Re-visiting the role of portfolio effects in merger review

What are portfolio effects?

Portfolio effects are consequences that may flow from merging firms’ complementary product portfolios, or product offerings with analogous properties, such that the merged firm experiences a dominant position in a market (due to the enlarged, and possibly unmatched, product portfolio).

It is certainly possible for consumer benefits to manifest from conglomerate mergers, including through lower product prices arising from synergies due to economies of scope, transaction economies and effects on strategic behaviour. Other possible benefits may include savings yielded from production efficiencies, quality control and product enhancements to improve complementarities.

Notwithstanding the benefits, conglomerate mergers may give rise to potential competition risks, as the merger may result in increased potential for forced tying, bundling, or analogous practices (e.g. full-line forcing) that restrict buyer choice. While such conduct may initially increase economic welfare due to the lowering of prices for products in the short term, it could, under certain conditions, ultimately have the opposite effect, particularly where the merged firm is subject to less competitive constraint. The merged firm, where it has market power, may have an incentive to exclude competitors from accessing a particular customer base or raise rivals’ costs and engage in anti-competitive behaviour, where the merged firm has a dominant position at a functional level of the supply chain.

Such conduct can ultimately result in higher prices, lower product quality, high entry-barriers resulting in reduced investment and/or innovation, and reduced overall consumer welfare.

Regulatory application of portfolio effects

Historically, there has been some divergence between competition authorities assessing a merger through the lens of portfolio effects. 

Commencing in the late 1970s, the position in the United States (US) in respect of conglomerate mergers was that competition authorities should only act against such transactions if they eliminated potential competition. Decisions as to merger clearance were not subject to a portfolio effects analysis.

By contrast, the European Commission (EC) does assess the potential for competitive harm in markets arising from conglomerate mergers by examining portfolio effects.

This deviation has resulted in some mergers being assessed differently across different jurisdictions, an example of which was the proposed GE/Honeywell merger which was notified to both the EC and the US Department of Justice (DOJ) in 2001. The DOJ approved the merger, whereas the EC opposed it due to having identified anticompetitive risks. Relevantly, the EC determined that post-merger, GE and Honeywell would jointly be in a position to improve their position in the relevant markets by tying and bundling products, and GE’s cross-subsidisation of certain products was probable, which would provide the merged entity with a comparative advantage over non-integrated competitors. The merger was subsequently abandoned.

Notwithstanding the US authorities’ somewhat relaxed view towards conglomerate effects considerations, there has been a change in the wind since the appointment of Lina Khan as chair of the Federal Trade Commission (FTC) in June 2021. Chair Khan has taken a number of steps to increase the vigilance of the FTC, including foreshadowing a likely change in approach with respect to the role of portfolio effects in merger analysis.

This new direction has manifested in the FTC withdrawing approval for its Vertical Merger Guidelines in September 2021, which the FTC is working with the DOJ to update. Chair Khan further remarked that the FTC must “update [its] thinking for the current economy” and that the FTC “must examine how a range of strategies and effects, including extension strategies and portfolio effects, may warrant enforcement action.” 1 Considerations around effective regulation of mergers in digital markets were no doubt a key factor underpinning this observation, and it should be noted that there may be possible ‘spill-over’ effects into traditional ‘brick & mortar’ mergers, where portfolio effects considerations are front-of-mind with competition authorities.

Relevantly, in the Australian context, the ACCC’s Merger Guidelines do reference consideration of conglomerate effects, and it can be expected that the ACCC may place more weight on such considerations, particularly in the context of mergers occurring in the digital space.

While there has been no express indication by the ACCC of an increasing weight of consideration of portfolio effect, it is important to note comments made by ACCC Chair Gina Cass-Gottlieb in her keynote address to the ICC/IBA Pre-International Competition Network Forum on 4 May 2022, in which it was recognised and acknowledged that international regulatory authorities are reviewing more complex, global mergers, which requires strong collaboration between agencies across international jurisdictions. Realistically, such collaboration is only possible where there is a high degree of consistency in how agencies seek to enforce their respective competition regimes.