquisition by way of an interim injunction from the Federal Court, under s. 80. In some rare cases the ACCC will seek an ex-parte injunction (i.e. without notice to the parties), if it finds it likely that notice to the parties may enable them to take some step to defeat the effectiveness of any injunction granted (e.g. when parties have declined undertakings, and there is a chance that they might close the deal before the injunction).⁴⁶

If the firms consider that there are significant public benefits stemming from the merger, the merging firms can apply for an authorization (see below), which is a process of granting immunity, on public benefit grounds, for mergers and acquisitions that would or might otherwise breach s. 50 of the Act.⁴⁷

The vast majority of mergers are handled by an informal consideration by the ACCC, and the decisions of the Commission are not published. Williams and Woodbridge (forthcoming)⁴⁸ identify a number of shortcomings with regards to the informal consideration process. First, the process is not based in the Act, but is outlined in the Merger Guidelines by the ACCC with their interpretation of s. 50 of the Act. The authors find that this gives a high level of uncertainty to the process. Second, the reasons behind decisions are not published, which creates a lack of formal guidance by means of precedent. As well as increasing the uncertainty of the process, the limited guidance enhances the ACCC's discretionary position. Third, the authors find that the lack of information gives the ACCC significant bargaining power, permitting it to engage in "administrative arm-twisting".⁴⁹ Williams and Woodbridge recognize that the secrecy and usually rather speedy decisions made in an informal consideration to be the main reasons for its popularity compared to the much less frequently used processes of applying for authorization and litigation under s. 50. Both applications for authorization and litigation under s. 50 involve a high degree of public exposure and are time consuming.

2.2.3 Application for Authorization

Much attention has been paid to the Australian system of authorization, however the the authorization option has not proven popular to date. In fact, since 1995 only 9 applications for authorization have been treated.

The Merger Guidelines defines an authorization as "? the granting of immunity, on public benefit grounds, for mergers and acquisitions which would or might otherwise contravene ss. 50 or 50A of the Act."⁵⁰ An authorization is given for a period of time, and can be conditional and subject to undertakings. The Tribunal can review the ACCC's decision. It is therefore within the authorization process' "public benefits test" that the ACCC can formally consider efficiencies.

Once parties have lodged their application the ACCC has 30 days, which can be extended to 45 days, to render a decision. Requests for information can extend the period even further. Within this period time the Commission must gather information from market participants and other interested parties. The process is very public, and apart from information that has been allowed to remain confidential, all information is placed in the public register. This is different from the informal process described above.

The determination of the application is published along with the detailed evaluation of all the factors of the case. The evaluation will, as under the informal consideration, follow the framework set out in the chapter 5 of the Merger Guidelines (see chapter 2.2.1 above).

The Merger Guidelines lists the kind of information that an application (at a minimum) must entail, and the application must also clearly specify the claimed public benefit. General statements regarding benefits are not going to be considered, but must be supported by factual material. The ACCC recognizes that there are difficulties inherent in measuring benefits, but nevertheless stresses the importance of submitting claims that are probable, not just possible or speculative, and achievable in a foreseeable future.⁵¹

2.2.4 Litigation for Breach of s. 50

Since the Act came into force in 1974 there have only been four fully argued merger cases, and none of these have considered efficiencies. Furthermore, all four cases were argued under the dominance test, which has since been replaced by the SLC test. This creates a lack of precedent in the litigation of mergers for breach of s. 50. Consequently, very limited information on the litigation of mergers exists.

The process for finding a substantial lessening of competition is likely to follow the five-step system that the ACCC has set out in the Merger Guidelines, and will involve an analysis of all the factors set out in s. 50(3).

