Only the largest European mergers are subject to the EU Merger Regulation. See “When will the European Commission Review a Merger?” If the European Commission does not review a transaction, then it will be subject to the merger control regime of a member state. The EC Merger Regulation, Council Regulation No 139/2004, establishes the key test for European merger control: does the transaction cause a “significant impediment to effective competition” in the European Union, or a part of it? European competition law defines, in detail, the term “effective competition.”
European competition law defines this term regarding both horizontal mergers and non horizontal mergers, most of which are vertical mergers. Since vertical relationships are between firms which are not in competition with one another, the European Commission is far more like to block horizontal mergers.
As in the United States, Competition concerns usually arise when there are horizontal overlaps: when one merging party is in competition with the other merging party. As the European Commission explains in its very useful horizontal merger guidelines, if the merger eliminates horizontal overlaps, then it may give the merged firm too much market power. A firm has too much market power when it does not face sufficient competitive pressure and can thus improperly raise its prices. DG Comp, the competition authority of the European Commission, carefully analyzes transactions to ensure that a merger will not allow a firm to raise its prices. DG Comp starts its analysis with the same market definition test used by each competition authority in the United States: can the merged firm could raise its prices 5%? See “How do the Antitrust Enforcers Regulate Horizontal Mergers in the United States? But the European Commission also considers other factors, such as the market share of each party to the merger, before determining if the transaction will improperly lessen competition.
The merger regulation requires the European Commission to examine harms to competition which the merged firm would itself cause, called non coordinated effects. For example, the transaction may allow the merged firm to raise its prices this 5%. If so, then DG Comp will see if there are any important competitive constraints. For example, the market may exhibit buyer power: buyers may have market power themselves, and thus may be able to resist a price hike.
The merger regulation also requires the European Commission to examine coordinated effects. These will arise in an oligopolistic market. An oligopolistic market is one with only a few firms. This market may lack effective competition, and this lack of competition may allow all the firms, together, to raise their prices 5%. If so, then EU merger control would probably not allow the merger.
Merger analysis also looks to see if the transaction will create an efficiency. Perhaps the transaction will lower costs. While the European Commission will consider such an efficiency, the horizontal merger guidelines, summarizing many EU court precedents, clearly state that competition law rules only consider such an efficiency it will benefit consumers. Such an efficiency will there rarely alleviate the European Commission’s competition concerns.
Further, as the head of DG Comp, Commissioner Vestager, issued an important Commission Notice in which she made clear that the Commission will also review merger cases in which each merging party is trying to develop the same product. Each merging party is thus competing in a Future Market, where they could not possibly raise prices. See “How do American and European Competition Authorities Protect Competition to Innovate?” Future Market cases include killer acquisitions. Killer acquisitions are transactions in which a large firm buys a small firm which it fears will be a strong future competitor. And the EU General Court recently ruled that Commissioner Vestager correctly interpreted the merger regulation, and thus may aggressively use competition law to block killer acquisitions.