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GUIDE FOR THE ANALYSIS OF MERGER TRANSACTIONS

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GUIDE FOR THE ANALYSIS OF MERGER TRANSACTIONS Powered By Docstoc
					GUIDE FOR THE
ANALYSIS OF MERGER
TRANSACTIONS

                  JUNE 2012




             |www.fne.gob.cl
PRESENTATION


The presentation and dissemination of this document is an effort of the Fiscalía Nacional
Económica (“FNE”, in English: National Economic Prosecutor’s Office) to promote
competition among economic agents, by providing guidelines with respect to the FNE’s
approach to merger transactions, and the criteria, analytical framework and tools this
service will use when assessing mergers. The current document is aimed to supersede
the existing 2006 Guide for the Analysis of Horizontal Merger Transactions.

The FNE, recognizing the importance that mergers have for the development of the
marketplace, seeks to specify and clarify the analysis it undetakes in this area, in order
to provide certainty about the way in which it will perform its function.

The proposed Internal Guide for the Analysis of Horizontal Merger Transactions not only
gives an account of the currently relevant analytical criteria, but also describes the
special procedure to which the FNE will subject reviews of transactions when the parties
involved, before consummating the transaction, communicate [to the FNE] their
intention merge and provide information for this analysis. This procedure has been
designed based on stages and subject to time periods that guarantee effective and
timely reviews.

This document constitutes advocacy material which adheres to the FNE’s internal
regulations. Therefore, it does not bind the “Tribunal de Defensa de la Libre
Competencia” (TDLC; in English: Competition Tribunal) or the Supreme Court, and it
does not alter or affect the consultation mechanism established in the articles 18 N°2,
31 and 32 of the Competition Act (DL 211).

Sincerely,

Felipe Irarrázabal Ph.

Fiscal Nacional Económico /
National Economic Prosecutor




                                                                                        2
CONTENTS

INTRODUCTION ............................................................................................................................... 4


I.       ANALYSIS OF HORIZONTAL MERGER TRANSACTIONS ........................................................... 5
      I.1. Analytical Framework........................................................................................................... 6
      I.2. Analysis ................................................................................................................................. 8
         I.2.1. Transaction description .................................................................................................. 8
         I.2.2. Market definition ............................................................................................................ 9
         I.2.3. Market Share ................................................................................................................ 11
         I.2.4. Concentration and thresholds ...................................................................................... 11
         I.2.5 Market Entry Conditions ................................................................................................ 13
         I.2.6 Effects on Competition .................................................................................................. 15
         I.2.7 Countervailing effects .................................................................................................... 19
II.      PROCEEDINGS FOR THE ANALYSIS OF HORIZONTAL MERGERS .................................. 23
      II.1 Scope ................................................................................................................................... 23
         II.1.1. Completion of Proceedings .......................................................................................... 23
         II.1.2 Refinement of the notified merger while investigation is in progress .......................... 25
         II.1.3. Confidentiality ............................................................................................................. 25
         II.1.4 Deadlines ...................................................................................................................... 26
         II.1.5 Notification and Communication ................................................................................. 26
      II.2. Notifying the FNE of the Intention to Merge.................................................................... 26
      II.3. Preliminary Stage: Overview of the operation and the evaluation. ................................ 27
      II.4. Stage 1: Intermediate evaluation of the operation.......................................................... 27
      II.5. Stage 2: In depth evaluation of the operation ................................................................. 29



ANNEX N° 1: INTERNAL PROCEDURE DIAGRAMME................................................................ 32
ANNEX N° 2: INFORMATION NEEDED WHEN NOTIFYING THE FNE ON PROSPECTIVE
MERGERS.......................................................................................... ¡Error! Marcador no definido.




                                                                                                                                                     3
INTRODUCTION


In general terms, mergers are arrangements or transactions that have as an object or
effect for two or more independent economic entities to become a single entity, or form
part of the same corporate group.

Mergers are positive, and in many cases crucial, for the development of a strong and
healthy market economy. They give companies the opportunity to increase their
efficiency through the use of synergies and cost-savings. This, in turn, benefits
consumers when those efficiencies are effectively passed on to them.

Nevertheless, sometimes mergers can affect competition in the marketplace. Thus,
national and foreign legislation provide different mechanisms for the assessment and
control of these transactions, which are aimed, on the one hand, to avoid potential
damage that may be caused to competition and, on the other hand, to guarantee
normal business development.

With that understanding, consensus exists that merger-control is one of the corner-
stones of every developed system for the protection of competition.

In Chile, merger control is subject to the general rules that apply to any event, act or
contract that impedes, restricts or hinders competition, or that generates the risk or
potential to do so.

Thus, mergers that impede, restrict or hinder competition, or that tend to produce
those effects, infringe the provisions of Decree Law N°211 (“DL 211” or “Competition
Act”). Therefore, those who implement or enter into such transactions without the
approval of the Competition Tribunal (“Tribunal” or “TDLC”) may be subject to fines
and/or one or more of the remedies established by that statute, notwithstanding any
preventive, corrective or prohibitive measures that may be imposed with respect to
those operations, as governed by articles 3 and 26 of DL 211.

Article 18, number 2 of DL 211, meanwhile, empowers the TDLC to review those
mergers that may infringe DL 211, i.e., that may impede, restrict or hinder competition,
or that may tend to produce those effects, giving the Tribunal the power to establish
conditions that must be complied with in those transactions.
                                                                                      4
The FNE, pursuant to the mandate contained in article 2 of DL 211, should facilitate or
intervene in the “contentious” and “non-contentious” proceedings that arise from those
events, expressing in each case–and using the appropriate procedural means–whether it
believes a merger to impede, restrict or hinder competition; to tend to impede, restrict
or hinder competition; or that it may produce such effects.

The present Guide is an effort to publicize, to companies and to the general community,
the manner in which the FNE will assess if merger transactions among actual or
potential competitors infringe or may infringe the provisions of DL 211, explaining the
criteria on which this analysis is founded.

