By Gareth Vaughan
Chairman Mark Berry says the Commerce Commission doesn't have a line in the sand in terms of an upper limit of marketshare it's comfortable with a company having. Rather it looks at what the competitive constraints might be on the merged entity if it approves a takeover application.
And speaking to interest.co.nz, Berry said he can understand the perception the Commerce Commission, which has blocked just two takeovers in the last five years, rarely says no to a takeover application.
Asked whether the Commission has a specific marketshare percentage it doesn't want to see any company above in a given market, Berry said it doesn't. The Commission last month approved the takeover of Lumley by Insurance Australia Group, which takes IAG's share of the insurance market to just over 50%.
"We don't have any magic marketshare numbers," Berry (pictured below) said. "Our (New Zealand) marketshare numbers look very high on an international scale because we're a small country and it's just a fact of life that when we're looking at mergers often it's four to three or three to two. That quite routinely is the type of marketshare aggregation we're getting."
"We've given approvals to mergers that had marketshare that was much higher than this particular (IAG-Lumley) case," added Berry.
"The critical thing you're looking at when we would approve a merger, where you've got say 70% or north of that marketshare, is what is the competitive constraint for the merged entities? If the merged entity puts up its prices 5% or 10% what's going to happen in that market?"
"(In) a lot of the market's where we're giving approval to those kind of numbers you're dealing with tradable goods where there's a lot of import competition. So very often you'd suddenly find imports flooding in. The import parity price provides a constraint. Or particularly if you've got other domestic competitors who are well established and who have got spare capacity, naturally they're going to readily expand and compete in market where they get that opportunity."
Market dynamics rather than marketshare per se is the key for the Commission, he said.
"Marketshare is a starting point but there's no direct translation of 'here's a magic number of marketshare' that we would accept a merger on or not. We have, over a large number of years, approved market shares that are quite high, but that's partly a function of a small market like New Zealand with few players," Berry said.
'There's usually a fairly strong argument as to why approval should be given'
Over its last five financial years, including the current year that ends on June 30, the Commission has approved 50 takeover applications and declined just two. However, some of the clearances were granted on the condition divestments were made. Berry said he could understand a perception the Commission doesn't often reject takeover applications.
"I can understand that perception given the numbers of applications we get and those that get turned down. People who apply here go through a quite lengthy and costly process. And I expect when people come in here they've generally done their homework, and there's usually a fairly strong argument as to why approval should be given," Berry said.
"So there might be a lot of mergers that aren't happening because there's a realisation it wouldn't get over the threshold here (from the Commission)."
"Each case we get we do go through quite carefully because we do end up with permanent restructuring of markets, so we are careful in the way that we analyse mergers. But it's true to say that a high percentage of merger applications are successful here," Berry said.
"There aren't very many that don't have plausible arguments run with them as to why approval should be had."
The Commission's website says it aims to achieve the best possible outcomes in competitive and regulated markets for the long-term benefit of New Zealanders.
'A pro-competitive effect'
Berry also said economic efficiency in an economy as small as New Zealand's is why some industries have very few companies competing in them.
"So mergers can have a pro-competitive effect in terms of ending up with more efficient producers in the market. So there are very plausible arguments to justify the kind of market dynamics we have," Berry said.
He also noted New Zealand firms need to be able to compete against imports, and scale helps them do this.
"New Zealand firms are competing often against import competition. (So) there's problems for New Zealand firms if they are not efficient producers and that's why you do need some critical mass when you open up your economy to imports...So that's another driver for a small market economy having justifiably fairly high levels of concentration," Berry said.
Berry was appointed Commerce Commission chairman in April 2009 for an 18 month term. This was extended by five years and runs until March 2019. He's a former partner at law firm Bell Gully and ex-consultant at Chapman Tripp, another law firm.
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