12 February 2024

Opinion piece: Merger policy is critical


Published in The Australian

Competition is about giving Australians more choice.

For workers, genuine competition between businesses provides greater opportunities to switch jobs, allowing them to make the most of their skills and secure better pay and conditions.

For consumers, competition provides more choice, allowing people to shop around and find better‑value products and services. There is no better tool than competition policy for keeping real prices down.

Competition is also crucial if Australia is to make the most of the big shifts around digitalisation, growth in the care economy and the net zero transformation.

Yet there are worrying signs the intensity of competition has weakened over recent decades, with evidence of increased market concentration and mark‑ups in several industries. Other countries find themselves at similar crossroads and many are – like us – reviewing their competition policy settings.

An early achievement of Australia's Competition Taskforce is the development of the nation's first whole‑of‑economy approach to tracking mergers and acquisitions. In simple terms, this approach exploits administrative microdata on labour flows between Australian businesses, adapting a US methodology to identify when a merger takes place. Using labour flows makes it possible to define mergers in an economically meaningful way, excluding mergers that are just trivial paper shuffles.

There are three significant findings in these initial results.

First, the database shows that regulators and researchers have only a partial view of merger and acquisition activity in Australia. Under the voluntary notification system, the Australian Competition & Consumer Commission has considered about 330 mergers each year on average over the past decade.

Initial results from the database tracking labour flows suggests there are many more than this – somewhere between 1,000 and 1,500 a year. This means that for every merger that is notified to the ACCC there are two to three more taking place.

Second, the database reveals acquisitions are disproportionately made by huge firms. The largest 1 per cent of firms make about half of all acquisitions.

The data show that larger firms have increased merger activity since the 2010s and that acquisitions are most common in manufacturing, retail, professional services, and health and social services.

Third, the database shows target merger firms are more likely to have a trademark or patent than an average firm. Target firms are more than twice as likely to have a patent and almost twice as likely to have a trademark. This highlights the purchase of intellectual property as a possible motivating factor behind mergers.

While further insights will come to light as additional data sources are added to the database, it already gives us a more detailed picture of merger activity in Australia than we've had before.

Mergers aren't necessarily a bad thing. They can enhance competition if efficiencies are passed on to consumers. They can be a healthy way for firms to achieve economies of scale and diversify risk. And they present an efficient way for businesses to exit the market or for their owners to move on to other ventures.

But the proposed mergers that raise competition concerns warrant close scrutiny.

The ACCC weighs a range of factors when assessing whether a merger is likely to be anti‑competitive, including market concentration, barriers to entry, regulatory or intellectual property constraints, import competition and product differentiation.

It then must assess the likely impact on competition based on the information provided by the merger parties – which is sometimes incomplete and not always provided in a timely way.

These assessments can have a profound impact on the economy. For business, a less competitive market can increase the cost of doing business, and reduce the incentives and opportunities to invest, grow and innovate. For consumers, a less competitive market leads to higher prices, less choice and lower wage growth. It's crucial our merger laws, processes and regulations are effective.

The Competition Taskforce issued a consultation paper in November asking whether our current merger regime remains fit for purpose. The paper also canvassed the ACCC's proposed reforms and looked at examples of merger regimes from other jurisdictions.

The Taskforce also invited comment on whether certain types of acquisitions by larger firms are adequately captured by competition laws. This includes creeping or serial acquisitions, and so‑called killer acquisitions – where a large player, such as a pharmaceutical company, snaps up a smaller competitor with the aim of killing off its products or innovations. The academic literature highlights a curious fact about mergers. According to work by Geoff and J. Gay Meeks, only one in five research papers find that the typical merger boosts profits or sharemarket value. In a book titled The Merger Mystery: Why spend ever more on mergers when so many fail?, they point out that mergers often boost the remuneration of managers, while leading to lay‑offs among workers. For the sake of shareholders, workers and citizens, it is important to ensure that Australia's regulatory system is not facilitating value‑destroying mergers.

The Competition Taskforce has held a large number of meetings and received many submissions on whether our merger rules and processes are working effectively and where they can be improved. Ultimately, any changes to merger settings should deliver benefits to the economy and consumers while providing certainty to business.