1 Fradkov P. // “Energy of industrial growth” in Russian: “Energiya promyshlennogo rosta”, September 2009, p. 22-23) RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES THE PRACTICE OF REGULATING ECONOMIC CONCENTRATION IN MERGER AND TAKEOVER DEALS O.Smirnova Merger and takeover deals are contrary to competition, and so their effect on relevant commodity markets is assessed by the controlling bodies responsible for supervision over competition and prevention of monopolistic activity. The paper analyzes the practice of the RF Federal Antimonopoly Service (FAS) rejecting the application for registering such deals. The drawbacks in the methodology of analyzing the market for mergers è takeovers which is used as a substantiation for the decisions by the FAS made with regards to violations of antimonopoly legislation are pointed out.
The main goal of regulating economic concentration is to limit opportunities for some of the market participants to influence the overall conditions for economic activity on the market. In accordance with Federal Law No 135 ‘On protection of competition’, the Federal Antimonopoly Service (FAS) of Russia exercises control over the parameters of economic concentration in merger and takeover deals with the participation of resident companies of the Russian Federation. After the adoption of ‘the second antimonopoly package’ on 23 August 2008, it is necessary to obtain a preliminary approval by the FAS of a deal involving merger, takeover and creation of a commercial organization in cases when the summary value of an organization’s assets amounts to 7 billion rubles, and annual proceeds – to 10 billion rubles. A notification of the conclusion of a deal is necessary if the value of assets or the proceeds from sales are in excess of 400 million rubles The economic factors for a deal becoming an object for the attention of the RF FAS are asset value, the volume of proceeds, or the fact of one of the participants in a deal being on the register of economic subjects occupying 35 % of the market. It is important to measure the size of assets because it is only logical to build on the assumption that the bigger a company the greater the market power it enjoys. The factor of at least one of the participants in a deal on the register of economic subjects occupying 3 % of the market places that deal in the category of those having a potentially significant influence on the market.
This approach has some limitations of its own because the register of economic subjects may contain no data on the participants in a deal while these participants taken together may take up a substantial market share. Possibly, in addition to the existing registration practice, it would be worthwhile to give consideration to registering the instances of collective domination on some of the markets in order to more efficiently regulate the economic concentration processes.
As economic concentration parameters, the market concentration index (CR – the sum of the market shares taken up by different producers) and the Herfindahl - Hirschman Index (HHI).
According to Russian antimonopoly legislation, the economic factors applied in analyzing a deal can be divided into those estimated during the phase of a deal entering the sphere regulated by Law No 135-FZ ‘On protection of competition’ and those estimated during the phase of a deal being considered by the RF FAS. After an analysis of the market as a whole, it becomes possible to study its individual indices – in particular, the dynamics of prices or the profitability indices of the participants in a deal.
We are going to look at the practice of regulating merger and takeover deals on the basis of examples of the operation of the FAS of Russia drawn from all its press releases concerning refusals to register a deal (2007 – 2008 and the first half-year 2009) or the prescriptions (2008 and the first half-year 2009) published on the Federal Antimonopoly Service’s official website (www.fas.gov.ru ).
It should be noted that these data have some limitations. Thus, the regulation practice has demonstrated that it is only in some exceptional that the RF FAS can take the decision to reorganize the economic subject created as a result of a deal concluded without notifying the antimonopoly agency, and that by no means all the deals are concluded with the preliminary approval or notification of the antimonopoly agency.
THE PRACTICE OF REGULATING ECONOMIC CONCENTRATION...
There also exist other methods of gaining control beside merger and takeover deals – for example, a tolling scheme makes it possible to fully control the economic activity of a subject and thus to influence the actual economic concentration status.
According to the results of our analysis of the practices of 2007 – 2008 and the first half-year 2009, all the reasons of refusals to approve the conclusion of a deal can be subdivided into two groups:
1) insufficient information for adequate decision-making, including lack of information on the real owners of the applying company (the end beneficiaries), false information on the groups constituting the parties to a deal, and failure to submit the information concerning the relative activity of the parties to a deal;
2) The consequence of a deal may be restriction of competition, for example in ‘horizontal’ and ‘vertical’ deals, including the formation of a merger on the power engineering market in accordance with Federal Law of 26 March 2003, No 36-FZ, ‘On the specific features of the functioning of power engineering during the transition period, on introducing alterations to some legislative acts of the Russian Federation, and on recognizing as null and void some legislative acts Russian Federation in connection with the enactment of the Federal Law ‘On power engineering’).
Table THE STRUCTURE OF REFUSALS TO AUTHORIZE DEALS First half-year Index / year 2007 Number of refusals 15 30 Of these, for reasons of: 12 - absence of information to base decision-making on:
including: 7 - absence of information on end beneficiaries;
- false information on groups of persons; 1 - no information on activities of parties to a deal; - possible restrictions to competition:
including: 3 - restrictions to competition in ‘vertical’ deals on power engineering market; 3 - in ‘horizontal’ deals - in ‘concentric’ deals Number of applicants 13 23 - of these, foreign 7 4 While analyzing the data shown Table 1, it can be said that the most frequent reason of a refusal is the incomplete character of the submitted information, while potential restrictions on competition only rarely serve as the grounds for a refusal to satisfy an application or to accept the submitted information.
Thus, the only case when the agency refused to grant the permission to purchase a share in a ‘horizontal’ deal in the first half-year 2009 was the application by Open-end Joint-Stock Company ‘VAMIN Tatarstan’ which, according to the Tatarstan Administration of the RF FAS, occupies 54 % of the market for whole milk products. The object of the deal – Limited Liability Company ‘Asanbash’ – also manufactures whole milk products. As a result, it was ruled that as a result of that deal competition could become restricted due to elimination of the economic subjects not belonging to the relevant group, and the core economic subject’s dominant position could become even more prominent.
