“Mergers and acquisitions: did you say market shares?” (L’Opinion)

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Emmanuel Combe published on September 29, 2021 a column in L’Opinion on the role of market shares in the competitive analysis of M&A.

 

Mergers and acquisitions: did you say market shares?

 

We saw in the previous column that in order to assess the impact of a merger on competition, the first step was to delimit the markets on which the operation takes place. Once these “relevant markets” have been delimited, the second step is to assess the evolution of market shares after the merger. At first sight, this exercise seems simple: for example, if company A has a market share of 40% and company B 20%, the merger between A and B will logically lead to a market share of 60%. Nevertheless, several questions may arise.

 

First, which indicator should be used to calculate market shares?  The most common approach is to use the total turnover, which reflects the real activity of the firms, beyond volumes or audience. But in some specific cases, other indicators can be used. For example, in food retailing, where competition takes place in a local catchment area, it is more relevant to use commercial surface area in m² rather than sales.

Secondly, at what market share threshold does a merger present a risk for competition? The answer is more conventional than theoretical: in Europe, market shares of over 50% post-merger suggest significant market power. Conversely, market shares below 25% are unlikely to be a problem.  But in some cases, market share may underestimate the real weight of a player: this is the case of a merger with a small disruptive company called “a maverick firm”. For example, in 2006, the Commission was concerned about T-Mobile’s takeover of a small telephone operator, Tele ring, in Austria, which had a market share of only 15% but which had an aggressive pricing policy vis-à-vis the three large operators.

Finally, the market share of the merging companies says nothing about the overall market configuration: how many companies remain outside the merger and with what market share? In our example, a merger of A and B that leads to a 60% market share will probably have a different impact on competition depending on whether the rest of the market is composed of a single firm C or 20 small firms each with a 2% market share. To assess the overall configuration of the market, one can use a concentration index, such as the Herfindhal index. This index allow to assess the symmetry or asymmetry of market shares, before and after the merger.

While high market shares and high concentration invite close scrutiny of the transaction, this does not necessarily mean that the merger is dangerous for competition: one must move on to the most delicate stage, which consists of studying the various possible impacts of a merger on competition. This will be the subject of our next column.

 

 

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