While there is not the same scope for introducing evidence on efficiencies that is provided by the public benefits test in authorizations, efficiencies might be relevant in a s. 50 analysis if they can be seen to have an impact on the level of competition in a market. The Merger Guidelines acknowledge that a merger might increase the competitiveness of the merged firm, and may therefore also increase (or not substantially lessen) competition in a market. Therefore efficiencies can be integrated in the framework of competition analysis, but is not to be considered a 'trade-off' against an SLC -- as it could potentially under an application for authorization. The ACCC finds that "the relevant question is the effect or likely effect of the merger on firms' abilities and incentives to compete in the relevant market, including any effects flowing from efficiencies."⁵² Williams and Woodbridge (forthcoming) also speculate that efficiencies may be relevant under s. 50 in regards to whether the lessening of competition is substantial, but they are cautions because of the lack of jurisprudence in this field.

2.3 Historical Context and Evolution of the Role of Efficiencies

Australia has had merger control legislation since 1906 in the Australian Industries Preservation Act, which imitated the United States Sherman Act. The Act had a short life and was abolished in 1909. In 1965 Australia enacted the Australia Act, based on the then United Kingdom Model, although without any explicit merger control provisions.⁵³ With the current Trade Practices Act 1974, Australia returned to the US model. Between 1974-77 the test used by Trade Practices Commission (now ACCC) for merger regulation was a competition test (substantial lessening of competition) rather than a market dominance test. In 1977 the Act was amended to adopt a market dominance test, but after a failed proceeding⁵⁴ the Trade Practices Commission was very cautious in resisting mergers. In 1986, s. 50 was slightly amended to control for redundant wording, and the market dominance test was reinforced. Also, the Act was amended with s. 50A, which regulates acquisitions outside Australia. The market dominance test was finally abolished in 1992 with the Trade Practices Legislation Amendment Act 1992, which changed the test back to a substantial lessening of competition test and the merger guidelines were amended to reflect the amendments of the Act. Only four mergers have been tried under s. 50, and all under the dominance criterion.

With the Australian merger review system being rather young, there is not much historical information on the evolution of the treatment of efficiencies to report. As stated above, none of the four merger cases litigated involved efficiencies. Also, efficiencies are only considered to be playing a small, and at the present, a fairly undefined role in a s. 50 analysis.

The current precedent for treatment of efficiencies in what could be denoted an efficiencies defense, is set in applications for authorizations, pursuant to s. 90(9), and the Tribunal's hearing of appeals on the same matters. The granting of authorizations for mergers has been part of the law since it was enacted in 1974. Section 90(9) and (9A)⁵⁵ sets out provisions for mergers to be authorized despite the likelihood of a merger substantially lessening competition pursuant to s. 50. It has not been clarified in the Act what determines a benefit to the public, nor how large a benefit must be, to clear a merger that is in breach of s. 50. This has been left for the ACCC and the Tribunal to decide. The authorization process gives us guidance on the wider concept of public benefit, and this will be treated below.

2.4 Definition and Measurement of Gains in Efficiency

Efficiency arguments under informal considerations and litigation for breach of s. 50 as interpreted by the ACCC, are generally the same and are explained together below. Following that, the rules for arguing efficiencies in an application of authorization are defined.

2.4.1 Efficiencies in Informal Considerations and in Litigation for Breach of s. 50

The Merger Guidelines express that efficiencies are to be dealt with under an application of authorization. Hence, parties that anticipate efficiencies playing an important part of clearing their merger should raise these arguments in an application for authorization, not under an informal consideration.⁵⁶ As mentioned above, the reasons behind decisions in informal considerations are not published, meaning there is very little information, apart from the ACCC's merger guidelines, to demonstrate the treatment of efficiencies.

As noted above, the ACCC nevertheless acknowledges that efficiencies can form part of the analysis if they contribute to enhance competition in the market. The Merger Guidelines indicate that:

"The weight and significance accorded to different types of efficiencies should be a function of their magnitude and probability, the degree to which they likely will enable the merged firm not only to be a better competitor but to enhance (or not lessen) competition and thus benefit consumers, and the delay with which these consumer benefits are to be realized."⁵⁷

It is clear from the quote that efficiencies in a s. 50 analysis can not be a defense to a merger that lessens competition. Efficiencies must be substantiated in order to ascertain their magnitude, and they must be probable. The less substantiated and probable the efficiencies are, the less likely it is that they will have any effect in the analysis. The claimed efficiencies must enable the merged entity to compete better and enhance competition in the market, thereby benefiting consumers. If there is any delay in this benefit reaching consumers, this will seemingly also give less weight to the claimed efficiencies.

