Last month, Don Mackay, the Chairman of Wattyl Paints, used the platform of his Annual General Meeting to criticise the ACCC for preventing his company from taking over Taubmans. This resulted in the conjugal rights to Taubman's passing to Barlow Ltd of South Africa. The ACCC decision was made in spite of the industry leader, Dulux, having a larger market share than Wattyl/Taubman combined.
Merger policy is a central theme of my new book, Australian Competition Policy: Deregulation or Reregulation? The book examines the current vogue for regulation in the name of promoting competition.
In 1993, the ACCC obtained increased scope to review merger proposals. The test requiring mergers be approved was changed from one where mergers resulted in "dominance in a substantial market" to one of "substantial lessening of competition in a substantial market".
This opened up a vast new arena for regulatory oversight. And although only 5-10 per cent of mergers are opposed by the ACCC, these are often in industries desperately in need of rationalisation.
Mergers contested by the ACCC have included Westpac/Bank of Melbourne and Ampol/Caltex. In both cases, the ACCC's agreement to the mergers came with onerous conditions. This is in spite of banking and petroleum being highly competitive markets in which new players can readily enter.
With Westpac/BoM the ACCC went to extraordinary lengths to find a cause to intervene. It divided banking into six product categories and examined these as if they were self contained within each state. It then reviewed the combined market share against its competition criteria. This triggered "concern" because the combined firm's held 9 per cent of the deposit banking market in Victoria! The ACCC's conditions for authorising the merger offered major benefits to the Bank of Bendigo by forcing Westpac to open its payments network to a competitor.
While such an action increases competition in the market in the first instance, forcing an innovator to share a successful network development places a disincentive on innovators to build new systems. Why go to the expense and take the risks when a regulator will require your competitor to share its success with you?
In another case, Australis/Foxtel, the ACCC's refusal to sanction the merger resulted in the bankruptcy of Australis. The ACCC's blocking action was taken to help Optus maintain its viability.
Decisions like these that favour one firm at the expense of others require Solomonic wisdom. And there is no more abundance of this in the ACCC than any other government agency.
ACCC Chair, Allan Fels supports his agency's actions in these and other cases. He argues that they increase competition and prevent firms co-existing and enjoying a much quieter life. Yet, a small number of competitors does not mean less intensive competition, witness the vigorous tussles between duopolies like Coke and Pepsi, Ansett and Qantas, and Woolworths and Coles. Moreover, the usual measure of competitive intensity, lower price outcomes, is an inappropriate yardstick. If two firms are engaged in unprofitable cut-throat competition, requiring them to remain at loggerheads rather than letting one exit forces the industry to retain resources that could better be employed in other directions.
Industry rationalisation is a permanent feature of successful economies. But the fact is that without government support, markets are so dynamic that no firm can hold and exploit a monopoly position. Whenever the ACCC opposes merger actions it is therefore likely to reduce efficiency. Political considerations may prevent governments removing this policing role. One solution, put forward by Briggs and Scheelings in my book is to reverse the onus of proof so that the ACCC is required to demonstrate that a proposed merger is harmful.
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