1st ATE Symposium on
Competition Policy Issues:
Theory Meets Practice
Theory Meets Practice
in Merger Control
Koki Arai
Senior Researcher for Economic Analysis
Japan Fair Trade Commission
December 13, 2013
Massey University
The views in this presentation are my own, not any organizations.
１
Outline
• Theory Meets Practice in Merger Control
• Case Study: ASML / Cymer
• Ex-post Evaluation of the effects of mergers
２
Theory Meets Practice
in Merger Control
• There are many studies on a merger.
• Many of them include policy implications.
Difficult to use a research
that indicate probability of
welfare increase or decrease
through pure theory
Easy to explain analysis that
describe an incentive
mechanism with a few
examples
Who is user?
３
Theory Meets Practice
in Merger Control
• In merger control discussion, theory meets
lawyers and businesses.
For lawyers, it needs to give simple but
reasonable economic explanation.
For businesses, it needs to enforce rules based
on evidences concerning ex-post assessment.
４
Theory Meets Practice
in Merger Control
For lawyers, it needs to give simple but
reasonable explanation.
– A case study in Japan: Discussion of vertical
merger and its remedy
– How to explain anticompetitive effect
– New measures to be theorized
５
Theory Meets Practice
in Merger Control
For businesses, it needs to enforce rules based
on evidences concerning ex-post assessment.
– Empirical studies of mergers’ effects and
implications from competition policy
– Research from widely viewpoints
CR04-11: CPRC Report (The Competition Policy
Research Center)
６
Case Study
ASML / Cymer
I. Introduction
• ASML US, the subsidiary of ASML Holdings N.
V. that runs business of manufacturing and
selling lithography systems used in the frontend process of semiconductor manufacturing,
is planning to acquire all the shares of Cymer
which runs business of manufacturing and
selling light sources composing an important
part of the lithography system.
７
８
II. Particular field of trade
1. Upstream market(light source)
(1) Product Range
– KrF light source, and
– ArF light source
– (EUV lithography systems are under technical
challenge)
(2) Geographic Range
– the whole world
•
Lithography system manufacturers and distributors,
domestic and overseas light source users give nondiscriminatory treatment to domestic and overseas
light source manufacturers.
★
９
II.Particular field of trade
1. Upstream market(light source)
(1) Product range
• Lightsource, a device that generates laser beams, is one of the
essential and important parts of lithography systems as mentioned
in II-2,below,and is used to print electronic circuits on wafers. The
light source in which the parties currently have transaction is DUV
(Deep Ultraviolet Light) light source.DUV light source can be divided
into two major types: KrF light source and ArF light source.
• Telling of a general nature of light sources, the shorter wavelength
it generates, the higher resolution performance it achieves that
enables print circuits to be done in more microscopic bandwidth.
With regard to the wave lengthof the light source, KrF light sources
have wavelength light of about 248nano meter (hereinafter “nm”)
and ArF light sources have wavelength light of about 193nm. Light
sources with longer wavelength light are used to print circuits with
broad bandwidth. Light sources with shorter wavelength light are
used to print circuits with narrow bandwidth.
II.Particular field of trade
1. Upstream market(light source)
(1) Product range
• Although there is another type of light source besides DUV
light source called EUV(Extreme Ultraviolet Light)light
source which has wavelength light of about 13.5nm, EUV
light sources and EUV lithography systems are under
technical challenge. Therefore, current sales of EUV light
sources are marginal and made only for research and
development purposes.
• As mentioned above, due to the differences of resolution
performances and price ranges between KrF light sources
and ArF light sources, users which are manufacturers of
lithography systems do not recognize KrF light sources and
ArF light sources as substitutable. Therefore, the JFTC
defined one product range as “KrF light sources” and
another product range as “ArF light sources” both are
separately subject to its review.
II.Particular field of trade
1. Upstream market(light source)
(2) Geographic range
• Light source manufacturers and retailers(hereinafter
“light source manufacturers”) sell their light sources at
a substantially same price all over the world. Moreover,
lithography system manufacturers and distributors,
domestic and overseas light source users, give nondiscriminatory treatment to domestic and overseas
light source manufacturers.
• Therefore, for each of the light sources as defined in (1),
above, the geographic range is, respectively for each,
defined as “the whole world”.
II. Particular field of trade
2. Downstream market(lithography system)
(1) Product Range
– “KrF lithography systems,”
– “ArF lithography systems,” and
– “ArF immersion lithography systems”
• Geographic Range
– the whole world
★ １０
II. Particular field of trade
2. Downstream market(lithography system)
(1) Product range
• Lithography system is a device that makes an image of
electronic circuit patterns(circuit original plate)in
reduced size, projected through its lens and prints the
image on a wafer which is the basic structure of
semiconductor integrated circuits.
– In case of light sources, one with shorter wavelength light
has higher resolution performance that enables the light
sources to print circuits with narrow bandwidth, a
lithography system with ArF light source called “immersion
lithography system” exists.
– This lithography is designed to enhance high resolution via
application of refraction index of water created when the
area between the lens and wafer is immersed with water.
II. Particular field of trade
2. Downstream market(lithography system)
(1) Product range
• With respect to resolution performances of
lithography systems by the light source, the
lithography system attached with KrF light source
is capable of resolution performance of
approximately 100-250 nm, the lithography
system attached with ArF light source is capable
of approximately 65-90 nm and the immersion
lithography system attached with ArF light source
is capable of approximately 45-65nm.
• Therefore, the resolution performance of ArF
immersion lithography system is the highest
among the lithography systems.