Also, if efficiencies create a new or enhanced competitive constraint on the unilateral conduct of other firms in the market, or contribute to undermining coordinated conduct in the market, the merger is less likely to substantially lessen competition. If the efficiencies claimed "are likely to result in lower (or not significantly higher) prices, increased output and/or higher quality of goods or services, the merger may not substantially lessen competition."⁵⁸

The ACCC acknowledges that efficiencies cannot be precisely quantified, but will required strong and credible evidence that "such efficiencies are likely to accrue and that the claimed benefits for competition are likely to follow."⁵⁹

As indicated above, none of the four merger cases that have been litigated have dealt with the issue of efficiencies under a breach of s. 50.⁶⁰ Therefore, it is unknown at this point how the courts would treat efficiencies arguments. It would appear, however, that the courts will not engage in a balancing of efficiency benefits against a loss of competition. To the extent this might be possible, this is for the authorization process. For example, in Davids (1993) on a matter of an appeal of the ACCC's (at that time TPC) decision not to grant authorization one judge comments:

"Provisions such as s. 50 are not tools designed to enable the Court to strike a balance between the economic advantages that might flow from the economies of scale and other efficiencies resulting from a particular merger, on the one hand, and the economic detriments of the merger, such as increased prices that consumers may have to pay, on the other? Any such balancing exercise is for the Trade Practices Commission to carry out in dealing with an authorisation application under ss. 88(9) and 90(9), not the Court that has to consider whether s. 50 bars a particular merger."⁶¹

Further, Corones (1999) states that since efficiencies were mentioned in earlier versions of s. 50(3), but ultimately taken out of the provision, the courts could interpret this as the Parliament's intention not to treat efficiencies in a s. 50 litigation.⁶² In Arnotts⁶³ (one of only four mergers that have been heard by the Courts) the subject of economies of scale played a role, but the subject here related to market power that existed in market for biscuits.

Thus we conclude that the treatment of efficiencies in a s. 50 analysis, whether in the form of an informal consideration or litigation is apparently not very developed. We turn now to the subject of applications for authorizations.

2.4.2 Efficiencies in Applications for Authorization

As mentioned above, the Act does not define the concept of public benefit, but a number of cases relating to authorizations of mergers have treated the subject. Other cases, regarding other competitive restraints, have also given consideration to public benefit, and these give a good indications as to the Tribunal's and the ACCC's definition of public benefit.

As indicated, an authorization is a granting of immunity from an assessment under s. 50, where the ACCC finds that the merger creates public benefits that outweigh the detriment to competition. On the matter of what is "public" the Tribunal in the Re: Howard Smith Industries Ltd. case established that:⁶⁴

(a) the term "public" refers to the Australian public;

(b) the term "public" is wider than simply consumers and would permit consideration of the achievement of economies of scale even if the cost saving is not passed on to consumers through lower prices; and

(c) a benefit to shareholders through higher dividends may amount to a benefit to the public, but one that might be given less weight because it is not spread widely throughout the community.⁶⁵

There is also guidance with respect to what counts as a benefit. Some came in Re 7-Eleven Stores, which concerned a redetermination by the Tribunal of an authorization granted by the ACCC of a more flexible system regarding the distribution of newspapers. The Tribunal overturned the ACCC's determination, and states:

