revision of merger guideline and some case studies of merger review focusing on market definition...

Revision of Merger Guideline and Some Case Studies of Merger Review focusing on Market Definition

Japan Fair Trade CommissionMerger & Acquisition Division

Yuji [email protected]

Past Efforts to Improve Accountability of Japanese Merger Regulation

Annual release of the outlines on the review of some cases of business combinations (1993 ～ )

Issue of “Guidelines to Application of Act concerning Review of Business Combination” (5.31. 2004)

Issue of “Policies dealing with prior consultation regarding business combination plans” (2002)

Background of Merger Guideline Revision

Improved environment for implementing M&A to restructure industries (The Commercial Code Revision, enacted May, 2007) and the globalization of economy made us perceive necessity to revise merger guidelines.

JFTC decided the revision to improve predictability of regulation, regulatory transparency, and quickness of merger review more in accordance with the above economic situation.

Background of Merger Guideline Revision The Japanese government made “New

Economic Growth Strategy” and “Basic Policies for Economic and Fiscal Management and Structural Reform” in which the JFTC should have reviewed three points in the Merger Guideline last year. Market Definition (to show the possibility to

admit the global market as relevant market) Safe Harbor (to fit it to past records of merger

review) Framework of Import (to clarify its evaluation

method)

Background of Merger Guideline Revision

In the revision process, the JFTC has communicated with wide range of actors such as business groups (Keidanren, etc.), practitioners (attorney, M&A advisory consultants), academic professors, METI, foreign competition authorities (US, EU).

The revised guideline is published at March 28, 2007.

Revised Points- Clarification of Market Definition Methodology

In the revised merger guideline, the SSNIP (small but significant and non-transitory price increase by a hypothetical monopolist) test is adopted as a basic procedure to define a relevant market.

To define the market, demand substitution is mainly considered, but supply substitution should also be considered if it is appropriate.

Revised Points- Clarification of Market Definition Methodology

〔 function and efficacy 〕 are similar?

To check whether 〔 function and efficacy 〕 are similar or not, the concept of SSNIP can be available as a tool.

Substitutability for the users is the main factor to define the relevant market

Defining the market is based on the concept of SSNIP

〔 function and efficacy 〕 are part of the evidence to show the substitutability for users.

When the price was raised,

When the price is raised,

BA

AB

then users are expected to substitute B for A.

So A and B should be the same product range.

Old Guideline

Revised Version

Revised Points- Definition of Geographic Range

Suppliers in A area

User (PC manufacturer)

in all over the worldPC manufacturersIn

Japan （ Ex.Fjitsu）

Suppliers in B area

Sony, NEC, and other Suppliers in Japan

PC manufacturersIn

USA （ ExDell ）

PC manufacturersIn Taiwan

In this case, the JFTC has used the geographic range all over the world to analyze the market, but there have been no description on the possibility to define international market as a relevant market in the old Guidelines. In the revised version, we clearly wrote it down that we can define the international range as a relevant market.

Integration of Optical Disk Drive Business between Sony and NEC・ PC manufacturers buy optical disk drives

without paying attention to the suppliers’ geographic location.

→ In this situation, the suppliers of the drive is thought to be competing each other all over the world.

→ We concluded that this business combination does not substantially restrain competition because of the factors, such as strong competitors, bargaining power of users.

Revised Points- Safe-Harbor

Safe-Harbor threshold is set as a combination of HHI and the increment of HHI. Using the increment of HHI rather than the

share is more consistent with the merger regulation which treats with the structural change of industry.

The combination of HHI and the increment of HHI is more consistent with global standard.

Revised Points- Safe-Harbor

New Safe-Harbor The levels of new safe-harbor are

determined by Japanese merger review experience in recent five years.