This document continues the path inaugurated by the October 2006 “Internal Guide for
the Analysis of Horizontal Merger Operations”, which it replaces. Some legal changes,
progress in economic theory, new case-law from national courts and the experience the
FNE has accrued analyzing merger operations since the 2006 Guide was published,
justify this new version. Inevitably, the factors that explain the necessity of a new guide
will keep on changing in the future, which will force the FNE to revisit its application,
and when the current document no longer captures these changes – it will need to be
replaced.

The present guide likewise describes the internal procedure the FNE will apply in order
to analyze merger transactions when the parties notify the FNE of their intention to
merge, subjecting it to concrete and determined phases and foreseeable timeframes.
Unlike the rest of the Guide, this new procedure will govern the approach of the FNE in
the analysis of vertical mergers and conglomerate mergers, in all the relevant matters.


      I. ANALYSIS OF HORIZONTAL MERGER TRANSACTIONS


The mechanism described below is applied to horizontal mergers1. Therefore, whenever
merger transactions, or simply mergers, are mentioned, that should be understood as
referring to mergers among actual or potential competitors2.


1
  The FNE understands by horizontal merger, a merger in which the companies involved are actual or
potential competitors in a given relevant market; by vertical merger, a merger in which the companies
involved operate at different levels of the supply chain, normally in a relation as supplier and client; and
by conglomerate merger, a merger that is neither horizontal nor vertical in nature.
                                                                                                          5
The present chapter aims to clarify the analytical framework the FNE will use for the
assessment of horizontal mergers’ competitive effects (I.1) and the tools normally used
in those evaluations (I.2). Moreover, both sections intend to clarify the types of
evidence considered by the FNE in performing these analyses.

Because this document intends to provide guidance for all horizontal merger
transactions, this Guide provides only general considerations and criteria, which cannot
always be applied to each particular analysis. Thus, it must not be understood as
establishing a strict theoretical framework, or as regulating the necessary or logical
order in which such an analysis must be performed. Needless to say, every merger
transaction demands, by its own nature, a thorough examination of the details of the
market in which it takes place, of the merger itself and of the parties involved, among
many other issues.

All in all, the present Guide provides a clear and transparent orientation about the
analytical framework used by the FNE for the analysis of merger transactions, and an
explanation of the tools normally applied in concrete examinations.



            I.1. Analytical Framework

The FNE considers that a merger transaction infringes or may infringe DL 211 when it
grants, reinforces or increases the capacity of the merged entity, by itself or in
coordination with others, to exercise market power, or when it tends or may tend
towards that.

In turn, a merger transaction grants, reinforces or increases market power when the
merged entity faces fewer competitive constraints than would be faced by the merging
companies separately if the transaction did not take place. When this happens, it is

2
  What is stated below is equally applicable to agreements and associations, or proposed agreements and
associations, among competitors that may cause similar effects to those that result from a merger
transaction. Therefore, the FNE may, when considered appropriate, analyze according to the criteria
stated by this Guide transactions that, without causing two or more competitors to cease to be distinct,
diminish their levels of autonomy or alter the way in which they take their competitive decisions, as may
occur when competitors participate together, directly or indirectly, in a specific business (e.g., joint
ventures); the acquisition of a minority interest, directly or indirectly, in a competitors’ company; the
overlaps between the people in charge of administration or members of the board of directors of two
competing companies, etc.
                                                                                                       6
possible for the merged entity, in a unilateral or coordinated manner, to increase prices,
to reduce output, quality or variety of products, or to alter some other competitive
variable, causing harm to consumers in a way that none of the pre-merged entities
could have done separately3.

As a general rule, the assessment of a merger operation compares the levels of
competition in a scenario involving the companies looking to consummate the merger,
and what would take place following the merger. In other words, the degrees of
competition that would exist with and without the merger are weighed. The aim of the
assessment is to prevent those transactions that may lessen competition.

The degree of competition that existed before the conclusion of the merger is usually a
good indicator of the competitive reality that may be expected in case the merger does
not take place. Thus, in most cases, the competitive conditions that existed at the
moment of the merger are the best reference to assess its effects. Nevertheless,
sometimes the FNE considers changes that are reasonably foreseeable, evaluating, in
particular, the possible entry or exit of new competitors, assuming the merger does not
take place. It also considers the parties’ plans of expansion before the decision to
merge, the possible failure of some of the merging companies or imminent regulatory
changes, among other things.

An operation may grant, reinforce or increase market power, eliminating competition
among the merging parties, regardless of the behavior of third parties. These effects are
labeled “unilateral effects”. Moreover, a transaction may grant, reinforce of increase
market power, encouraging coordinated behavior among the merged firm and its
competitors. These effects are labeled “coordinated effects”. A transaction may cause
both types of risks, and the limits of each concept are not always clear.

In order to analyze if a transaction infringes or may infringe DL 211, the FNE normally
considers two related elements: the definition of the relevant market or markets that
may be affected by the merger, and the competitive effects of the merger in those
markets. The ultimate objective of the merger analysis is to determine the effects, not
to define the relevant market.




3
 In what follows, when the expression “capacity to raise prices is used”, the capacity to alter any of the
competitive variables mentioned must be considered included.
                                                                                                        7
Normally the evidence gathered and processed by the FNE may be used for both
defining the relevant market and assessing the competitive effects of the transaction.
Market definition and the rest of the tools used in the assessment of merger
transactions interact dynamically, and are usually complementary in the analysis
performed by the FNE.

The analysis that follows uses as a model the concentration among suppliers of a
product, and the possibility that it will increase the prices that customers pay, on the
understanding that this situation will affect the price paid by the final consumer. All in
all, it is important to keep in mind that the same type of analysis, with some appropriate
variations, will be done when market power appears as purchase power, or when the
competitive variable that may be altered is not price, but innovation, quality or variety
of the products.

Finally, the conclusions arrived at by the FNE when assessing a merger will rest on the
available information. This information is normally provided by the parties, who are
required to provide it in a complete, truthful and timely manner. Conclusions of the
FNE, and the courses of action following from them, that are based on erroneous,
incorrect or incomplete information can always be reviewed.