"Public benefit has been, and is, given a wide ambit by the Tribunal as, in the language of QCMA?, 'anything of value to the community generally, any contribution to the aims pursued by society including as one of its principal elements (in context of trade practices legislation) the achievement of the economic goals of efficiency and progress'. Plainly the assessment of efficiency and progress must be from the perspective of society as a whole: the best use of society's resources. We bear in mind that (in the language of economics today) efficiency is a concept that is usually taken to encompass 'progress': and that commonly efficiency is said to encompass allocative efficiency, production efficiency and dynamic efficiency."⁶⁶

The Merger Guidelines report that the Tribunal holds that "public benefits in the form of increased efficiency and better resource usage, resulting in lower unit costs, are most important in the consideration of applications for the authorization of mergers (emphasis added)."⁶⁷ These can consist of economies of scale and scope, more efficient technology resulting in reduced input or energy costs or combining complementary R&D facilities.⁶⁸

It is clear the public benefit has a very broad definition. In Re ACI Operations⁶⁹ the ACCC accepted that there were public benefits in the applicant's acquisition of the only other glass container manufacturer in Australia. The ACCC listed a number of points, which in its view could also constitute public benefits when considering authorizations. These involved economic development, promotion of industry cost savings, fostering business efficiency and industrial rationalization, which are related to efficiencies. Other issues, which revolve more around social goals, could also constitute public benefits. These include expansion of employment or prevention of unemployment, and employment growth in particular regions. Improvement of product choice, quality, safety and information for consumers are relevant in assessing public benefits, as well as assistance to small businesses with regards to guidance on costing, pricing or marketing initiatives to promote competitiveness. Import replacement and growth of export markets are given a fairly important role, and are also the only factors represented in the Act that must be considered, s. 90(9A).⁷⁰ Lastly, steps to protect the environment are also considered a public benefit.

It is also important that claimed efficiencies are durable. In the recent Australian Pharmaceutical case⁷¹ the ACCC found that although efficiencies were considerable, they were "likely to be dissipated over time. The loss of competitive tension in the market is likely to result in a lessening of the dynamic elements driven by competition and that greatly influence market development." The market participants would be reduced from three to two, had the merger been allowed.

It seems clear that the competitive impact of the merger must always be considered, even in the presence of other accepted public benefits. In QCMA the Tribunal determined that in order to assess the benefits to the public it is necessary to assess the competitive impact of the merger. The case concerned a merger between flourmills. It indicated that:

(a) "A merger may positively enhance the competitive process and thus give rise to a substantial benefit. ?

(b) But the benefits claimed may not mention competition. ? Nevertheless, our appraisal of all the listed claims must depend upon our appreciation of the competitive functioning of the industry, with and without the merger. ?

(c) A claimed benefit may in fact be judged to be a detriment when viewed in terms of its contribution to a socially useful competitive process. ?

(d) ? the substantiality of benefits needs to be measured against likely anti-competitive effects (and other detriments).

(e) Quite generally, the Tribunal's role is seen as forming one of the means of achieving the policy objective of the Act, namely the preservation and promotion of useful competition."⁷²

Significantly, this case and others also revealed that the Tribunal was evolving what Williams and Woodbridge (forthcoming) call a "future-with-and-without test". In such a test, the level of competition post-merger is compared to the level of competition that would exist in the future if the merger were not permitted. The relevant comparison is not with past levels of competition if they cannot be expected to remain the same.⁷³

It is also clear that it is not necessary to establish an SLC before the public benefits can be considered. The Tribunal has stated that in granting an authorization it is not appropriate or necessary to express any views, as to whether the merger would likely breach s. 50, but the framework that is established in chapter 5 of the Merger Guidelines still useful in assessing the competitive effects of the merger.

2.5 The Methodology and Welfare Standard Employed

2.5.1 Informal Considerations and breach of s. 50

According to the Merger Guidelines efficiencies are only considered in the competitive effects analysis when claimed efficiencies enable the merged firm to enhance competition in the market. In the quote given (see chapter 2.4.1.) the enhanced competition must "thus benefit consumers" and if there is any "delay with which these consumer benefits are to be realized" this will be counted against the efficiency claim. Also, the efficiencies must benefit competition, and not as under an application for authorization benefit the public.