II. Particular field of trade
2. Downstream market(lithography system)
(1) Product range
• With respect to KrF lithography systems, ArF
lithography systems and ArF immersion lithography
systems, since there are differences between
resolution performances and price ranges among them,
the substitutability for semiconductor manufacturers
and distributors and semiconductor manufactures to
produce by order which are customers of lithography
systems does not exist.
• Therefore, the JFTC defined the product ranges as “KrF
lithography systems”, “ArF lithography systems” and
“ArF immersion lithography systems” individually for
each.
★ １１
II. Particular field of trade
2. Downstream market(lithography system)
(1) Product range
• Nonetheless, chipmakers which are customers
of lithography systems can freely choose any
light sources manufactured by each of light
source manufacturers when they purchase
lithography systems.
II. Particular field of trade
2. Downstream market(lithography system)
(2) Geographic range
• Lithography system manufacturers sell
lithography systems at substantially same
price all over the world. Chipmakers which are
domestic and overseas users give nondiscriminatory treatment to domestic and
overseas lithography system manufacturers.
Therefore “the whole world” is individually
defined as a geographic range.
１２
III. Review concerning substantial restraint of competition
1. The status of the parties and the competitive situation
(1) Upstream market(light source)
• KrF: HHI - 5,300.
• ArF: HHI - 6,300.
(2) Downstream market (lithography system)
• KrF lithography systems: HHI - 8,300.
• ArF lithography systems: HHI - 5,100.
• ArF immersion lithography systems: HHI - 7,500.
★
１３
III. Review concerning substantial restraint of competition
1. The status of the parties and the competitive situation
(1) Upstream market(light source)
• In the market for KrF light sources, the market share of
Cymer would be approximately 60% (ranked in the first
in the market) and the HHI would be approximately
5,300.
• In the market for ArF light sources, the market share of
the parties would be approximately 75% (ranked in the
first in the market) and the HHI would be
approximately6,300.
• Therefore, both products do not meet the safe harbor
standards for vertical business combinations.
• Company A (a domestic manufacturer) is the only
competitor of Cymer.
★
１４
III. Review concerning substantial restraint of competition
1. The status of the parties and the competitive situation
(2) Downstream market (lithography system)
• In the market for KrF lithography systems, the market share of
ASML would be approximately90% (ranked in the first in the
market) and the HHI would be approximately 8,300.
• In the market for ArF lithography systems, the market share of the
parties would be approximately45% (ranked in the second in the
market) and the HHI would be about 5,100.
• In the market for ArF immersion lithography systems, the market
share of the parties would be approximately85% (ranked in the first
in the market) and the HHI would be approximately 7,500.
• Therefore, all products do not meet the safe harbor standards for
vertical business combinations.
• With respect to KrF lithography systems, Company X and Company
Y (both of them are domestic manufacturers) are the only
competitors of ASML. With respect to ArF lithography systems and
ArF immersion lithography systems, Company X is the only
competitor of ASML.
１５
III. Review concerning substantial
restraint of competition
Three discussion points:
i) Refusal of sale, etc. of light sources
transaction
ii) Refusal of purchase, etc. of lithography
systems transaction
iii) Access to confidential information
１６
III. Review concerning substantial restraint of competition
2. Refusal of sale, etc. of light sources transaction
(1) Impact of refusal of sale
• In the downstream market, Company X and Company Y
which manufacture and distribute KrF lithography systems,
ArF lithography systems or ArF immersion lithography
systems procure an appreciable extent of KrF light sources
or ArF light sources from Cymer of the upstream market.
• As a result of the Acquisition, in case where Company X or
Company Y are deprived of an opportunity to deal with
Cymer or in case where Company X or Company Y is
disadvantageously treated in transactions compared with
ASML, Company X or Company Y are placed in a
disadvantageous situation and there are some possibilities
of resulting in market foreclosure or exclusivity.
１７
III. Review concerning substantial restraint of competition
2. Refusal of sale, etc. of light sources transaction
(1) Impact of refusal of sale
• Cymer occupies a high market share of the
upstream market and there are few competitors
in the upstream market.
• Therefore, if Cymer substantially sells light
sources exclusively to ASML, and thus the
competitors in the downstream market lose the
primary procurement sources of light sources and
result in market foreclosure or exclusivity, it is
considered that such situation has a large impact
on competition in the downstream market.
１８
１９
Possibility of
Refusal of Sales
１９
III. Review concerning substantial restraint of competition
2. Refusal of sale, etc. of light sources transaction
(2) Allegations of the parties and assessments thereof
A. Allegations of the parties
• According to the parties’ claim, upon selling
lithography systems, as to a light source which
constitutes an important part of lithography systems,
whereas it is chipmakers who decide to choose which
light source of which light source manufacturer, if the
parties engaged in input foreclosure, the parties lose
not only their light source profit causes but also lose
trust from chipmakers and that leads to have impact on
ASML’s lithography sales.
• Therefore, the parties claimed that input foreclosures
provide no incentive for them.
２０
III. Review concerning substantial restraint of competition
2. Refusal of sale, etc. of light sources transaction
(2) Allegations of the parties and assessments
thereof
B. Review and assessment of the allegations of the
parties
• It is chipmakers that purchase lithography
systems and choose light sources attached to
lithography systems.
• According to the following facts, it is considered
that chipmakers have countervailing power to a
certain degree against the input foreclosure by
the parties:
★
２１
III. Review concerning substantial restraint of competition
2. Refusal of sale, etc. of light sources transaction
– (i) chipmakers state that, should the parties exercise
an input foreclosure after the Acquisition, chipmakers
are still able to give their opinions regarding the
choice of light source manufactures to the parties
since the state where multiple choices of light sources
are retained contributes to price and performance
competition;
– (ii) most of the sales of the parties are occupied by
several major chipmakers and
– (iii) the development of lithography systems and light
sources are carried out according to the roadmap of
the whole semiconductor industry that includes such
as chipmakers.