          I.2. Analysis


       I.2.1. Transaction description

The FNE usually begins the analysis by describing the transaction, determining the main
legal, contractual, commercial, financial and economic issues. One of the most
important goals of this analysis is to determine whether the transaction is really a
merger. Among other things, the FNE tries to determine:

   a. What is the transaction;
   b. Who are the parties involved;
   c. Which companies may be considered ‘related’ to the merging parties and who
      controls them (through direct or indirect ownership)
   d. What sort of business and/or activities do the merging parties and their related
      parties have;

                                                                                        8
    e. What part of their operations is included in the merger;
    f. The amount of the transactions involved, and the sales volume of the merging
       entities;
    g. The companies’ schedule for the implementation of each phase, and the time-
       frames and conditions to which they are subject.
    h. The existence of non-compete clauses and their terms.


        I.2.2. Market definition


The FNE defines the relevant market in order to establish a framework for the analysis
of the competitive effects of a merger. The relevant market contains the most important
alternatives to which clients can turn for the substitution of the products supplied by
the parties involved in the merger. Therefore, the relevant market is normally useful to
determine the competitive limitations faced by the merging companies.

However, merger analysis will not always begin with, or necessarily consider, the
definition of the markets relevant to the transaction. Nevertheless, the FNE defines
markets in most of the cases it analyses, and even when it does not, it always considers
at some point the alternatives consumers have to the products offered by the merging
parties.

Relevant market is understood as that of a product or group of products, in a geographic
area in which the product is produced, bought or sold, and in a time frame such that
market power may be exercised in relation to it. The FNE treats as part of the same
market the product or group of products which consumers consider as sufficiently close
substitutes4.

Moreover, the FNE considers that the relevant market is delimited by the smallest
geographic area in which market power related to the relevant product may be feasibly
exercised.



4
  The actual or potential competitors’ ability to respond to a price increase by the merging entities is
important when determining the merged entities capacity to exercise market power in relation to a
specific product in a determined geographic area. Nevertheless, the FNE usually considers these
circumstances when analyzing market entry conditions. See., 1.2.5.
                                                                                                      9
When defining the relevant market, the FNE considers a number of factors which can
predict the substitution of the product or products offered by the merging entities, or
the area in which it is offered, in the face of a substantive change in its price or quality.
Among others , the FNE normally considers the following:

   a. Price differences among products that may be thought of as part of the same
      relevant market and its variation considering the geographic area in which the
      products are offered and purchased;
   b. The function or use of products that may be considered as part of the same
      relevant market;
   c. The main physical and technical features of the good or service;
   d. The channels through which the products are delivered to customers;


Among others, the FNE uses the following sources to analyze the elements listed above:

   a. National and International case-law;
   b. Past evidence about consumer’s tendency to change product or geographic area
      in the face of a quality or price variation;
   c. Commercial decisions of the merging parties or their possible competitors,
      grounded on the possible product or area substitution performed by consumers
      in the face of variations in the products’ price or quality.
   d. The opinion of customers and competitors, especially of the former.
   e. Market studies the companies may have, especially if they have been made
      before the decision to merge;
   f. Different customers categories and price discrimination;
   g. In case sufficient and reliable data is available, the FNE normally uses
      quantitative tools in its analysis, which may help to define the relevant market.


The FNE will consider, in addition, the temporal dimension of the relevant market,
especially when evidence exists about peak-demand and off-peak demand or
seasonality (summer and winter), or when dealing with durable goods or with products
that quickly become obsolete.


                                                                                          10
       I.2.3. Market Share


Once the relevant markets are defined, the FNE identifies the companies that
participate in it, including, when appropriate, those companies which operate from
abroad. Then, the FNE determines each company’s market share according to their
respective sales revenue. When sales revenue are not the best indicator of the
competitive importance of each of the participants in the market, the FNE uses as a
complement, or instead of it, the total sales volume, installed capacity, stockpiles, etc.
When determining the method to measure market shares the FNE will also consider the
available data and the costs of providing or producing it.

Normally the FNE considers the market share of each participant at the moment of the
transaction which is being analyzed. Nevertheless, the shares may be calculated taking
into consideration changes that reasonably might be expected in a near future. For
these purposes the FNE may consider exits, entries and imminent expansions by
participants in the relevant market. When the characteristics of the market so require,
the FNE can obtain valuable information from historic market shares and their evolution
over time. This will be especially the case in markets where shares have a high volatility,
as it frequently happens in those markets in which innovation is a relevant competitive
variable.

In order to calculate the market shares that may be expected after the merger, the FNE
normally uses the sum of the merging entities’ market shares.


       I.2.4. Concentration and thresholds


Once the participants and their respective market shares are identified, the FNE will
normally determine the level of concentration in the market and the changes caused by
the merger transaction under analysis.




                                                                                        11
To determine both the level of concentration that exists in a market and its variation
due to the merger, the FNE uses mainly, but not exclusively, the Herfindahl Hirschman
Index (HHI)5.

The FNE assumes that mergers below a certain threshold have scarce potential to
damage competition. Therefore, the FNE will rule out further analysis:

    a. If the HHI after the merger is below 1500;
    b. If 1500 < HHI < 2500 (the value of this index shows a mildly concentrated market)
       and ΔHHI < 200; and
    c. If HHI > 2500 (the value of this index represents a highly concentrated market) and
       ΔHHI < 100.

    The FNE thoroughly analyzes mergers that exceed those thresholds.

    Even when a merger transaction does not exceed those thresholds, the FNE may closely
    analyze it under special circumstances, such as:

    a. One of the parties involved in the merger is a potential competitor, or a participant
       that has recently entered the market with a small market share that does not
       necessarily reflect its potential participation in a reasonably foreseeable future.
    b. One of the merging parties is an important innovator or an especially vigorous and
       independent competitor (a maverick company6), in a sense that is not reflected by
       the market shares; or,
    c. There are current signs of coordination, or they have appeared recently in the past.