Post-merger share is below 10 %, or below 25% with the HHI below 1000 Post-merger share is below 10 %, or below 25% with the HHI below 1000

①Post-merger HHI below 1,500②Post-merger HHI between1,500 and 2,500 with the increment in the HHI below 250③Post-merger HHI above 2,500 with the increment in the HHI below150

①Post-merger HHI below 1,500②Post-merger HHI between1,500 and 2,500 with the increment in the HHI below 250③Post-merger HHI above 2,500 with the increment in the HHI below150

<Revised Guideline>

Old unilateral effect safe harbor

In the old merger guideline, even if a merger is in range of the unilateral safe harbor, it is reviewed by JFTC, since the coordinated effect is doubted. So, to simplify the safe-harbor application, the safe-harbor for both unilateral effect and coordinated effect is set.

<Old Guideline>

Revised Points- Clarification on How to Evaluate Import Pressure

In the revised guideline, how to evaluate import pressure is described with more detailed explanation.

The approximate time to evaluate import pressure is set as forthcoming 2 years.

Revised Points- Clarification on How to Evaluate Import Pressure

Only 8 items to evaluate import pressure are drawn simply.

There is no detailed explanation on each item.

All 4 items should be checked Import pressure

① Degree of institutional barriers

② Degree of import-related-transportation cost and the existence of problems in distribution

③ Degree of substitutability between the imported product and the company group’s

④ Possibility of supply from overseas

<Old Guideline>

<Revised Guideline>

Revised Points- Clarification on How to Evaluate Efficiency

In the revised merger guideline, efficiency consideration is changed to describe from abstract to more concrete explanation.

And standards are shown on how to evaluate efficiency.

Revised Points- Clarification on How to Evaluate Efficiency

Efficiency is evaluated from the following aspects:

(1) Efficiency is specific to the business combination.

(2) Efficiency should be feasible.

(3) Efficiency contributes to increase consumers’ welfare.

However, if it removed almost all competition even the business

combination has some efficiency, it would be considered to

substantially restrain competition.

Efficiency is evaluated from the following aspects:

(1) Efficiency is specific to the business combination.

(2) Efficiency should be feasible.

(3) Efficiency contributes to increase consumers’ welfare.

However, if it removed almost all competition even the business

combination has some efficiency, it would be considered to

substantially restrain competition.

<Revised Guideline>

Revised Points- Revised Description on Remedy

In revised guideline, if industrial structure has changed to make the remedy for business combination unnecessary and the parties apply to JFTC on that, the remedy could be changed or removed.

The description of typical remedies is added to the guideline.

Revised Points- Other Points

Safe-Harbor on vertical or conglomerate merger:

The description of failing company consideration amended.

The description on buying power from users are made more detailed.

Post-merger share is below 10 %, or below 25% with the HHI below 1000. Post-merger share is below 10 %, or below 25% with the HHI below 1000.

Post-merger share is below 10 %, or below 25% with the HHI below 2,500. Post-merger share is below 10 %, or below 25% with the HHI below 2,500.

<Revised version>

<Old Guideline>

Case Studies Focusing on the merger review cases in

which the market is analyzed by global market. ①Establishment of Optical Disk Drive Joint

Company by Sony and NEC (2005FY) ②Stock Acquisition of Komatsu Electronic

Metals Co., Ltd. by SUMCO (2006FY) ③Stock Acquisition of Maxtor Corp. by the

subsidiary of Seagate Technology (2006FY)

Case Studies-①Sony-NEC on optical disc drive business

Story Parties

Sony Corporation NEC Corporation

Establishing their Joint Company of optical Disk Drives

Market Optical Disk Drives


Particular Field of Trade (Relevant Market) Divided by products for major PC manufacturers an

d distributors Products Range: The following products are differe

nt on the disk used in each drive and their functions.

CD-ROM CD-R/RW DVD-ROM COMBO DVD±RW


Particular Field of Trade (Relevant Market) Geographic Range: The analyzed market on

products for major PC manufacturers is global market, so the market share of each parties are calculated on the global market.

The reason of this analysis is that the headquarters of major PC manufacturers purchase the devices in all parts of the world in bulk, the product price set by optical disk drive manufacturers is set uniformly throughout the world, and the manufacturers request estimates from leading optical disk drive suppliers in all parts of the world and select the supplier with the estimates.


Market Share The market share of the parties on the

products except CD-R/RW drive and DVD±RW are lower than 10%, so the establishment of joint company does not substantially restrain competition on the products.