III. Review concerning substantial restraint of competition
2. Refusal of sale, etc. of light sources transaction
(3)Measures proposed by ASML US
• After the JFTC explained to ASML US as saying
that such input foreclosure might be a point
potentially to argue in the review of the
Acquisition, ASML US has proposed that it
would take the following measures against the
concern of the input foreclosure.
２２
III. Review concerning substantial restraint of competition
2. Refusal of sale, etc. of light sources transaction
(3)Measures proposed by ASML US
– (i) With respect to DUV light sources, Cymer will
continuously do business with Company X and Company Y
under fair, reasonable and non-discriminatory terms of
trade as well as in the manner of paying regard to and
being consistent with the existing agreements. Moreover,
with respect to EUV light sources, after the Acquisition,
Cymer will do business with Company X and Company Y
under fair, reasonable and non-discriminatory terms of
trade as well as in the manner of paying regard to and
being consistent with the industry standard.
– (ii) Cymer will implement joint development activities with
Company X and with Company Y under the reasonable
terms of trade. With respect to DUV light sources, Cymer
will implement it in the manner consistent with the
existing agreements.
★
２３
III. Review concerning substantial restraint of competition
2. Refusal of sale, etc. of light sources transaction
(3)Measures proposed by ASML US
– (iii) For five years from the execution of the
Acquisition, the parties will report the status of
compliance with the measures mentioned above
to the JFTC once a year.
– (iv) The report mentioned (iii) is to be created by
an audit team independent from parties, which
will be appointed subject to a prior approval of
the JFTC.
III. Review concerning substantial restraint of competition
2. Refusal of sale, etc. of light sources transaction
(4) Assessment under the AMA
• The measures proposed by ASML US mentioned (3), above, are as
follows: Cymer will continuously deal with Company X and
Company Y in a manner consistent with the terms of trade
equivalent to that of prior to the Acquisition. Moreover, an audit
team independent of the parties’, which will be appointed subject
to a prior approval of the JFTC, conducts an audit and Cymer will
report to the JFTC regarding the result of audit for a certain period
of time after the Acquisition, thus the effectiveness of the
measures will be ensured. Moreover, as mentioned in (2) B above,
there is competitive pressure from chipmakers to a certain degree.
• Therefore, taking the measures proposed by ASML US, etc. into
consideration, the Acquisition will not cause the input foreclosure.
２４
III. Review concerning substantial restraint of competition
3. Refusal of purchase, etc. of lithography systems transaction
(1) Impact of refusal of purchase on competition
• In the upstream market, Company A which runs
business of manufacturing and selling KrF light
sources and ArF light sources sells an appreciable
extent of KrF light sources or ArF light sources to
ASML of the downstream market.
• As a result of the Acquisition, there is a possibility
of placing Company A in a disadvantageous
situation and resulting in market foreclosure or
exclusivity, in case where Company A is deprived
of an opportunity to deal with ASML or Company
A is treated disadvantageously in transactions
compared to that of Cymer.
２５
III. Review concerning substantial restraint of competition
3. Refusal of purchase, etc. of lithography systems transaction
(1) Impact of refusal of purchase on competition
• ASML occupies a high market share of the
downstream market and there are few
competitors in the downstream market.
• Therefore, if ASML virtually procure light sources
exclusively from Cymer, and thus the competitors
in the upstream market lose sale destinations and
excluded from the upstream market, it is
considered that such situation has a large impact
on competition in the upstream and downstream
markets.
２６
２７
Possibility
of refusal
of purchase
２７
III. Review concerning substantial restraint of competition
3. Refusal of purchase, etc. of lithography systems transaction
(2) Allegations of the parties and assessments thereof
A. Allegations of the parties
• As mentioned in 2(2) A above, the parties alleged that
there was no incentive for the parties to engage in the
customer foreclosure because if the parties engaged in
it, there would be competitive pressure from the
chipmakers due to the fact that the choice of the light
source is dependent on the decision of chipmakers.
B. Review and assessment of the allegations of the
parties
• As mentioned in 2(2)B above, chipmakers have
countervailing power to a certain degree against the
customer foreclosure by the parties.
２８
III. Review concerning substantial restraint of competition
3. Refusal of purchase, etc. of lithography systems transaction
(3) Measures proposed by ASML US
• After the JFTC explained to ASML US that such
customer foreclosure might be a possible
issue in the review of the Acquisition, ASML
US has proposed that it would take the
following measures against the concern of the
customer foreclosure.
★ ２９
III. Review concerning substantial restraint of competition
3. Refusal of purchase, etc. of lithography systems transaction
(3) Measures proposed by ASML US
– (i) When ASML develops in partnership with Cymer or
Company A and places orders for products, parts and
services of light sources to them, ASML will determine
the supplier based on objective and nondiscriminatory criteria, such as quality, logistics,
technology, cost and chipmakers’ preferences etc.
– (ii) ASML will continuously permit chipmakers to
choose light sources of their choice, and not unduly
exert influence on the decision of chipmakers with
respect to the choice of light sources.
III. Review concerning substantial restraint of competition
3. Refusal of purchase, etc. of lithography systems transaction
(3) Measures proposed by ASML US
– (iii) ASML will substantially simultaneously provide
both Cymer and Company A with information which is
necessary in research and development of light
sources and order placements for light source
products, parts and services.
– (iv) For five years from the execution of the
Acquisition, the parties will report the status of
compliance with the measures mentioned above to
the JFTC once a year.
– (v) The report mentioned (iv) is to be created by an
audit team independent from parties, which will be
appointed subject to a prior approval of the JFTC.