Here the welfare standard appears to be a consumers' surplus standard, as defined in chapter 1 above.

2.5.2 Application for Authorization

Miller (2002) says that the methodology in satisfying the s. 90(9) is for the ACCC to conduct a weighing of the detriments and benefits. The ACCC has not specifically designated a weighing of resulting benefits to the public against resulting detriment, the anti-competitive effect. The test is whether the ACCC is satisfied that there is a net or overall benefit after any detriment to the public has been taken into account.⁷⁴

In QCMA, the Tribunal stated:

"We accept that the statute calls upon us to adopt a balance-sheet approach: we must balance the likely benefits and detriments flowing from the acquisition" ⁷⁵

There is some suggestion that the relevant standard under authorizations could be a total surplus standard as described above in chapter 1. Corones (1999) concludes that as "long as the claimed public benefit involves a reduction in social costs, it does not matter that the cost saving is not passed on to consumers in form of lower prices; however, it would be necessary to have regard to how widely the cost savings is shared among the group of beneficiaries."⁷⁶ The Tribunal in QCMA indicated that private benefits (e.g. to the shareholders of merging firms) could be considered as public benefits. And in the 7-Eleven Stores case quoted above (in section 2.4.2), the Tribunal stated that "the assessment of efficiency and progress must be from the perspective of society as a whole: the best use of society's resources."

Of course it is one thing to say that shareholders count and another to go all the way to a total surplus standard in which a dollar of surplus to a shareholder carries the same weight as a dollar of consumer's surplus. Our view of the Australian experience is that, while the door may be open to a total surplus approach in authorization cases, it is far from clear that the ACCC and Tribunal are prepared to go this far.⁷⁷

However, it is clear that the welfare standard employed by the ACCC and the Tribunal in applications for authorizations is different from that employed in other merger cases.

2.6 Efficiencies Gains and Consumers

As just suggested, it would appear that there is no absolute requirement that efficiency gains are passed on to consumers, but consumers are a relevant factor. The Merger Guidelines state that in granting authorizations, it is relevant to analyze how reduction in competition affects the ultimate consumers.⁷⁸

In Howard Smith, in which an application for an authorization of a joint venture between towing companies was denied, the Tribunal stated:

"If a merger is likely to result in the achievement of economies and a considerable cost saving in the cost of supplying a good or service this might well constitute a substantial benefit to the public, even though the cost saving is not passed on to the consumers in the form of lower prices. Nevertheless, if such a merger benefited only a small number of shareholders of the applicant corporations through higher profits and dividends, this might be given less weight by the Tribunal, because the benefits are not being spread widely among the members of the community."⁷⁹

The result of Howard Smith appears to be that consumers need not benefit from the merger, but benefits do need to reach more than the shareholders of the merged firm. Also, in Rural Traders⁸⁰ it was accepted that private benefits are not irrelevant,⁸¹ resulting in the ACCC stating in the Merger Guidelines that benefits to the public are not limited to benefits to consumers. Furthermore, the ACCC acknowledges that even if a merger creates economies of scale or other resource savings, these might not immediately be available to consumers through lower prices. The fact that there is an overall resource saving in the community is of interest.

In the recent case, Australian Pharmaceutical⁸² the ACCC denied the authorization, concluding that efficiencies would likely "be retained by the merged entity for its benefit, and the benefit of its shareholders." Efficiencies achieved must benefit more than its shareholders.

In Dupont⁸³ the resource savings and efficiencies flowing from the merger in the production of sodium cyanide, which involved savings in electricity and capital, and significant environmental benefits, were unlikely to result in lower prices for the consumers. The authorization was granted despite leaving only three firms, each with about 30% market share, to compete with a very low level of import competition.