In general, the FNE uses structural information from the markets involved in a merger as
a starting point in its analysis, and avoids as much as possible to consider it as an
accurate predictor of the competitive performance of a market. However, in the
absence of sufficient information to establish outright the competitive effects that may



5
  The HHI is calculated by summing the squares of the market shares of all participants, as a percentage.
When a percentage of the market cannot be ascribed to a particular participant, in order to complete this
percentage of non-determinable source, the FNE, according to a conservative criterion, assumes infinite
participants, each with a market share that tends to zero. This assumption, by definition, cannot
overestimate the levels of concentration in a market.
6
  Maverick companies are those atypical in the market, usually small firms that tend to behave in an
independent manner, not following a leading company, therefore becoming vigorous and effective
competitors in the market, Their behavior, independent and unpredictable, may give an important
impulse to competition, and may even block the collusive efforts of other companies.
                                                                                                      12
be expected from a merger, the FNE will have the market structure as a qualified
antecedent to assess the merger in question.



       I.2.5 Market Entry Conditions


Possible entry of new participants into the defined relevant market could reverse any
concerns about anticompetitive effects linked to the transaction, if the authority is
convinced that entry is feasible, timely and sufficient.

In the context of analyzing the feasibility, timeliness and sufficiency of entry, the FNE
will give high importance to the empirical evidence provided by the market (particularly,
industrial organization studies regarding the specific industry). For instance, the absence
of reported entry after a non-transitory increase in the incumbent firms’ margins
suggests unfavorable entry conditions.



Feasibility of entry

Feasibility of entry is related to expected profitability levels, taking into account the
impact that such entry will have on aggregate levels of output, marginal production
costs and the price of the good or service. Thus, entry by new competitors in markets
characterized by economies of scale is less feasible. The reason is that reaching the
appropriate scale could imply such an increase in aggregate output that would force
prices downwards, affecting expected profitability.

Expected profitability and, consequently, feasibility of entry, will also depend on the
existence of entry barriers.

Entry barriers are those market characteristics giving relative advantages to incumbents
as compared to their potential competitors, delaying or increasing costs of the latter’s
entry, and allowing incumbents to exercise market power for a prolonged period of
time.

The main Entry Barriers are:




                                                                                        13
-Legal barriers: Every obstacle to entry backed by a legal norm that prevents new
competitors’ entry or gives a relative cost advantage to incumbents against potential
entrants; for instance, some sectoral regulations, patents and licenses or permits
necessary for certain activities belong to this kind of entry barrier.

In international trade, legal barriers are represented by tariffs, as well as non-tariff
restrictions, which aim to protect some domestic markets. Such restrictions can take the
form of authorization requirements for imports or market quotas for potential
substitutes of imported goods or services.

-Sunk costs: Sunk costs are those costs that the company cannot recover within a
reasonable timeframe, when leaving the market. The FNE looks particularly at the
presence of the following sunk costs: start-up costs such as information gathering,
alternative product design, development and testing, equipment installation, staff
recruitment and distribution channels; investment in specific assets; investment in
marketing and advertising, brand building, after-sale services; research and
development; and innovation and technology.

- Strategic behavior: Among others, the FNE looks at the following strategic variables:
(excessive) investment in capacity, non-competition clauses; and the reputation of being
a “strong competitor” due to the aggressive character of pricing policies or commercial
practices which by and large raise rivals’ costs7.

-Tangible assets difficult to replicate by new entrants: Access to facilities or inputs which
are essential or necessary for the production/commercialization process or research and
development centers that prevent potential entrants from successfully challenging
incumbents.

-Intangible assets difficult to replicate by new entrants: Most importantly, the degree of
customer loyalty, proximity to suppliers and distributors, brand recognition and
intellectual property rights.




7
 Strategic behavior does not necessarily imply an infringement of the competition laws. Thus, a legal
activity from the point of view of competition law may nevertheless make the entrance of new
competitors more difficult or costly.

                                                                                                  14
The FNE will analyze the existence of other factors affecting feasibility of entry such as
economies of scale and scope, potential network effects, as well as switching costs, and
market maturity (as opposed to a market in expansion, more open to the entry of new
actors).

The feasibility of entry increases when companies working in adjacent markets own
production facilities that may be used to enter into the particular relevant market, thus
reducing sunk costs associated with such entry.

Time and sufficiency of entry

The FNE analyzes the speed and continuity associated with entry, to determine whether
such entry will be able to deter or prevent the exercise of market power by incumbents.
Even though the timeliness of entry will depend on the market characteristics and
dynamics, the FNE, in principle, will not consider to be tolerable the exercise of market
power for more than two years.

In order to determine the aforementioned, the FNE will assess the time necessary to
gather the assets needed to initiate operations and to optimize their use, to establish or
access a distribution network and to obtain a critical mass of customers.

In addition to being feasible and timely, entry must be of sufficient scope and extent to
deter or prevent the anticompetitive effects associated to the merger. Thus, empirical
evidence proving low scale entry in niche segments, does not allow presuming that this
requirement is concurring.

       I.2.6 Effects on Competition

The merger analysis consists in comparing levels of competition expected if the merger
takes place against the levels in case it does not. A reduction in the level of competition
implies an increased risk of creating, reinforcing or increasing market power for the
merged entity, or jointly for the incumbents in the market, hence generating the
capacity and incentive for price increases in the market.

For the purpose of the analysis, the FNE will use all the reliable evidence that allows for
an assessment of whether the transaction violations or could violate the provisions of
DL 211. The FNE may consider the following non-exhaustive list of factors regarding the

                                                                                        15
competitive outcomes expected from the operation: market shares of the merging
parties; market concentration ratio and its variation due to the transaction, as well as
the market shares of the other market participants; feasibility of timely and sufficient
entry; effects that previous mergers in the same market or in similar markets may have
had on competition8; events similar to mergers which may be informative regarding
most likely effects (such events can take the form of market entries or exits or any kind
of natural experiment that might have occurred in the market); the information that
may be provided by markets similar to those affected by the transaction that permit, for
instance, a comparison of the behavior of one of the merging parties against its
behavior in the presence or absence of the other merging parties, or against a higher or
lower number of competitors.