III. Review concerning substantial restraint of competition
3. Refusal of purchase, etc. of lithography systems transaction
(4) Assessment under the AMA
• The measures proposed by ASML US mentioned (3) above
represent its promise that after the Acquisition, ASML will
continuously deal with Company A in a manner consistent with the
terms of trade equivalent to that of prior to the Acquisition.
Moreover, an audit team independent of the parties’, which will be
appointed subject to a prior approval of the JFTC, conducts an audit
and ASML will report to the JFTC regarding the result of audit for a
certain period of time after the Acquisition, thus the effectiveness
of the measures will be ensured. Moreover, as mentioned in (2) B
above, there is competitive pressure to a certain degree from
chipmakers.
• Therefore, taking the measures proposed by ASML US etc. into
consideration, the Acquisition will not cause the customer
foreclosure.
３０
III. Review concerning substantial restraint of competition
4. Access to confidential information
(1) Impact of access to confidential information on
competition
• Light source manufacturers and lithography systems
manufacturers share various confidential information,
such as product development, product specification,
their customers, etc. with each other in terms of
developing, manufacturing, and selling products.
• Thus, after the Acquisition, there is a possibility that,
Cymer accesses to Company A’s confidential
information shared between ASML and Company A
through ASML, or ASML accesses to Company X or
Company Y’s confidential information shared between
Cymer and Company X or Company Y through Cymer.
３１
III. Review concerning substantial restraint of competition
4. Access to confidential information
(1) Impact of access to confidential information on
competition
• It is recognized that there is less possibility the parties
and competitors take coordinated conduct because
technological innovation is frequent in upstream and
downstream markets and there is competitive pressure
to a certain degree from chipmakers.
• However, there is a possibility that the parties may use
the confidential information for their advantages, and
thereby their competitors may be placed in a
disadvantageous situation and foreclosure or
exclusivity in market may be occurred.
３２
III. Review concerning substantial restraint of competition
4. Access to confidential information
(1) Impact of access to confidential information on
competition
• The parties occupy high market shares of the both
upstream and downstream markets and there are few
competitors in these markets respectively.
• Therefore, if the confidential information of
competitors is shared between the parties and market
foreclosure or exclusivity are resulted in, it is
considered that such situation has a large impact on
competition in the upstream and downstream markets.
３３
３４
Possibility of access to
confidential information
３４
III. Review concerning substantial restraint of competition
4. Access to confidential information
(2) Measures proposed by ASML US
• After the JFTC explained to ASML US that handling confidential
information of competitors might be a possible issue in the review of the
Acquisition, ASML US has proposed that it would take the following
measures against the handling of confidential information.
– (i)Directors/Employees of Cymer who are responsible for the confidential
information of Company X or Company Y will be prohibited from providing the
confidential information to directors/employees of ASML and enter into a nondisclosure agreement.
– (ii)Directors/Employees of ASML who are responsible for the confidential
information of Company A will be prohibited from providing the confidential
information to directors/employees of Cymer and enter into a non-disclosure
agreement.
– (iii)To comply with (i)and (ii)above, the parties will create a protocol of information
blackout for its employees.
– (iv)For five years from the execution of the Acquisition, the parties will report the
status of compliance with the measures mentioned above to the JFTC once a year.
– (v) The report mentioned (iv) is to be created by an audit team independent from
parties, which will be appointed subject to a prior approval of the JFTC.
３５
III. Review concerning substantial restraint of competition
4. Access to confidential information
• (3) Assessment under the AMA
• The measures proposed by ASML US as mentioned in (2)
above represent its promise that after the Acquisition, the
parties implement measures to prevent disclosure of
confidential information which includes their
directors/employees to enter into a non-disclosure agreement.
• Moreover, an audit team independent of the parties’, which
will be appointed subject to a prior approval of the JFTC,
conducts an audit and ASML will report to the JFTC regarding
the result of audit for a certain period of time after the
Acquisition, thus the effectiveness of the measures will be
ensured.
• Therefore, taking the measures proposed by ASML US, etc.
into consideration, the Acquisition will not raise an issue of
access to confidential information of competitors.
３６
IV Conclusion
• The JFTC concluded that, taking the measures
proposed by ASML US, etc. into consideration,
the Acquisition would not substantially
restrain competition in any particular fields of
trade.
３７
Contribution of Economics
• Theory Meets Practice :
• The foreclosure doctrine states that the main
purpose of an acquisition of an upstream or
downstream firm is to weaken the extent of
competition in either market by foreclosing
competitors from that part of the market taken
by the acquired firm.
– A theory of extending market power from one stage
to another must be explicit about what vertical
integration allows the firm to do that control over the
upstream price does not. (Salinger, 1988 QJE)
３８
Contribution of Economics
• Theory Meets Practice :
• New measures to be theorized
– “There is a possibility that the parties may use the
confidential information for their advantages.”
– The authority considers remedial measures with
case-by-case approaches.
– There is little knowledge of this type of measure
like a firewall shared in the authority from the
theoretical point of view.
３９
Behavioral Remedies
• The USDOJ’s Policy Guide to Merger Remedies
deleted the structural remedies principles:
– “A. Structural Remedies Are Preferred” in III. A. of
the Policy Guide of October 2004 is deleted in the
Policy Guide of June 2011.
– Several behavioral remedies are taken in recent
cases such as US v. GrafTech/Seadrift, and US v.
George’s Foods.
４０
Behavioral Remedies
• We have developed several useful merger
analyzing tools such as UPP, GUPPI, IPR and
First-Order Approach.
• Recent merger control establish two pillars:
applying these tools (UPP in 2010 US Merger
Guidelines) and taking thorough measures
including the behavioral remedies.
４１
Need to be theorized
• The thorough measures including behavioral
measures are needed to be theorized from the
economics viewpoints.
