PROTECTIONIST REGULATION: THE EUROPEAN COMMISSION BLOCKS MERGERS THAT THREATEN TOUGHER COMPETITION FOR EUROPEAN FIRMS

The more that a proposed merger threatens to harm rival European firms through increased competition, the greater the likelihood of European regulatory intervention, especially when the acquirer is foreign. That is the central finding of a study by Professors Nihat Aktas, Eric de Bodt and Richard Roll, published in the July 2007 issue of the Economic Journal.

European and US authorities have long claimed that regulation of mergers and acquisitions (M&A) protects consumers by guarding against monopoly power, but research carried out to date has failed to find evidence that M&A deals are really anti-competitive. This study goes a step further by suggesting protectionism as an alternative explanation for the existence of M&A regulation.

The researchers chose to test European regulation for several reasons, the most important being that the European Commission was already suspected of protectionism, especially towards the end of the 1990s. The US financial press was vociferous in accusing the European authorities of protectionism in the General Electric/Honeywell merger case and in the Microsoft antitrust case.

Previous work by these researchers had also uncovered some troubling trends in European M&A deals, showing that investors anticipate a far higher cost to the merging parties when the European Commission intervenes against foreign bidders as opposed to domestic (that is, European) bidders. Another important feature of European activity is the significant proportion of deals initiated by non-European bidders (almost 36% in the sample that this research looks at).

The anti-competitive effects of a proposed business combination can be assessed by the price reactions of rival firms immediately around the initial announcement date of the combination. If investors believe the combination will create monopoly power in the industry, rival firms' share prices should increase around the announcement date as they will also benefit from the anti-competitive effects.

This study analyses whether foreign acquirers are subject to more frequent regulatory interventions than domestic ones when local competitors are being harmed. Such a finding would be difficult to explain by anything other than protectionism. Negative domestic competitor returns around the merger announcement date are likely to be explained by increased competition benefiting consumers. Moreover, there is no reason why an acquirer’s nationality should influence a regulator’s inclination to intervene if the regulator is purely motivated by maintaining appropriate levels of competition.

The researchers collected data about all European Commission regulatory interventions during the period 1990-2000. Data availability limited the final sample to 290 cases, which cover almost all large transactions carried out in Europe in the 1990s.

These cases are particularly relevant to the study as their size makes them the most likely to cause competition concerns. Each case includes a listed bidder and a listed target for which listed competitors can be identified. Of the 290 proposed combinations in the sample, 55 (19%) were challenged by the European Commission – that is, they were approved only after concessions or suspended while an in-depth investigation was carried out.

The sample M&A operations are on average wealth-creating for the shareholders. The associated abnormal returns are about 1%, which corresponds to $57.5 billion. But the effect is on average negative for the shareholders of the rival firms with a loss of $67.7 billion. These results suggest that, on average, the proposed combinations are likely to enhance competition in the industry rather than reduce it, and could therefore damage local competitors.

European M&A regulators claim to be fostering competition and thereby protecting European consumers. But this study finds that the more harm suffered by European rival firms, the greater the likelihood of European regulatory intervention against a proposed combination. To make matters worse, European regulators are even more likely to intervene when the bidding firm is foreign.

Nihat Aktas, one of the authors of the study, comments:

‘It is hard to reconcile the actual pattern of European regulatory intervention with consumer protection.’

‘If the aim is to ensure that effective competition is maintained in the European economy, why would intervention increase with the level of enhanced competition and why would the bidder’s nationality matter at all?’

ENDS

Notes for editors: ‘Is European M&A Regulation Protectionist?’ by Nihat Aktas, Eric de Bodt and Richard Roll is published in the July 2007 issue of the Economic Journal.

Nihat Aktas is at the IAG Louvain School of Management (Université Catholique de Louvain). Eric de Bodt is at the Lille School of Management (Université de Lille 2). Richard Roll is at the Anderson School (University of California, Los Angeles).

For further information: contact Eric de Bodt on +32 475 24 01 69 (email: debodt@hotmail.com); website: http://www.edebodt.net); or Romesh Vaitilingam on 07768-661095 (email: romesh@compuserve.com).