Unilateral effects

One way transactions may generate adverse effects on competition is by eliminating
competition among merging parties, allowing the merged entity to unilaterally exercise
market power.

Unilateral effects are generated when, due to the operation, the merged entity acquires
sufficient market power to be able and have the incentive to increase prices or reduce
innovation, quality or variety offered to its customers.

That may occur, for instance, when a significant part of the acquiring company’s
customers would have directed their demand towards products offered by the acquired
company in the event of a price increase by the former. The above, provided that the
operation will allow the merged entity to internalize the loss, makes profitable a price
increase that would not have been possible if not for the merger.

Unilateral effects are also produced when a company benefiting from a monopolistic or
quasi-monopolistic position merges with a new or potential competitor.




8
 Notwithstanding the aforementioned, the FNE keeps into consideration, when using evidence from
previous transactions, that it is possible that the effects are not necessarily observable, because the
merged entity may be, for instance, avoiding the exercise of the obtained, reinforced or increased market
power knowing that this can be subject to monitoring -and eventually be used as evidence- by
competition authorities.
                                                                                                      16
In this case, the merger will normally prevent reductions in prices or increases in the
degrees of innovation or variety in the market9.

To determine the existence and severity of unilateral risks, and ideally to quantify them,
the FNE will use, in addition to the evidence described in section I.2.6, the following
criteria:

a) The degree of substitution among goods or services offered by the merging entities,
in relation to other products that can be considered part of the same relevant market, in
the case of differentiated products;
b) The ability of the other participants, in case a price increase by the merged entity
takes place, to increase the production (when looking at homogenous product) or to re-
position products in such a way that makes them compete more directly with those
offered by the merged entity (in case of differentiated products);
c) Product characteristics, for instance, the level of obsolescence, technological
renovation, degrees of differentiation, cost structure and variation, that may facilitate
the exercise of market power;
d) The behavior of the parties, particularly if there is evidence of abuse of market power
in the past;
e) The parties’ profitability;
f) Demand elasticity;
g) The characteristics of the merged entity such as its economic and financial strength
and the implications of these in its ability to limit competition; for instance by means of
control of intellectual property rights, inputs or distribution points;
h) The behavior, profitability and characteristics of the absorbed or merging parties, in
order to determine whether the purpose of the operation is to eliminate rivals. For
instance, the motivation behind the acquisition of an innovative competitor may be for
the dominant one to prevent being challenged;
i) How feasible it is for a customer of the merging parties to change its supplier.




9
 Unilateral risks that may result from a transaction are not necessarily limited to those implicating a direct
exercise of market power on customers or clients. In fact, though less frequently, the transaction may give
the merged entity the capacity and incentives to exclude competitors, generating an indirect exploitative
effect.
                                                                                                          17
The consideration of the factors mentioned above will depend on the concrete case (for
instance, if homogeneous or differentiated products are under analysis) and on the
available data.

Coordinated Effects

A merger may reduce competition in the relevant market(s) when it facilitates or makes
more effective coordinated behavior by the merged entity with its competitors.

Under competitive conditions, companies have incentives to offer their customers
products that are cheaper, varied or innovative. Structural changes involved in a merger
may affect those incentives, making it more profitable for each company to adapt its
own behavior to the others’ strategies instead of offering better terms to consumers
and thus gain customers. In sum, there are operations that make it more profitable for
firms to refrain from competition in one or more aspects, rather than engaging in rivalry
with its competitors.

There are different forms of coordination. For instance, coordination may be explicit or
implicit, or simply parallel conduct which is not the result of a previous arrangement
among companies. This implies that coordinated effects in merger analysis include
conduct that would not necessarily be objectionable under the competition law in other
contexts.

Coordination may take place with regards to some, several or all competitive aspects
relevant to a market. The FNE, when analyzing coordination risks, usually identifies
points or variables around which a coordinated action might take place, such as the
price of one or more products, the geographic market division or customer allocation.

To make coordination among market participants possible, and coordinated effects of a
merger likely, it is not required that all market participants adapt their behavior.

When analyzing the merger for coordinated effects the FNE usually considers several
factors that make a market vulnerable to coordination, as well as the effects of the
operation on these factors. Because coordinated effects are hard to quantify, however,
whenever possible the FNE will use quantitative tools for analyzing evidence of past
coordination in the market, market vulnerability to coordination or market changes
resulting from the operation. Among other factors, the FNE considers:

                                                                                      18
a) The level of concentration in the market;
b) The number of participants;
c) The degree of symmetry in market shares among participants;
d) Symmetry in the level of costs among competitors;
e) Product homogeneity or heterogeneity;
f) Degree of demand variance;
g) Information transparency in terms of prices or outputs or in any other factor that
would allow an estimation of these variables;
h) Exchanges of information between market competitors, as well as characteristics and
levels of disaggregation of the information exchanged;
i) Existence of a credible penalty when deviating from the agreement and an expedient
mean for detecting those deviations;
j) Degree of interaction among market actors, considering the number of markets they
participate in, frequency of their interactions and the relative significance of these in
their overall business value;
k) Characteristics of merging parties, particularly if one of them has been a maverick
company;
l) Evidence of collusion or coordination at the time of the merger or in the recent past;
m) Evidence that the merging parties have colluded or have coordinated their behavior
in similar or comparable markets to those involved in the operation;
n) Profitability of merging parties and profitability of the other agents;
o) Evolution of market shares; and
p) Cross-shareholdings of market participants.


       I.2.7. Countervailing effects

In addition to the unilateral or coordinated effects of the operation, the FNE will weigh
countervailing effects claimed by the merging parties during the investigation.
Particularly, potential efficiencies associated with the operation and the operation’s
power to prevent the exit from the market of the assets of a failing firm.

                                                                                        19
Efficiencies

Eventual efficiencies that may result from a transaction may counterbalance the
operation’s risks.