• The practitioners are seeking to appropriate
measures, and the wide range of theoretical
analysis and suggestion is required in the
cutting-edge competition policy.
４２
Theory meets practice
in merger control
Ex-post Evaluation of the effects of mergers
For businesses, it needs to enforce rules based
on evidences concerning ex-post assessment.
– Empirical studies of the effects of mergers and
the implications for competition policy
– Research from widely viewpoints
– CR04-11: CPRC Report (The Competition Policy
Research Center)
• Hiroyuki Odagiri, Koki Arai, Noriyuki Doi, Yasushi Kudo,
Takuji Saito, Kuninobu Takeda, and Chiharu Yanagita
４３
独占禁止法 第15条
Anti-Monopoly Law in Japan, Section 15
•
会社は、次の各号のいずれかに該当する場合には、合併をしてはならない。
– 当該合併によって一定の取引分野における競争を実質的に制限する
こととなる場合。
• No company shall effect a merger if any of the
following items applies:
(i)When the effect of the merger may be
substantially to restrain competition in a
particular field of trade.
•
This regulation applies to all types of business combination.
★ ４３
The Industrial Structure Vision 2010
by Industrial Ministry in Japan (METI）
• Competition policy: ensured transparency of
procedures, conversion to corporate merger
review that considers the medium- to longterm and the global market.
Business integration of Nippon Steel and Sumitomo Metal
(Press release, Feb. 3, 2011)）
• Objectives
– The companies would, through the business integration,
accelerate their global strategies and realize a level of
competitiveness which is globally outstanding in all aspects,
including technology, quality, and cost, by combining their
respective resources that each has built up, and generate
synergies through consolidation of the superiority area in their
respective businesses.
– Through the business integration, the companies aim to better
respond to the needs of customers both in Japan and overseas
and desire to contribute to further development of the
Japanese and global economy and improvement of global
society.
★ ４４
Business integration of Nippon Steel and Sumitomo Metal
（continued）
• Goals of the integrated company
• 5. Maximizing corporate value and the improving evaluation
from shareholders and capital markets
– By implementing the foregoing measures, the integrated
company would seek to maximize its corporate value and
would use its utmost efforts to obtain a high evaluation from
shareholders and capital markets by further improving its
profitability, promoting the strategic utilization of funds and
assets, and building up a stronger financial base.
Analyzing Effects of Mergers with an Oligopoly Model
• The oligopoly model suggests that a merger raises
the market price, reduces the output and profits of
merging firms (but may increase the profit rate), and
increases the profits of non-merging firms. The
social welfare is hurt.
– The results may change when the merger
contributes to efficiency increase and thereby
reduces the merging firm’s marginal cost.
４５
Merger Guidelines (JFTC, March 2007)
• “When improvements in efficiency, whether through
economies of scale, integration of production facilities,
specialization of factories, reduction in transportation
costs or efficiency in research and development, is
deemed likely to make the company group take
competitive action after the business combination, this
factor will also be considered to determine the impact
of the business combination on competition.”
４６
Considerations of Efficiency in the Guideline
• “Efficiencies to be considered in this case are
determined from three aspects:
– (i) efficiencies should be improved as effects specific to the
business combination;
– (ii) improvements in efficiencies should be materialized;
and
– (iii) improvements in efficiency contribute to the interests
of users.”
• => Condition (iii) requires that the interests of users
(i.e., consumer welfare) to increase. Therefore, the
efficiency increase must be very large.
４７
Needs for Empirical Studies
• Have mergers in the past really achieved such
aims?
– “Improve its profitability”: Did profit rates rise?
– “High evaluation from shareholders”: Did stock
prices rise?
– “Competitiveness in technology, quality, and
cost”: Did R&D expenditures increase? Did
inventions increase?
– “Better respond to the needs of customers”:
Did prices not rise?
４８
CPRC Joint Research Project on Post-Merger Evaluation
• We evaluate post-merger profitability, stock
prices, R&D, and selling prices, using the
data from mergers that occurred after 2000.
– For a similar study on mergers that
occurred during the 1990s, see an earlier
CPRC research report (CR02-03, 2003).
４９
Many studies for ex-post evaluation recently
• Retrospective Analysis of Agency
Determinations in Merger Transactions
Symposium, June 28-29, 2013, ABA
• International Journal of the Economics of
Business
– Special Issue: Hospital Mergers and Antitrust
Policy, Volume 18, Issue 1, 2011
– Special Issue: Issues in Empirical Merger
Analysis, Volume 13, Issue 2, 2006,
★
５０
Limitations of the Study
• Due to limitations of the study, the results remain
tentative.
– Dependence on published reports (except the price
study): financial reports and share price data of
non-public firms are unavailable, which
unfortunately are actually many.
– Short post-merger period: However, business
experts tend to say that mergers need to have
effects within 3 years.
– Diversity of merger motives and types: Quite a few
seem to have been made to rescue failing
companies.
Mergers and
Profitability
• The purpose of the project is to estimate the
impact of mergers on corporate performance.
To do so, we need to distinguish two types of
the impact: merger itself and merged firms’
characteristics.
５１
We need to analyze
this effect only.
Company
characteristics
Merger
Company
performance
５２
Selecting Control Firms against Merged Firms
• A simple comparison of pre- and post-merger changes
in financial indicators (e.g. ROE) between merged firms
and non-merged firms may not capture merger effects
alone. In this study, we apply a propensity score
matching method to select control firms, and then
compare financial indicators of merged firms to those
of control firms.
５３
Selecting Control Firms with
a Propensity Score Matching Method
• We begin by estimating firms’ propensity scores for
undertaking mergers, using firm characteristics as the
explanatory variables. Then, based on the estimated
propensity scores, we match a non-merged control
firm to each merged firm. Finally, we compare
changes in performance between them (average
treatment effects).