・ CD-R/RW drive ・ DVD±RW driveSony app.10%

NEC app.0~5%

sum app.10%

Sony app.30%

NEC app.5%

sum app.35%


Results (Horizontal Aspect) On CD-R/RW drive and DVD±RW

drive, the establishment of the joint company would not substantially restrain competition.

Increase of share by the establishment is low

Existence of Strong Competitors Strong Buying Power of Users

Case Studies-②SUMCO-Komatsu on Silicon Wafer business

Story Parties

SUMCO Komatsu Electronic Metals Co., Ltd.

Stock Acquisition of Komatsu Electronic Metals Co., Ltd. by SUMCO

Market Silicon Wafer


Particular Field of Trade (Relevant Market) Product Range

300mm silicon wafer All size silicon wafer

Geographic Range: The analyzed market on silicon wafer is global, so the market share of each parties are calculated on the global market.


Particular Field of Trade (Relevant Market) The reason to analyze global market

Products have no difference made by any national makers and transportation cost does not affect the choice of procurement place, so the users purchase the products from all over the world.

The product price set by silicon wafer maker is set uniformly throughout the world.


Market Share 300mm silicon wafer

SUMCO app.30%

NEC app.5%

sum app.35%


Market Share All size silicon

wafer6 D app. 5%

7 E app. 5%

Others app. 5%

(1) Sum of SUMCO and Komatsu

app. 35%

Total 100%

Rank Company Market Share

1 A app. 30%

2 SUMCO app. 25%

3 B app. 10%

4 C app. 10%

5 Komatsu app. 10%


Results: On 300mm silicon wafer and all size silicon wafer, the stock acquisition does not substantially restrain competition.

Reason: Unilateral effect aspect

Easiness to change supplier by users Existence of strong competitors Existence of excess supply capacity of competitors Strong buying power of users


Reason: Coordinated effect aspect

The situation in which lower price tends to attract demand

Difficulty to expect competitors’ behavior because of drastic innovation of silicon wafer

Case Studies-③Seagate-Maxtor on HDD business

Story Parties

Seagate Technology Maxtor Corporation

Stock acquisition of Maxtor Corporation by the subsidiary of Seagate Technology

Market HDD (Hard Disc Drive)


Particular Field of Trade (Relevant Market) Product Range (Horizontal aspect)

HDD for enterprise usage HDD for desktop PC HDD for laptop PC (not treated by Maxtor)


Particular Field of Trade (Relevant Market) Geographic Range: The analyzed market on

HDD wafer is global, so the market share of each parties are calculated on the global market.

The reason to analyze global market Products have no difference made by any national

makers and transportation cost does not affect the choice of procurement place, so the users purchase the products from all over the world.

The product prices set by HDD makers are set uniformly throughout the world.


Market Share and HHI HDD for enterprise usage

HHI is approximately 4600~4700, and the increment of HHI is approximately 1400~1500.

Rank Companies’ name

Market Share

1 Seagate 45~50%

2 A 15~20%

3 Maxtor 10~15%

4 B 10~20%

5 C 0~5%

(1) Sum of Seagate and Maxtor

60~65%

Total 100%


Market Share and HHI HDD for enterprise usage

HHI is approximately 3600~3700, and the increment of HHI is approximately 1300~1400.

Rank Companies’ name

Market Share

1 Seagate 30~35%

2 A 25~30%

3 Maxtor 20~25%

4 B 10~15%

5 C 5~10%

6 D 0~5%

(1) Sum of Seagate and Maxtor

50~55%

Total 100%


Results (Horizontal Aspect): On HDD for both enterprise usage and desktop PC, the stock acquisition does not substantially restrain competition.

Reason: Unilateral effect aspect

Easiness to change supplier by users Existence of strong competitors Existence of excess supply capacity of

competitors Strong buying power of users


Reason: Coordinated effect aspect

The situation in which lower price tends to attract demand

Difficulty to expect competitors’ behavior Frequent innovation and short product

life cycle tend to cause product price decrease

revision of merger guideline and some case studies of merger review focusing on market definition...

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