To sum up on this point, then, we note that in applications for authorization efficiencies need not be passed on to consumers. In an informal consideration, the Merger Guidelines demand that efficiencies included in the analysis of a mergers effect on competition must enhance competition in ways that benefit the consumers through lower prices, wider choice of products or better quality.

2.7 Merger specificity

The Merger Guidelines require that the claimed efficiencies are merger specific, when concerned with applications for authorizations, hence parties must clearly set out how these are related to the merger:
"Applications for authorisation should clearly set out the claimed public benefits, how they relate to the proposed merger, their likely magnitude and timing. It is often difficult to measure public benefits in precise quantitative terms. Nevertheless, general statements about possible or likely benefits will not be given much weight unless supported by factual material." ⁸⁴

2.8 Attainability of efficiencies in a less anti-competitive manner

The Merger Guidelines states that "(t)he phrase 'not otherwise available' previously formed part of the public benefit test. This is no longer an absolute requirement." There must still be a connection between the benefits claimed and the merger. It is the ACCC's view that it is still relevant whether the benefits are otherwise attainable, when comparing the scenarios existing with or without the merger, in which case benefits attainable in a less anti-competitive manner would receive less weight in the analysis. ⁸⁵

The most recent application for authorization in Australian Pharmaceutical, ⁸⁶ concerned a merger between two full-line pharmaceutical wholesalers, resulting in a combined market share of 60% in some markets, and leaving only one remaining competitor. In its denial of the application, the ACCC indicated that the parties failed to prove that the claimed benefits, which included enhanced efficiency in the distribution of pharmaceuticals, would not be achievable without the merger.

Increased bargaining power is considered to be pecuniary savings and merely a transfer of wealth, and cannot in itself be considered a public benefit. Such savings were rejected in Wattyl, ⁸⁷ where the second largest paint company wanted to acquire the third largest. High barriers to entry and little import competition in a highly concentrated market contributed to that decision.

2.9 Elimination or Near Elimination of Competition

The Merger Guidelines does not directly specify that gains in efficiency can justify or offset the elimination or near elimination of competition. However, the ACCC may be open to the possibility. In a recent speech, Commissioner Ross Jones reported that:

"? in granting authorisation the Commission is giving immunity from a significant economic principle. It is allowing firms to substantially lessen competition, and thereby gain substantial market power, even monopoly power." ⁸⁸

Some cases give evidence to Commissioner Jones' statement. In Davids (1996), ⁸⁹ an application for an authorization to acquire QIW was successful. The merger was the last of a number of concentrations in the independent grocery wholesaler market, the previous one being a vertical integration of retail stores. The merger was allowed because of public benefits found , despite the fact that it would leave Davids as the only independent wholesaler in the market. Among the benefits to the public were considerable savings in warehousing and distribution facilities, advertising and improved generic product ranges. Although competition was substantially lessened in the independent wholesaler market, the merger would enable the independent retailers to enhance their competition with the supermarket chains.

In the case of Pasminco Ltd,⁹⁰ the joint venture between Australian Mining & Smelting Ltd and North Broken Hill Holdings Ltd. was allowed due to enhanced international competitiveness and an increase in the value of exports. This was despite the fact that the merger would leave only one producer in the Australian market, which would then be in a position to dominate the market. The ACCC found that a number of efficiencies flowed from the joint venture, among which were rationalization benefits from production synergies.

In Adelaide Brighton,⁹¹ it was determined that the merger would substantially lessen competition in one market in Western Australia, but give rise to public benefits from rationalizations, and an increase in competition in other markets in Australia, (also considered a public benefit).

In Australian Pharmaceutical, the reduction of competitors from three to two was considered to reduce the competitive tension in the market. The claimed efficiencies were considered to be likely in the magnitude calculated by the parties, and would enhance competitiveness in other areas, such as import replacement or increased exports.

The conclusion is that at the very least, the elimination of competition in one or more markets may be allowed if the associated efficiencies enable the merged firm to better compete in other markets, either domestically or internationally.