５４
The Industry to be Analyzed in this
Study
• We analyze mergers among first regional
banks and second regional banks.
– Years: 2000 - 2006 (Fiscal Year).
– Number of merger cases: 6.
★
５５
Estimation Result of the Propensity Score
Result of Logit Estimation (Sample Size : 773)
Explanatory Variables
Constant
ROE
Square of ROE
Operating Cost Ratio
Capital Asset Ratio
Bad loans Ratio
Log of Assets
Square of Log of Assets
Growth Rate of Regional
Production
Estimated
Coefficients
Significance
-407.693
0.188
-0.020
4.769
-1.899
0.535
52.613
-1.723
***
***
*
***
***
**
*
0.541 ***
The explanatory variables except constant are lagged ones.
Standard errors are adjusted for banks, and ***, ** and *
mean statistically significant at 1% , 5%, and 10%, respectively.
Merged Banks and selected Control Banks
Merged Banks (Month / Year of Merger)
Control Banks
The Kinki Osaka Bank (April / 2000)
The Towa Bank
The Shinwa Bank (April / 2003)
The Chukyo Bank
Tsukuba Bank (April / 2003)
Suruga Bank
Momiji Bank (May / 2004)
The Yachiyo Bank
The Nishi-Nippon City Bank (October / 2004) The Yachiyo Bank
The Kiyo Bank (October / 2006)
The Hokuto Bank
Measurement of Corporate Performance
• We employ ROE (Current Profit / Net Worth) as a
measure of corporate performance, and look at its
changes from one year before merger as defined
below. For merged banks before the merger, we
create hypothetical merged banks by summing up the
two firms’ data, to compute ROEi,base. To control the
effects of business fluctuation, we subtract the
annual average from ROE to make year-adjusted ROE.
ROEi ,t  ROEi ,t  ROEi ,base
ROE i ,t : ROE of firm i at time t ,
ROE i ,base : ROE of firm i at one year before merger .
５６
Year-adjusted ROE in a Year before Mergers
Merged Banks and Control Banks
Merged Banks
ROE Year-adjusted ROE
Control Banks
ROE Year-adjusted ROE
The Shinwa Bank
9.696%
The Chukyo Bank
11.928%
The Kinki Osaka Bank
34.664%
The Towa Bank
25.079%
Tsukuba Bank
4.784%
Suruga Bank
16.084%
Momiji Bank
11.682%
The Yachiyo Bank
2.017%
The Nishi-Nippon City Bank
3.334%
The Yachiyo Bank
2.017%
-14.035%
The Hokuto Bank
3.282%
The Kiyo Bank
５７
Comparison of Corporate Performance (ROE)
The Shinwa Bank and The
Chukyo Bank
The Kinki Osaka Bank and The
Towa Bank
★
５８
Comparison of Corporate Performance (ROE)
Tsukuba Bank and Suruga
Bank
Momiji Bank and The
Yachiyo Bank
Comparison of Corporate Performance (ROE)
Nishi-Nippon City Bank and The
Yachiyo Bank
The Kiyo Bank and Hokuto
Bank
Comparison of Corporate Performance (ROE)
• Number of merger cases in which ROE
decreased relatively to non-merging banks
– 1st year after the merger: 3 (out of 4)
– 2nd year after the merger: 4 (out of 6)
– 3rd year after the merger: 3 (out of 6)
– Note that statistical significance is lacking in
the changes in performance (both means
and medians).
５９
Conclusion
• We used the sample of regional banks in
Japan, applied the propensity score method
to select matching firms, and estimated the
impact of mergers on corporate performance.
Our results suggest that mergers rarely
contribute to increases in profitability.
６０
Mergers and Stock Prices
(An Event Study)
Methodology
・Applying an event study method, we
analyze the extent that the
announcement of a merger influences
the stock price.
・The effect of merger is calculated as the
excess of actual post-announcement rate of
return over the expected rate of return
calculated with a market model.
６１
Model
Calculate estimated parameters
aˆ i , bˆi
Ri ,t  ai  bi Rm,t  ui ,t .
Ri ,t
Rm,t
Stock rate of return of firm i, period t
Market rate of return, period t

６２
(2) Calculate abnormal rate of returns


ARi ,t  Ri ,t  aˆi  bˆRm,t .
ARi ,t
(3) Calculate cumulative abnormal rate of returns, CAR i
T2
CARi T1 , T2    ARi ,t .
t T1

６３
Cases of Business Combination Studied : 15
・Mergers
・Establishment of holding company
・Establishment of a consolidated subsidiary
(6)
(8)
(1)
６４
An example:
Establishment of a joint holding company by
Sankyo Co., Ltd. and Daiichi Pharmaceutical Co.,
Ltd.(2005)
・Event day： February 21, 2005
６５
Case: Mergers of Sankyo and Daiichi Pharmaceutical
Dayly transition of the CAR（Event day ; February 21,2005）
SANKYO & DAIICHI PHARMACEUTICAL
0.140
三共㈱：SANKYO
CO.,LTD.
0.120
0.100
0.080
ＣＡＲ
0.060
0.040
0.020
第一製薬㈱：
DAIICHI
PHARMACEUTICAL
CO.,LTD.
エーザイ：EISAI
CO.,LTD.
0.000
-0.020
-0.040
中外製薬：CHUGAI
PHARMACEUTICAL
CO.,LTD.
-0.060
-0.080
★ ６６
• The CAR of merger companies (Sankyo & Daiichi)
was positive immediately after the merger
announcement but eventually became negative
(though statistically insignificant), while that of the
rival companies remained positive.
