What the ACCC assesses: the competition test

Section 51ABZH of the Competition and Consumer Act applies when the ACCC considers “whether an acquisition, if put into effect, would or could, in all the circumstances, have the effect, or be likely to have the effect, of substantially lessening competition in any market.”

Section 51ABZH(4) adds that an acquisition may have that effect if it “would, in all the circumstances, have the effect, or be likely to have the effect, of creating, strengthening or entrenching a substantial degree of power in the market.” In weighing it, the ACCC must have regard to all relevant matters, and may look at the deal’s contract, arrangement or understanding and at the parties’ commercial relationships. In making its decision it must also have regard to the object of the Act and to all relevant matters, including the interests of consumers.

The guidelines say a substantial lessening of competition does not mean a large or weighty one; it is “one that is ‘real or of substance’ and thereby meaningful and relevant to the competitive process.” The harm can show up as increased prices, reduced output, poorer quality, less choice or stifled innovation.

An outcome is likely when it is more than speculative or a mere possibility; it need not be certain, nor more probable than not.

On market power, the guidelines report that the explanatory memorandum to the reforms meant the new words, in the guidelines’ phrase, “to clarify that even a small change in market power may amount to a substantial lessening of competition.”

The assessment looks forward. The ACCC compares the state of competition likely if the merger proceeds with the state likely if it does not, which it calls the “future with and without” test; the future without the merger is the counterfactual. It generally starts from the conditions of competition that existed before the merger was anticipated, and may take account of likely and imminent changes, such as a competitor’s plans to enter, expand or exit.

Each merger is analysed on its own facts, but the guidelines explain how some situations can raise competition concerns, each with a worked example.

1. Close competitors. Two bread suppliers whose customers treat their loaves as close substitutes: once merged, the constraint each placed on the other’s prices disappears.
2. A concentrated market. Two of the four largest car suppliers merging, leaving customers fewer suppliers to switch to.
3. A potential or nascent competitor. An established solar battery supplier buying a startup that is developing a competing battery.
4. Restricting rivals’ access. A bicycle maker buying a distributor that its close competitor also uses.
5. Linking goods or services. A real estate listings platform buying a data analytics supplier, which could then link the two, for instance by offering listings and analytics as a package.
6. Serial acquisitions. A medicines supplier repeatedly buying small rivals, where no single purchase may substantially lessen competition but the series may.

The ACCC may measure concentration with the Herfindahl-Hirschman Index (HHI). It considers a market with an HHI above 2,000 highly concentrated, for example five firms each with 20 percent, and an increase of more than 100 points, for example a merger of two firms each with around 7 percent, a significant increase. The guidelines add that concentration is weighed alongside other factors, such as the effectiveness of rivals.

Under section 51ABZH(6), the ACCC may treat an acquisition’s effect as the combined effect of it and other acquisitions put into effect during the 3 years ending on its effective notification date, where those acquisitions share a party with the current one and the targets deal in the same, or substitutable or competing, goods or services.

Where it identifies competition concerns, the ACCC considers countervailing factors, which it lists as “the entry or expansion by rivals, the countervailing power of customers, and rivalry-enhancing efficiencies.” The parties can also offer a remedy aimed at the concerns an acquisition could otherwise cause.

The Act sets a bar for each outcome. The ACCC may attach conditions to an approval only if it is satisfied that, without them, the acquisition could substantially lessen competition. It may decide that an acquisition must not be put into effect only where the notification is in phase 2, a notice of competition concerns has been given, and it is satisfied the acquisition would, or would be likely to, substantially lessen competition.

Section 50 of the Act still applies to acquisitions outside the notification system. It stops a corporation acquiring shares or assets “if the acquisition would have the effect, or be likely to have the effect, of substantially lessening competition in any market.” According to the ACCC, it can investigate acquisitions below the thresholds that are not voluntarily notified where they might be likely to have that effect, and the guidelines say this can include completed mergers.

While a notified deal is under review, customers of and suppliers to the merging businesses may make a submission to the ACCC, within the timelines shown on the acquisitions register.