WHY THE HURDLE FOR MERGER & ACQUISITION ACTIVITY IN AUSTRALIA IS GETTING HIGHER
By James Malliaros
The Australian Competition and Consumer Commission (ACCC) is the guardian of the consumer. It is responsible for ensuring that any proposed mergers between companies will not have the effect of substantially lessening competition in a market or that likely public benefit from a merger outweighs the likely public detriment.
In Australia, there are on average 300 domestic company mergers and acquisitions (M&A) each year. However based on previous case studies, it is expected that the ACCC will get much tougher on any proposed mergers in the future. To give one an indication of the reasons behind the ACCC’s tougher stance on M&A activity, you only need to look at the concentration of some Australian companies in industries that are used by the average Australian every day.
The best way to measure market concentration is using the Herfindhal-Hirschman Index (HHI). It is a metric used by regulators in assessing whether competition in an industry would be significantly reduced post-merger – the more concentrated markets have higher HHI scores.
The below chart shows the HHI of four industries, contrasting Australia against the less concentrated US market.
As you can see, Australian industries, particularly the supermarkets and domestic airlines, are highly concentrated.
There are probably three reasons the ACCC is increasing its focus on M&A activity and getting tougher on approvals:
Firstly, the ACCC is reducing the number of public reviews undertaken each year. In the past, about 50% of mergers underwent public review but this has dropped to just 11% in FY 2017. Less volumes of reviews give the ACCC more time to focus their efforts on specific cases and to determine if the merger is in the best interest of the consumer.
Secondly, the ACCC is increasing the number of notices issued as part of its evidence gathering process. In the past year, the ACCC has doubled the number of notices issued. Deals between APN Outdoor and oOh!Media, South 32 and Metropolitan as well as Camp Australia and JAG were all abandoned in 2017 due to ACCC objections.
Finally, the ACCC is now the only regulatory authority that has the power to approve a merger. Prior to the recent parliamentary reforms, approval for a merger could also be granted by the Australian Competition Tribunal (ACT) and the Federal Court. That meant merger participants could bypass the ACCC. The ACT has failed to block a merger in over 20 years and was thus an attractive option for merger parties desperate to get a deal done.
The ACCC clearly has renewed focus and power to block contentious M&A activity in the Australian market. Given the high level of concentration within Australian industries, this focus is likely to result in the ACCC blocking more M&A. Most notably, the Fairfax Media (FXJ) and Nine Entertainment (NEC) $4 billion merger that will create an integrated media giant across television, online video streaming, print, digital and real estate advertising will come under intense scrutiny by the ACCC and is likely to take at least three months to complete.
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