–Suggests that the stock market expected the longrun profitability of the merged firm would rather
decrease, while that of the rival firms would
increase.
Results of the 15 Case Studies: Summary
Transition of the CAR
16
15
14
13
効果なし
Effect none
2
4
4
12
number of matters
案
件 11
数 10
9
下落
fall
2
7
1
6
5
1
上昇
rise
11
10
4
7
7
7
2
2
2
2
6
6
6
6
2
8
7
7
9
7
3
2
1
0
六
日
目
seven day
五
日
目
six day
四
日
目
five day
三
日
目
four day
二
日
目
three day
一
日
目
two day
one day
event day
イ
ベ
ン
ト
日
七
日
目
６７
• In 11 cases out of 15 (i.e., 73%), CAR was
positive immediately after the merger
announcement; however, after a week, it was
positive only in less than a half of the cases,
that is, 6 cases or 40% of the cases. In the
majority of the cases, CAR was not
significantly different from zero.
６８
Conclusion
• In the capital market, the investors will make an
investment decision based on the predicted present
value of the firm’s long-run profits. Hence, if the
merger is expected to raise efficiency of the firm and
thereby its long-run profitability, the merger
announcement should raise its stock price and result
in a positive CAR.
– According to our study of 15 cases, such a positive
effect was observed immediately after the
announcement in many of the cases but, after a
week, the effects were obscure in the majority of
the cases.
６９
Mergers and R&D
Purpose
• To analyze the impact of mergers on innovation
– To examine the post-merger R&D activities
of Japanese manufacturing firms, after
2000 :
•
Indices to be studied are：
– R&D expenditures (as an intensity, i.e., a ratio to sales)
– The number of published patent applications
７０
Review of Theoretical & Empirical Studies
• Theoretical predictions
– Quiet life hypothesis vs. Schumpeterian hypothesis
• In controversy
– “Innovation aversion” (Farrell & Shapiro[2010])
• New products may compete against the merger
partner’s products, lessening incentives for
innovation.
– The effect of a merger depends on two relations;
• Market & technology relatedness within the
merging firms
• Relations between merging and non-merging
firms
７１
Empirical Analyses: Diversity of Evidences
• More evidences suggest the negative
effects
–Colombo & Garrone [2006] suggest
the following:
Mergers, particularly horizontal
mergers, tend to reduce R&D
Tend to reduce R&D when the merger
partners’ technologies are
substitutable
７２
• Conclusion from the survey of theoretical
and empirical analyses
• Today, competition authorities tend to
give more weight to the investigation of
the impact of mergers on innovation in
their enforcements. Unfortunately,
economic studies suggest that this impact
is neither simple nor universal.
７３
Empirical Analysis
Methodology
• 39 mergers after 2000
• Comparison of R&D activities before and after
mergers
• R&D measures
– R&D intensity (R&D expenses/sales)
(consolidated)
– Number of published patent applications
(published after 1.5 years from application)
(non-consolidated)
７４
Results: 39 Cases after Year 2000
B3・A3
B3・A5
B3・A3-5
Δ＞0
Δ＜0
All
Δ＞0 Δ＜0
All
Δ＞0
Δ＜0
All
R&D intensity
17
22
39
17
17
34
16
19
34
Published application
11
28
39
9
25
34
11
23
34
Δ： post-merger value less pre-merger value (Δ＞0 or ＜0 )
B3：3-years mean, pre-merger; A3(5)： 3 (5)-years mean, post-merger;
A3-5： 3-years mean during the 3rd to 5th year after merger
７５
Results concerning R&D Intensity
• R&D intensity increased in less than half of the
cases
• In R&D-intensive industries, it increased in the
majority of cases
(9 out of 15 among firms with R&D intensity ≥ 3%,
7/10 with R&D intensity ≥ 4%)
• It increased in 5 of the 6 cases that were
subject to JFTC’s review
★ ７６
Results concerning published patent applications
• Decreased in the majority of cases, similarly to
R&D intensity
• Even in R&D-intensive industries, it increased in less
than half of the cases
(5 out of 14 among firms with R&D intensity ≥ 3%, 4/10 with R&D
intensity ≥ 4%)
• Also, it increased in just 2 of the 5 cases that were
subject to JFTC’s review
• However, the effect of time lag between R&D
and patent applications need be examined.
Result: Published Applications
2-year lag (BA3 and A3-5 compared)
3-year lag (A3 and A4-5 compared)
Δ＞0
Δ＜0
All
12
22
34
12
22
34
BA3: 3 years-mean during pre-merger 1st year to post-merger 2nd year
A3: 3-years mean during post-merger 1st to 3rd year
A3(4)-5： 3 (2)-years mean during post-merger 3rd (4th) to 5th year
Conclusion
• No evidence that mergers always promote
R&D.
• In R&D-intensive industries, there were more
cases in which mergers promoted R&D:
however, they rarely resulted in more patents.
– However, the study is constrained by imperfect measures
of innovation activities and the lack of detailed
information. An examination of such detailed information
will be needed in actual merger investigations.
７７
Mergers and Prices
The Purpose
• In this study, we examine the price
effect of mergers by analyzing how
retail prices of goods in the market
changed before and after the mergers.
７８
Methodology and Model
• Using retailer scanner data and following the
methodology of Ashenfelter and Hosken
(2008), we compare pre- and post-merger
monthly changes in retail prices of the
products of merged firms (or firms in a
combined group) with those of others
– We will also apply the method for the estimation
of the effects on sales and market shares.