The refusals to approve of ‘vertical deals’ occurred only on regional power engineering markets.
Consequently, a refusal as a method for managing economic concentration is practiced only in absence of necessary information concerning the parties to a deal. On regional markets refusals are issued with regard to deals with a clear domination of one of the parties.
RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES Let us consider another method of economic concentration management – the issuance of a prescription by the results of the consideration of a deal.
This type of regulation has been applied for preventing misuse of a dominant position (Article 10 of Federal Law 10 No 135-FZ ‘On protection of competition’). On the basis of our analysis of prescriptions it can be concluded that they by no means list all the possible instances of 2007 2008 1st half-year 2009 violation of antimonopoly legislation. When the terms No information for decision making Possible restrictions on competitions for a specific behavior on the market are issued with Fig. 1. Reasons for refusals to satisfy applications and to accept the submitted regard to a certain deal, information the sectoral specificity of a given market is taken into consideration – the experience of the sector’s functioning and the types of violations of antimonopoly legislation committed on that market.
Table 2 systematizes the prescriptions issued by the RF FAS in 2008 and the first half-year 2009.
Table STRUCTURE OF PRESCRIPTIONS First halfIndex / year year Number of prescriptions 76 Applicant’s sector:
- investment activity; 40 - industry; 9 - extracting industries; - housing and utilities system; - fuel and energy complex; - communications services; - wholesale and retail trade; 1 - transport services; - insurance 1 Market where competition is to be possibly restricted resulting from specific deal:
- industry; - fuel and energy complex;
- housing and utilities system’s services; - transport services;
- insurance services; - extraction of mineral resources;
- wholesale and retail trade; - communications services;
- tourism services Type of deal:
- horizontal; 25 - vertical; 14 - concentric 37 THE PRACTICE OF REGULATING ECONOMIC CONCENTRATION...
Table 2, cont’d First halfIndex / year year Number of geographical or commodity markets where restriction of competition resulting from deal is identified:
58 11 4 1 1 1 0 0 Participation of foreign companies in deals:
- yes 20 - no 56 As seen from Table 2, 2008 1st half-year more than in 50 % of cases the applicant is a company engaged in investment activity. It should be noted that 80 % of the foreign companies participating in deals are investment companies.
The common feature of the year 2008 and the first halfyear 2009 is that the share of companies stating that their core activity is investment is more than 50 %.
In order to assess the structure of cases when prescriptions were issued, Fig. 2. Sectoral structure of the prescriptions issued in the data presented in Table and the fi rst half-year 2009.
2 were subdivided into groups on the basis of cluster analysis of kmedians. As result, there emerged 10 Concentric Vertical Horizontal groups consisting of a total of 76 deals in respect of which prescriptions were issued in 2008 and 4 groups of deals in 2009.
If we compare the distri- bution of prescriptions into groups in 2008 and the first 37 half-year 2009, it can be said that some types of deals resulting in possible restriction of competition remained 2008 1st half-year unchanged – these are purchases by investment comFig. 3. Structure of prescriptions, by type of deal, 2008 and panies of enterprises renderthe fi rst half-year 2009.
Industry industry activity Insurance Extracting Investment services complex retail trade Housing and utilities system Wholesale and Fuel and energy Communications Transport services RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES ing heating and water supply services and horizontal deals between foreign and domestic producers of mutually replaceable products.
A certain dependence between the creation of holding companies and the sectoral market where the target companies operate has proved the fact that with the present situation on the corporate control market the regulation of economic concentration on the basis of market principles is quite justified. Nevertheless, a significant obstacle to assessing the effect of certain deals on competition by the antimonopoly agency is the very small number of markets that have been actually systematically studied. Thus, there exist some restrictions to market assessment in the form of commodity and product boundaries between market participants The shortcomings of the methodology applied in market analysis are the main reason for the abolition, in a judicial procedure, of the RF FAS’s resolutions issued with regard to violations of antimonopoly legislation and the placing on the register of economic subjects that take up more than 35 % of federal or regional markets.
Table GROUPS OF CASES WHEN PRESCRIPTIONS WERE ISSUED IN 2008.
No of Group description group 1 Horizontal deals between participants of heating and water supply markets Horizontal deals between companies on industrial commodity markets manufacturing mutually replaceable products 3 Concentric deals between domestic companies selling heating and water supply services Deals between participants in the construction industry and companies selling rendering and water supply services Deals between market participants engaged in investment activity and producers of industrial commodities Deals between market participants engaged in investment activity and extraction of mineral resources 7 Deals between producers of heating and water supply services and trade companies Vertical deals between companies in industry or fuel and energy complex, with possible restrictions of competition on several commodity markets Deals between foreign companies engaged in investment activity and those rendering communications services Deals between companies engaged in investment activity and those selling heating and water supply services Table GROUPS OF CASES WHEN PRESCRIPTIONS WERE ISSUED IN THE FIRST HALF-YEAR Group Description No Horizontal deals in industry between companies with foreign participation manufacturing mutually replaceable products Vertical deals between trade companies and companies rendering î heating and water supply services 3 Deals between companies on insurance market Deals between foreign companies engaged in investment activity and companies rendering 4 heating and water supply services, with possible restriction of competition on several regional markets The approach based on the study of the economic parameters of the activity of participants in deals in almost never applied in the practice of the antimonopoly agencies in the Russian Federation. The main reasons for the limited application of such indices are the specificities of the Russian accounting system, the records of financial indices kept by statistics agencies, and the methodological backing for these procedures.