2.10 Efficiencies in the Review of other Competitive Restraints

Horizontal anti-competitive agreements are covered by s. 45 of the Trade Practices Act, which prohibits agreements between competitors, which have the purpose or effect of fixing, maintaining or controlling prices.⁹² Other agreements which entail elements of price fixing or market sharing as an ancillary restraint are not prohibited per se, but will be prohibited if they substantially lessen competition. In order for an agreement to be allowed the parties must show that the purpose of the agreement will give the parties some sort of benefit, which improves their ability to supply goods or services to the market. The benefit must be shared between the parties, and not benefit just one party. Purposes, which are commercially necessary, appropriate or reasonable, are acceptable. All types of agreements can be authorized by the ACCC upon application as seen above in the case of mergers. It must be proven that there are benefits to the public and that the benefit would outweigh the detriment to the public flowing from the agreement, pursuant to s. 90(6). As indicated, when assessing benefits to the public, the most important element is efficiency.

Likewise, engagement in exclusive dealing⁹³ is prohibited if the purpose or effect is to lessen competition substantially, pursuant to s. 47 of the Act. As with anti-competitive agreements above, exclusive dealing will not be prohibited if the purpose of the arrangement is not anti-competitive. Exclusive dealing can be allowed regardless of it breaching s. 47 if the ACCC accepts a notification, which is a process similar to that of applying for authorization. Contrary to application of authorization, the party notifying a conduct does not have to await the ACCC's decision to accept the notification, but can notify after the conduct has been commenced. The ACCC can revoke immunity for exclusive dealing if it considers the conduct substantially lessens competition and that in all the circumstances there appears to be no countervailing public benefit; or any public benefit does not outweigh the detriment to the public resulting from the lessening of competition.

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³⁶ General Information on the Act from Rowley & Baker (2000).

³⁷ See Appendix A for relevant provisions of the Act.

³⁸ Information on the Federal Court of Australia is from: http://www.fedcourt.g ov.au/aboutct/aboutct_act.html

³⁹ Merger Guidelines, June 1999, para. 4.27-28.

⁴⁰ See, e.g. Williams and Woodbridge (forthcoming).

⁴¹ Merger Guidelines, June 1999, Figure 1, p. 29 and para. 6.35.

⁴² Merger Guidelines, June 1999, para. 4.9

⁴³ Which is not the same as how these matters might be considered by the ACCC under an application for authorization.

⁴⁴ Merger Guidelines, June 1999, para. 4.11

⁴⁵ Merger Guidelines, June 1999, para. 4.14

⁴⁶ Merger Guidelines, June 1999, para. 4.24-25

⁴⁷ Merger Guidelines, June 1999, para. 6.1 and 5.33.

⁴⁸ Williams and Woodbridge (forthcoming), p. 13.

⁴⁹ Williams and Woodbridge (forthcoming), p. 21.

⁵⁰ Merger Guidelines (1999), para. 6.1.

⁵¹ Merger Guidelines, 1999, para. 6.48.

⁵² Merger Guidelines, June 1999, para. 5.17.

⁵³ Rowley & Baker (1996) and Corones (1994).

⁵⁴ Trade Practices Commission v. Ansett Transport Industries (Operations) Pty Ltd (1978) 32 F.L.R. 305.

⁵⁵ Subsection (9A) was inserted pursuant to the1992 amendments to the Act.

⁵⁶ This is the official line on how information on efficiencies is to be introduced. However, since efficiency arguments would be relevant in an application for authorization, it is possible that ACCC officials listen to them as part of the informal clearance process. The point of such informal processes is typically to achieve the same ends as the formal processes in a more expeditious and less costly (and perhaps also more confidential) manner. If the alternative formal process is authorization, ACCC officials might consider the public benefits of the merger in an informal review. However, we have no confirmation that this is indeed what happens.

