Blog Martijn Snoep: Small mergers, big problems

With the Dutch Competition Act having been in force for over 25 years, we can safely draw the conclusion that this law has proven effective in combating most types of competition problems. However, two gaps do exist. The first gap concerns competition problems that are not the result of illegal practices but rather of, for example, a tacit understanding between companies to follow each other’s price hikes. In a previous blog, I noted that it would be good to introduce a new statutory tool for plugging this gap. In Europe, that tool is also called a market investigation tool or the New Competition Tool (NCT). The second gap concerns small acquisitions, which ACM does not need to be notified of and which cannot be assessed either, yet still cause competition problems. In this blog, I will discuss the latter gap. My conclusion is that there are valid reasons for plugging this gap through amendments to the Dutch Competition Act, granting ACM the power to call-in small acquisitions that are suspected to cause competition problems. These can subsequently be assessed under the regular procedure.

Turnover thresholds for merger control

The aim of ACM’s merger control is to prevent businesses from obtaining market power. We want to prevent acquisitions that allow companies to dictate prices, reduce the quality of their products and services, or stifle innovation. However, ACM cannot assess all acquisitions. At the time, the Dutch legislature decided that the only acquisitions that ACM needed to be notified of and that ACM could assess were those where both parties to the acquisition each had turnovers in the Netherlands of at least 30 million euros. The rationale behind this turnover threshold was that acquisitions of companies with turnovers below this threshold were not likely to produce any problems. ACM assessments of these kinds of acquisitions would lead to unnecessary administrative costs.

Small acquisitions: like stringing together beads

Fast forward to today and we have seen that small acquisitions can indeed lead to problems, for example if competition takes place at the local or regional level, or in the case of niche markets. With regard to the former, think of vets, GPs, day care centers, and auto repair shops. With regard to the latter, think of sector-specific software or insurances, specialist hobby products, and special food products. Market power at the local or regional level, or in niche markets leads to higher prices and reduced quality for the users of these products and services. The majority of small acquisitions do not result in market power. Yet a small share of them do. That is certainly the case if the acquiring company is a major player whose deliberate strategy is to pursue inorganic growth through the acquisition of smaller competitors one at a time, like stringing together beads. Recent acquisitions by private-equity firms of veterinary practices and GP practices using such a “roll-up strategy” have sparked off public unrest and have raised the question, also in the media and among lawmakers, “Where is ACM?” The answer to that question is: “Nowhere, because ACM cannot block those acquisitions since the turnover thresholds have not been met.”

Killer acquisitions

And then there is one more category of small acquisitions that do lead to competition problems, but which ACM cannot assess. Imagine a company that already has market power, and finds out that a new company has developed a revolutionary technology that has yet to hit the market. An acquisition of such a new company can protect the company with market power against future competition. However, since the new company does not generate any turnover yet, the acquisition does not meet the turnover thresholds, and ACM is left empty-handed. These types of “killer acquisitions” occur in the pharmaceutical sector as well as in the digital economy. However, it is also not outside the realm of possibility that these also occur in other sectors that are transitioning, and with major vested interests. Think of the energy sector.

A new power

In its current form, the Dutch Competition Act does not offer ACM the power to subject such small acquisitions to merger assessments. Some countries have made different choices so that their own ACMs are also able to assess small acquisitions. They can do so in different ways, each with their own pros and cons. First of all, the turnover thresholds can be lowered, for example, like they did in Germany and Austria. However, that also leads to more notifications, meaning higher regulatory costs, whereas only a small share of those transactions will actually lead to competition problems. Second, the thresholds can be lowered for transactions in specific sectors where a competition problem has been identified. In the Netherlands, this can already be done for “sectors that are transitioning” from public to private (and thus becoming competitive), such as the health care sector at the time, although, in that sector, the lowering of the thresholds was recently reversed. The drawback of this option is that, once market power has been detected, it is often already too late to do something about it. At best, attempts can be made to prevent it from getting worse. Third, the thresholds can be based on current or future market shares, irrespective of the market size, like in Spain and Portugal, but that leads to uncertainty for businesses, since it is not always clear in advance how the market should be defined. Fourth, a so-called “call-in power” can be included in the law, where ACM is granted the power to call-in a small acquisition within a certain period of time by indicating that it wishes to assess that acquisition under the regular procedure. However, the downside of this option is that it leads to uncertainty for businesses, leaving aside the question of whether an acquisition that has already been completed can even be undone. Finally, under recent European case law, small acquisitions can also be assessed afterwards, when an acquisition of a small company by a dominant company qualifies as abuse. However, the bar for this is higher than in regular merger control, and it also comes with the previously mentioned drawbacks of the call-in power, including the need for amending the Dutch Competition Act to make this possible.

If we weigh the pros and cons of the different options against each other, the call-in power seems to be the most favorable one. It’s no wonder then that many other countries in Europe (such as Sweden, Iceland, Norway, Italy, and Ireland) have gone for this option. The uncertainty for businesses can be taken away by offering the opportunity to get certainty in advance, for example by voluntarily notifying ACM of the acquisition. And with regard to the problem of dissecting already merged companies (“unscrambling the eggs”), this can be minimized by setting a short deadline, for example three months after the transaction’s announcement, before which ACM must indicate whether or not it wishes to assess the acquisition. After all, in most cases, it takes some time before businesses have actually been merged, so businesses can take this deadline into account. ACM will then have to decide, either on the basis of an investigation of its own or following a complaint, before that deadline whether or not it wishes to call-in the small acquisition in question. In that way, an equal balance is struck between the public interest of preventing market power and the company’s interest of legal certainty and lower regulatory costs.

The “Dutch clause” in the EU

A similar call-in power already exists at the EU level. Potentially problematic acquisitions that do not meet the EU or national thresholds can be referred to the European Commission by the national competition authorities (whether or not at the request of the European Commission), provided that trade between Member States is affected. This is also called the “Dutch clause” since, at the time, it was the Netherlands that requested this clause to be included in European law. ACM has already invoked this clause on several occasions, for example with regard to medical diagnostics, specialist software, and computer chips. This has resulted in the somewhat strange situation that ACM can refer problematic acquisitions to Brussels that do not meet the Dutch thresholds but do have an effect on European trade, but that it has to let go of acquisitions that fall below those thresholds and only have a negative effect within the Netherlands.

25 years after the Dutch Competition Act came into force, it is good to weigh, once again, the pros and cons of the different options for small-acquisition assessments against each other. Today, we can also learn from experiences in other countries. That is why, sometime in the next few months, ACM will organize a roundtable discussion to sit down with specialists and other interested parties, and share ideas. To be continued!

Martijn Snoep, Chairman of the ACM