Two kinds of efficiencies are of interest: a) Productive efficiencies, regarding cost
reductions; and b) Dynamic efficiencies, regarding the development of new or better
products.

Productive efficiencies are mainly the result of scale and scope economies, market
clusters, synergies, elimination of duplications, specialization of production sites,
rationalization of management functions (for instance, sales, marketing, accounting,
procurement, finances), and of distribution, advertisement and capital increases.

These efficiencies may play a countervailing role particularly for unilateral risks. Thus, an
economic agent that, due to the merger, obtains the capacity to increase its prices may
not have the incentive to do so due to a significant reduction in its cost curve.

In addition, productive efficiencies may contribute to reduce coordination risks.
Increasing cost differences among the resulting firm and its competitors may reduce the
entity’s incentives to coordinate with its rivals.

Dynamic efficiencies are synergies allowing companies to continuously improve their
performance on quality, service or variety. Those synergies result mainly from the
complementariness of the merging parties. Hence, these types of efficiencies are more
often the result of vertical or conglomerate mergers rather than of horizontal mergers.

Dynamic efficiencies do not directly mitigate potential risks; rather they work as an
indirect counterweight. As a consequence, a merger may harm consumers by means of
higher prices and at the same time benefit them through the creation of a business
structure providing newer and better products. In such cases, the FNE will weigh
qualitatively the effects associated with both scenarios.


                                                                                          20
The FNE will balance the efficiencies that the merger could generate against the risks to
the extent that the claimed efficiencies are all verifiable, inherent to the merger, and
capable of compensate for the increased market power obtained by the merged entity.

Verifiable

Efficiencies should be demonstrated through convincing evidence, regarding both the
likelihood of their materialization as well as their potential magnitude.

The FNE will analyze, for this purpose, the business background, financial statements,
research and development reports, strategic plans, integration plans, consultant’s
studies and any other information available or provided by the parties.

Inherent to the merger

The parties must demonstrate that efficiencies are inherent to the merger, i.e.,
attributable directly to the transaction and not achievable by other alternatives less
restrictive to competition, such as internal growth or collaboration among competitors
(e.g., by a joint venture).

The above implies an analysis regarding probability rather than possibility, in the sense
that the question focuses on the probability that efficiencies would have been achieved
without the merger and not whether they were likely in the absence of the merger.

Prone to compensate for the increased market power obtained by the merged entity

Efficiencies resulting from a merger should be capable of reverse the risks to
competition associated to the operation. For this reason, the parties need to provide
evidence that efficiencies are sufficient, timely and likely to be passed on to consumers.

a. Sufficient: The magnitude of efficiencies should be sufficient to counterbalance the
entity’s incentives to raise prices as a consequence of the increased market power
gained by the operation. Thus, the higher the harm to consumers the higher should be
the magnitude of the efficiency.




                                                                                       21
b. Timely: Efficiencies should ideally coincide with anticompetitive effects associated
with the transaction. The longer they take to come into effect, the less consideration
they will be given in the FNE’s analysis.

c. Able to be passed on to the consumers: The FNE will assign greater consideration to
reductions in variable costs or marginal costs, because these reductions are more likely
to be passed on to consumers. Reductions in fixed costs will receive a lower
consideration, and only to the extent in which they benefit consumers, as occurs with
fixed costs that become variable in the medium-term or those applied to research and
development (R&D) in industries with intense competition in R&D.

Customer’s bargaining power

Besides the pressure exercised by its competitors, merging companies may be subjected
to their customers’ competitive pressure. Depending on the intensity of this pressure, it
is possible that customers’ bargaining power outweighs post-merger increased market
power. The above seems more likely with respect to unilateral effects rather than
coordinated effects.

The FNE does not consider that the mere existence of customers with market power is
an effective counterbalance to the risks detected, and understands that, in addition, it is
necessary to provide evidence that customers have the capacity and the incentive to
turn to alternative suppliers or to vertically integrate in case of a deterioration of the
terms offered by the merged entity.

The FNE will also inquire about the existence of other customers not possessing such
bargaining power, which may be exposed to the exercise of increased market power by
the merged entity.

Failing firm exemption

The FNE understands that when the acquired firm may be considered a failing firm, the
above analysis might be affected. In effect, if company assets are about to disappear
from the market, a prospective approach towards this market suggests that consumers
will not be in a worse position after the merger, relative to the position in the absence
of the operation.


                                                                                        22
In order to fulfill the requirements of the failing firm exemption, the firms must
establish:

a. The firm allegedly failing, due to economic problems, will leave the market in the near
future unless it is absorbed by another company;
b. The exit will lead inevitably to the disappearance of its tangible and intangible assets
from the market;
c. Having explored alternatives, there was no other option to preserve the company’s
assets in the market that would be less costly for competition.



     II. PROCEDURES GOVERNING HORIZONTAL MERGER ANALYSIS BY THE FNE


In its examination of mergers, the FNE will subject its analysis to the following
procedures:


     II.1. Scope


The procedures detailed below are applicable to investigations aimed at assessing the
competitive effects of mergers of all kinds as long as (i) the merger has not been
consummated and (ii) the FNE is notified by the parties directly involved in the
transaction (hereon, the “Parties”).

If the Parties, after the initiation of the proceedings and regardless of its progress,
consummate the reported transaction, the FNE will not be bound by the procedures
established in this Guide and will instead be subject to the Internal Guidelines for
Investigation and Judicial Action.

The procedures included in this Guide are of a collaborative nature, such that the FNE
can terminate the process, in the absence of diligence or collaboration by those that
initiated it.


       II.1.1. Completion of the proceedings


                                                                                        23
Based on the results of the investigation, the FNE can conclude the process in the
following ways: (i) issue a decision to take no further action, (ii) reach an out of court
settlement, (iii) issue an opinion to the TDLC, for cases initiated by the Parties’
notification of their intention to merge, or (iv) submit a query to the TDLC.