⁵⁷ Merger Guidelines, 1999, para. 5.17. The ACCC's quote stems from a report by the Federal Trade Commission Staff: "Anticipating the 21st Century: Competition Policy in the New High-Tech Global Marketplace", Antitrust & Trade Regulation Report, Vol. 70 No.1765, Special Supplement, 6 June 1996, p. S-36.

⁵⁸ Merger Guidelines, 1999, para. 5.172-3

⁵⁹ Merger Guidelines, 1999, para. 5.174

⁶⁰ Williams & Woodbridge (forthcoming).

⁶¹ Davids Holding Pty Ltd v Attorney-General (1994) 49 FCR 221; ATPR 41-304 at 42,098:

⁶² Corones (1999), p. 220.

⁶³ Re Arnotts Ltd v. TPC (1990) 24 FCR 313

⁶⁴ (1977) 28 F.L.R. 385.

⁶⁵ See Rowley and Baker (2000), p. 3-9.

⁶⁶ Re 7-Eleven Stores Pty Ltd (1994) ATPR 41-357, and see Miller (2002), p. 756.

⁶⁷ Merger Guidelines 1999, para. 6.39.

⁶⁸ See, e.g., the case Email Ltd./Simpson Ltd. ATPR (CCH) 50-001 (1981). The case is discussed in Griffin and Sharp (1996), at 680.

⁶⁹ Re ACI Operations Pty Ltd (1991) ATPR (Com) 50-108

⁷⁰ As of the 1992 amendment of the Act. Import and export considerations have been mentioned in the Guidelines since 1986.

⁷¹ Re Australian Pharmaceutical Industries Limited and Sigma Company Limited, A30215, 11 September 2002

⁷² Re Queensland Co-operative Milling Assn Ltd (1976) ATPR 40-012, see Merger Guidelines, June 1999, para. 6.33.

⁷³ The Merger Guidelines indicate that the current method used by the ACCC, involves "comparing the position that would apply in the future were the proposed acquisition not given effect, with the position in the future which would arise if the proposed acquisition were given effect." Merger Guidelines, June 1999, para. 6.29.

⁷⁴ Miller (2002), p. 764.

⁷⁵ Merger Guidelines, June 1999, para. 6.31.

⁷⁶ Corones (1999), p. 55.

⁷⁷ The discussion of the Howard Smith case below also suggests that shareholders might not get full weight in all cases.

⁷⁸ Re Rural Traders Co-operative (WA) Ltd. & Ors. (1979), ATPR 40-110, see Merger Guidelines, June 1999, para. 6.36.

⁷⁹ (1977) 15 ALR 645, See Corones (1994) p. 375.

⁸⁰ Re Rural Traders Co-operative (WA) Ltd. & Ors. (1979), ATPR 40-110.

⁸¹ Miller (2002), p. 757

⁸² Re Australian Pharmaceutical Industries Limited and Sigma Company Limited, A30215, 11 September 2002

⁸³ Re Dupont, CA 95/23-24.

⁸⁴ Merger Guidelines, June 1999, para. 6.49.

⁸⁵ Merger Guidelines, June 1999, para. 6.37.

⁸⁶ Re Australian Pharmaceutical Industries Limited and Sigma Company Limited, A30215, 11 September 2002

⁸⁷ Re Wattyl (Australia) Pty Ltd., Courtaulds (Australia) Pty Ltd. (1996) ATPR 50-232.

⁸⁸ Commissioner Ross Jones speech at The Thirteenth Annual Workshop of The Competition Law and Policy Institute of New Zealand: "The Rationale for Merger Laws", August 2nd 2002, p. 17.

⁸⁹ Re Davids Limited in relation to its proposed acquisition of QIW Limited, Case No: CA96/3.

⁹⁰ (1988) ATPR (Com.) 50-082.

⁹¹ Re Adelaide Brighton/Cockburn Cement, A90682, 30 April 1999.

⁹² Corones (1999), pp. 155-184.

⁹³ Corones (1999), pp. 241-271.