PCC merger review as tool for competitive markets, consumer welfare
by Atty. Johannes Benjamin R. Bernabe
April 17, 2018
Of all the powers vested in the Philippine Competition Commission (PCC), none has attracted as much attention as its power to review mergers and acquisitions (M&As). Large businesses have had to not only conform with new regulations but contend as well with novel standards of scrutiny and approval. Small- and medium-sized enterprises have looked to the PCC’s exercise of this power for assurance that competition in or for the market will be maintained. Consumers expect this review would ensure choice, reasonable price and quality of the products they use.
The Philippine Competition Act (PCA) provides for compulsory review of M&As. Transacting parties whose transaction is valued above the PCC’s threshold must be notified before consummation of their deal. Some countries, notably Singapore and Australia, do not require compulsory notification before consummation and choose to review transactions on an “as needed” basis. Many other economies, such as the US, Japan, South Africa and Brazil, follow a compulsory system like ours. These countries, like the Philippines, put a premium on legal predictability and certainty as indispensable elements to doing business, and are averse to the risk of subjecting a transaction to review and possible prohibition and unwinding months or even years after they have been consummated.
The PCA initially set the threshold for compulsory notification at a “transaction value” of P1 billion. So it can hone in on transactions more likely to pose harm on the market, the PCC subsequently adopted a two-fold test: “size of party”, which pertains to the total revenues or asset size of one of the transacting parties, is now pegged at P5 billion; and the “size of transaction”, representing the assets or revenues of the acquired entity, has been fixed at P2 billion.
These rules, however, only tell us whether a transaction should be notified. They don’t begin to tell us whether the transaction is likely to substantially lessen competition.
Even if the thresholds for notification are not met or an otherwise notifiable transaction is not submitted for review, the Commission can still exercise its power to review M&As on a motu proprio (on its own initiative) basis. On at least two occasions, the Commission has had to undertake such a review where the transactions are likely to result in a substantial lessening of competition. In June 2016, the PCC sought to review PLDT and Globe Telecom’s acquisition of San Miguel Corp.’s telecom assets because of the parties’ insufficient notification. More recently, PCC has initiated a review of Grab’s acquisition of Uber’s Southeast Asian business.
In its review, the Commission determines whether a transaction is likely to result in a substantial lessening of competition. In the case of an M&A between firms that compete against each other, such as Uber and Grab, we ask, among others: will their transaction likely give rise to a situation where the absence of competitive pressure leads to increased prices, deterioration in quality or lower incentive to innovate? Is the merger likely to adversely affect consumers?
In transactions between non-competitors, such as in the SM Group’s proposed acquisition of Goldilocks last year, the Commission examined, among others, whether the merger would deprive competitors access to prime mall space under reasonable terms – an input these competitors need to compete with Goldilocks. In competition jargon, whether input foreclosure resulting in a substantial lessening of competition would occur.
The PCC employs various economic analytical tools to establish the likelihood that post-transaction, there will be increased ability and incentive for the transacting parties to exercise market power – unilaterally or in coordination with other firms – to the detriment of competition and consumers. At the same time, sound analysis also allows for clearing transactions that enable the merged firm to reduce costs and become more efficient, leading to lower prices, higher quality, higher quantity and diversity of products, or increased investment in innovation. When performing merger analysis, the Commission predicts a merger’s competitive impact to prevent problems beforethese materialize.
Herein lies the challenge for business and legal practitioners who face the Commission during merger review – at its core, competition law is economic analysis within a legal framework. The legal standard of “substantial lessening of competition” is not a concept framed with precision that lawyers can hang their arguments on. Rather, it varies from transaction to transaction, depending on the product or service, as well as geographic area involved, even the timing of the deal. Legal precedent has less of a place in competition law than in other fields of law.
If Filipinos are to pursue the constitutional goal of attaining a more equitable distribution of opportunities, income, and wealth, as well as an expanding productivity to raise the quality of life for all, it is imperative that we begin to appreciate the language and benefits of competition law.
Commissioner Johannes Benjamin R. Bernabe served as adviser to the Senate and the House of Representatives in the drafting of, and deliberations on the Philippine Competition Act. A lawyer by profession, he was a senior fellow at the Geneva-based International Centre for Trade and Sustainable Development and served as the Philippines’ lead trade negotiator on select issues at the World Trade Organization, also in Geneva, Switzerland.
(Originally published on Business Mirror’s Competition Matters column on April 17, 2018 here.)