In the context of this special proceeding, the FNE:

   1. Will make a decision to take no further action when, given the information
      available, believes that infringements to the provisions of the Competition Act
      (DL 211) are unlikely;

   2. Will consult the TDLC on the impact of the notified operation:

           a. When it believes that the merger, if materialized, would infringe the
              provisions of DL 211;

           b. When the information provided by the Parties is not sufficient for the
              FNE to discount that the notified operation, if materialized, would
              infringe the provisions of the DL 211;

           c. When the complexity of the merger or the remedies considered
              necessary is manifest, or if there are relevant matters regarding the
              competitive impact of the transaction upon which there is disagreement
              between the FNE and the Parties.

           d. When, for certain reasons, the FNE considers it appropriate to follow the
              consultation procedure established in Article 18 N°2 of DL 211. Before
              presenting the query, the FNE can encourage the Parties themselves to
              consult the Competition Tribunal about of the competitive effects of the
              notified merger.

   3. Will explore the possibility of reaching an out of court settlement with the
      Parties, when there is agreement on the potential risks of the operation with
      respect to the provisions of DL 211, and on the measures that can be adopted to
      safeguard competition in the marketplace.




                                                                                       24
Even if the FNE concludes that the merger should be notified to the Tribunal by the
Parties, the procedures described in this Guide can continue for the purpose of issuing a
report and submitting evidence in the consultation procedure initiated by the Parties.
This would permit the FNE to form a well-founded opinion regarding the potential
effects of the operation, including the effectiveness of the remedies proposed by the
Parties.

The same stands for those cases in which, during the course of the investigation, the
interested parties—on their own initiative or at the suggestions of the FNE—submit a
query to the Competition Tribunal. In these cases, and provided that the time periods
established by the Competition Tribunal for presenting evidence are compatible with
those established for the investigation, the FNE can continue this procedure to issue an
opinion before the Competition Tribunal later on10.


        II.1.2 Conclusion of the notified merger while investigation is in progress


In general, the FNE will consider that a merger has been consummated when two or
more economically independent companies become one single company, become part
of the same corporate group or when a non-transitory change in the control of the
entity takes place. The materialization or conclusion of a merger transaction includes,
but is not limited to, the conclusion of the legal acts that convey it.

If the measures needed to reestablish competition are deemed compatible with the
conclusion of the transaction, the FNE may provide assurances to the Parties that it will
continue the investigative procedures established in this Guide and agree on other
measures to remedy any effects that may eventually infringe the provisions of DL 211.


        II.1.3. Confidentiality


The FNE, if requested, will keep the confidentiality or reserved character of the merger
that has been reported. However, the information cannot kept confidential beyond the
first stage of the procedure. Once that phase has been completed, irrespective of



10
  An additional advantage of maintaining the current proceedings is that it facilitates the application of
the mechanism contemplated in Art. 31, N°2 of DL 211.
                                                                                                       25
whether the proceedings continue or the matter is closed, the FNE will make the
notification public.

The confidentiality of the information provided by the parties involved or by third
parties will be subject to the general rules. In case confidential or reserved information
is provided, the FNE will create and submit a public version.

When appropriate the FNE will make sure that information supplied by each party is not
made known to the other parties.


        II.1.4 Time periods


The time periods established below do not include weekends or public holidays11. The
FNE can extend them with the agreement of the interested parties.



        II.1.5 Notification and Communication


During this process, the FNE will look for the most expeditious way to communicate with
the Parties. To that end, the FNE will suggest that the Parties to provide contact details
(e-mail, address, day-phone) once the merger has been reported.



            II.2. Notifying the FNE of the Intention to Merge


The FNE will use the special procedures detailed in this Guide for any merger reported
using the electronic form found on its website. A copy of the form can be found in
Annex 2 of this guide.

The FNE should resolve any doubts expressed by the Parties, before the initiation of the
process.




11
  Annual leave referred in clause 1 of article 313 of the Tribunals’ Statute Code is not considered a public
holiday.
                                                                                                        26
          II.3. Preliminary Stage: Overview of the operation and the evaluation.


Once the merger has been reported, the FNE will assign it a title and file number. When
dealing with a confidential notification, the title and file number will reflect that nature.
The FNE will name a team with at least one lawyer and one economist.

The FNE will make sure that the notification has been made correctly, and will have
three days from the date of notification to do so. If the notification is complete, the FNE
will issue a resolution initiating the investigation. The Parties will be notified of the
decision, which will be published on the FNE website. If the transaction has been
reported on a confidential basis, the FNE will not make the decision public until the
confidentiality period has ended. If that is the case, the FNE will comply with the
provisions of the DL 211, art. 39, letter a), under which the President of the Competition
Tribunal needs to be notified of the reserved character of the investigation.

Once the merger has been report, and if it is deemed necessary, the FNE will summon
the parties’ representatives within five days after the investigation has been initiated, in
order for them to answer questions that the FNE invetigators may have regarding the
transaction or the market. The summons, as well as the conversations, will be
conducted in an informal manner, notwithstanding the need to record the conversation
and keep a register of it in the investigation folder.

Within 10 days after the initiation of investigation, or from the date of the meeting
described before, the FNE should communicate the Parties either the early termination
of the processs or the need to request additional information to that specified in the
initial [notification] form.

The FNE will give early termination to the process, issuing a decision to close the file
when, based on the available information, it concludes that the reported merger is
unlikely to infringe the provisions of DL 211.

A copy of the decision will be sent to the Parties within five days after the
announcement of an early termination of the investigation. The text of the decision will
be published on the website of the FNE.



          II.4. Stage 1: Intermediate evaluation of the operation



                                                                                          27
The FNE will send to each of the Parties an official letter requesting information beyond
that of the [initial notification] form, if based on the information available: (i) it
concludes that the merger may put competition at risk, or (ii) it deems the information
available insufficient to form a well-founded opinion regarding the likely effects of the
reported transaction.

Mergers reported on a confidential basis cannot maintain that status beyond the
initiation of this stage. Thus, the FNE will make the decision to initiate an investigation
publiconce the official letter requesting additional information is dispatched.