７９
pi, j,t  i, j  1posti, j,t  2 posti, j,t  MPPi  i, j,t
–
–
–
–
–
i:
pi,j,t :
αi,j :
posti,j,t :
MPPi :
– εi,j,t :
product,
j : region,
t :month
sales-weighted price index
product- and region–specific factor
= 0 before the merger; = 1 after the merger
Merging Party Product
(= 1 if merging firms’ product; = 0 otherwise)
error term
８０
Cases for the analysis
• Household flavor seasonings (3000
items)
• Sugar (850 items)
• Instant noodles (2200 items)
８１
Data
• The data were compiled from the POS
(point-of-sales) data of more than 600
stores in 8 regions and consist of
monthly sales and quantity.
– 8 regions: Hokkaido, Tohoku, North Kanto,
Tokyo Metropolitan, Hokuriku, Tokai, Kinki,
Chugoku, Shikoku, and Kyusyu
★ ８２
Estimated Coefficients
β1 : Post
β2 : Post×MPP
Flavor Seasoning
0.0016***
0.0039***
Sugar
0.0528***
0.0384***
Instant noodles
-0.0023***
0.0013***
Results
retail price after M&A
10
• β1 (the coefficient of “post”) is
8
positive → an increase in the
average market price after the
6
merger (red column)
• β2 (the coefficient of post×MPP) is
positive → an increase in the prices 4
of the merger firms’ products (blue
2
column)
β2 : Post×MPP
β1 : Post
0
Flavor Seasoning
Sugar
Instant noodles
-2
８３
In depth study: Flavor seasoning (Ajinomoto &
Yamaki)
• The cross term with Ajinomoto was positive
and significant while that with Yamaki was
negative and significant
– Relative to the market, Ajinomoto raised its prices
while Yamaki lowered its prices after the
acquisition.
– Possibility that merging parties changed their
product positioning and differentiated their
products in order not only to avoid cannibalization
but also to gain new customers.
８４
2007m3
Monthly sales share
.2
.1
0
.9
0
.9
.1
.2
1
Laspeyres index
1
Monthly sales share
1.1
Yamaki vs. Market
1.1
Ajinomoto vs. Market
2007m3
month
month
Black line: maket price level
Black line: market price level
Gray line: Ajinomoto’s price level
Gray line: Yamaki’s price level
８５
Estimation Results on Sales and Market
Shares
• After the merger, sales of merger firms and
their market shares decreased (flavored
seasoning and sugar) while sales of the
average firm in the industry increased
(flavored seasoning) or decreased (sugar).
• Also a case in which the merger firms
increased their sales (instant noodles).
８６
Estimated effects on sales and market shares
Market Sales
β1 : Post
β2 : Post×MPP
Flavor Seasoning
1.18***
-3.29***
Sugar
-0.74***
-21.79***
Instant noodles
-23534***
68902***
Market Shares
β1 : Post
β2 : Post×MPP
Flavor Seasoning
0.00000***
-0.00002***
Sugar
0.00003***
-0.00021***
Instant noodles
-0.00000***
0.00000***
８７
Conclusion
• After the merger, in all the three markets
studied,
– The average market price increased (except
instant noodles).
– The price of the merger firms’ product
(weighted average of the prices of the firms’ entire
products) increased more than the average
market price.
８８
Conclusion (continued)
• Effects on product positioning
– In the flavored seasoning market, one of the
merger partners raised its price while the
other lowered its price, suggesting a change
in the product positioning strategy.
• => Suggested is the need to examine the
effects on product composition and positioning
that a merger may cause. Some of the
consumers may benefit whereas the others
may be hurt.
８９
Summary of Empirical Analyses
• Effects on Profitability and Stock Prices
– No significant effect on profit rate was observed.
Though statistically insignificant, there were more
cases of declining profit rates.
– The stock prices rose in many cases on the day of
announcement but declined within a few days,
making the cumulative abnormal returns not
significantly different from zero in the majority of
cases.
=> Thus suggested is that efficiency increase was
rarely large enough to raise profitability and stock
performance.
９０
• Effects on R&D expenditures and number of
patents
– Both R&D expenditures and the number of
patents decreased in the majority of cases.
– However, there were also cases in which R&D
expenditures increased, usually in R&D intensive
industries.
– The measures may not have captured the
innovation activity accurately. More detailed
case-specific investigations are needed.
９１
• Effects on prices
– The study is confined to 3 industries.
– The average market prices increased (except
instant noodles), and the average prices of
the merger firms’ products increased
further.
– In an industry with product differentiation,
the merger firm may raise the prices of
some products while lowering the prices of
others, suggesting product re-positioning.
９２
Thus, in a nutshell,
• Decreased consumer welfare (in the three
cases studied).
• Unlikely to have improved efficiency enough to
increase the firms’ profitability and to raise
consumer welfare.
• Questionable if the mergers contributed to
“long-term competitiveness” as the Industrial
Structure Vision hopes.
• However, differences across cases need be
noted.
９３
Implications for Merger
Investigations
• The priority for competition policy offices
should be to watch the impact on prices and
the consumer welfare.
• On efficiency increase and the increase in
‘long-term competitiveness’, the firm needs to
show the detailed plans, together with the
scope for implementation.
９４
Use of Economic and Quantitative Evidences
• Merger evaluations in Japan have tended to
be based on qualitative evaluation based on
interviews, etc.
• A wider use is needed of more economic
evaluations based on quantitative analyses,
including SSNIP test, UPP test, and merger
simulations.
９５
Theory Meets Practice
in Merger Control
• In case of merger control discussion, theory
meets practice in two aspects:
Case Study: ASML/Cymer
 Competition Authorities enforce the law case-bycase basis, with attention to the theory.
Ex-post assessment from various perspectives
 Not only enforcement but also theory is needed
to be assessed after the fact.
９６
Thank you for your attention.
• Questions and Comments are welcomed.
• E-mail: Koki.arai@nifty.ne.jp