The request for additional information will not establish a response deadline. Requests
to third parties for information, on the other hand, will have a response deadline that
cannot exceed 15 days. The FNE will evaluate requests for extensions made by third
parties that deem the time granted to be insufficient to provide the requested
information.

Upon receiving the information by all Parties, the FNE will have 10 days to request the
rectification of mistakes and omissions that are detected or to ask for clarifications if
necessary. Beyond this point, if no rectifications are requested, the information will be
considered to have been submitted in a proper manner.

Within the 10-days time period starting from the day all merging Parties adequately
respond to the requests for information, and regardless of the state of the requests of
information by third parties, the FNE is obliged to notify the parties of the intention to
carry on with the investigation or to issue a decision to terminate and close the
investigation. The FNE may extend the deadline for another 10 days if necessary due to
the complexity or length of the responses.

The FNE will close the investigation if, based on the evidence collected, it considers it
unlikely that the reported transaction, when consummated, would infringe the
provisions of DL 211. A copy of the decision ordering the termination and closing of the
investigation will be sent to the Parties, no later than 5 days following the
announcement of the decision to terminate the investigation. The text of the decision to
close will be published on the FNE website.




                                                                                        28
            II.5. Stage 2: In depth evaluation of the operation


The FNE will proceed with the investigation if, based on the same information, it (i)
concludes that the merger may put competition at risk, or (ii) considers the information
available insufficient to form a well-founded opinion regarding the likely effects of the
notified transaction, or the measures that may be required to mitigate those effects. In
such cases, in order to inform the Parties about the progress of the investigation, the
FNE will communicate to them in writing regarding the potential anticompetitive effects
that are currently being considered, given the information available and the present
stage of the investigation.

Following the aforementioned written communication, the FNE will conduct a thorough
investigation regarding the market(s) affected by the merger, the potential effects and
the possible remedies to mitigate the risks that are not compensated by efficiencies.
Notwithstanding the particularities of each investigation and to the extent that this is
possible, this stage place special emphasis on quantitative analysis. Therefore, it is
possible that a significant amount of information will be requested.

Thus, the FNE will urge the Parties to assign, as soon as possible, a member of their staff
as a contact person who should be familiar with the company’s data and available
information, as well as with the time periods and workloads that are required to obtain
the data in the form requested by the FNE.

The FNE—through its investigation team—will arrange as many meetings with the
contact person as deemed necessary. These meetings might be recorded. The FNE will
use these occasions to explain in detail the information needed for this stage and will
urge the contact to provide the available information. In case the data needs be
processed, the FNE will need to be informed about the estimated time of delivery12.

The FNE can send official letters to the Parties or even third parties, requesting
additional information in relation to the risks detected13.

12
   Notwithstanding the possibility that the Parties and the FNE -if considered useful and always in a
voluntary manner- supply the information in earlier stages of the proceedings.
13
   At this stage, normally the FNE will need information from the rest of the actors of the investigated
market(s). To obtain such information, the FNE will send official letters to third parties, unless one of the
Parties can supply such information or knows of an easier way to obtain it.
                                                                                                         29
When the information requested in the official letters is received and processed, the
FNE can close the investigation if it considers the merger to be unlikely to infringe the
provisions of DL 211. Otherwise, the FNE will present to the Parties (together or
separately) its concerns regarding the possible competitive effects of the merger and
the actions that may be undertaken. Similarly, the Parties can propose to the FNE
remedies that may be appropriate for mitigation.

Depending on the results of the subsequent conversations, the FNE will explore the
following possibilities: (i) reach an out of court settlement (ii) encourage the Parties to
submit a query to the Competition Tribunal (iii) submit its own query to the Tribunal.




                                                                                        30
HOW TO CONTACT THE FNE


For more information contact:

Fiscalía Nacional Económica

Agustinas 853, pisos 2 y 12

Región Metropolitana

www.fne.gob.cl/english

goc@fne.gob.cl

Tel: +56 (2) 753 5600 - 5631

Fax: +56 (2) 753 5607 - 5608









                                31
                                                     ANNEX N° 1: INTERNAL PROCEDURE DIAGRAMME




     PRELIMINAR STAGE: SUMMARY EVALUAT ION OF THE MERGER
                                                                                                                                    Provide
                                                                                                                                    decision to
                                                                                                                                    Parties
                                                                                                                5 days

                                                                                                                                    Publish
                                                                                                                                    decision on
                                                                                                                                    website




               Assign                                                                                                              Early
                                                                Notify the                                                        termination
                File number                                     Parties
                Title                                          Publish
                                                                 decision to         Summon the         Summary
                Team
                                                                 initiate on        representatives   analysis of the
                                        Decision to initiate     website
                                                                                                       transaction
                                          investigations
                                                                                                                               Request of evidence
NOTIFICATION                                                                                                                   (start stage 1)

                Revise notification




                               3 days
                                                                               5 days                                    10 days
  STAGE 1: INTERMEDIATE EVALUATION OF THE MERGER



                                                                                                  Copy Decision
                                                                                                  to Parties

                                                                                        5 days    Publish
                                                                                                  Decision on
                                                                                                  website


                                                                                                 Termination of
                                                                                                 Investigation
                          Parties
Request for
                                          Receive                          Evaluation
Evidence                                            Analysis of evidence
                                          answers
(Publication of the
notification if this      Third
was reserved)             parties                                                                Initiate Stage 2



                                                       10 days               10 days
                                                                                                            Copy Decision
STAGE 2: IN DEPTH INVESTIGATION
                                                                                                            to Parties
                                                                                              5 days
                                                                                                            Publish
                                                                                                            Decision on
                                                                                                            website




                                                                                                       Termitation of the
                                                                                                       Investigation


 Communicate to                      Meetings
                    Assign Contact   Between          Official letter to    Answer to
 the Parties the                     Contact and     merging and third     Official letters            Presentation of
 results of the                      Investigation         parties                                     concerns and
 analysis                            Team
                                                                                                       course of action




                                                                            Extra judicial
                                                                             Agreement               Parties                FNE Consults
                                                                                                   Consultation

				
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