Enforcers must be careful when they analyse mergers for innovation concerns, because current market shares are not such a good predictor of what competition for research and development will look like, the case manager on the European Commission’s review of Dow/DuPont and Bayer/Monsanto has said. Charles McConnell in New York
Concerns about innovation occur when markets are highly concentrated but the analysis of potential harm in this area requires more caution than when looking at the price effects of a merger, Thomas Deisenhofer, the head of unit for mergers in basic industries, manufacturing and agriculture, told GCR Live New York. He spoke on Thursday in his personal capacity on a panel about innovation in merger analysis.
“I would argue that for an innovation problem to be there you need a concentrated market and definitely you have to be more cautious than on price competition,” he said. “On price competition your impact on the price depends on your market share – on innovation competition that’s not such a good predictor [as to] whether your innovation will be good or not.”
A company counts as a qualified innovator if it invests in innovation, and a company cannot be discounted just because it is a small player, the DG Comp official said.
His remarks came in response to a question from DuPont’s lawyer, Skadden Arps Slate Meagher & Flom partner Frederic Depoortere, asking what the appropriate number of innovators are for a market.
Deisenhofer said that the US and EU guidelines provide some direction on the matter, but he used his experience on the Bayer/Monsanto merger to illustrate how the commission makes this assessment.
It is not enough to describe the world of pesticides or traits as differentiated product markets, Deisenhofer said. It’s not one world, it is many worlds; and that translates to multiple different innovation efforts directed at different innovation spaces within those industries, he explained.
When the commission tried to calculate how many companies were active in each separate innovation space, it found that some were highly concentrated, with four, three, two or even zero active participants, since there are many areas where no one is doing research anymore, Deisenhofer explained.
A merger’s effect on innovation starts to become worrying when the number of innovators in a given innovation space shrinks from four to three or three to two, he said. He noted earlier in the panel that the barriers to entry in the pesticides market are very high, joking that even Google – which is present in a growing number of product markets – would not be able to enter that space.
Deisenhofer also responded to a question about the possibility that a tie-up makes an innovator more efficient – that a merged company might spend less in total dollars than the two companies would have spent absent that deal, but that the merged company spends the money more effectively.
That situation was present in Dow/DuPont, he said, noting that the commission found that the combined research and development spend would be more than each of the individual companies’ existing expenditure in this area, but less than the counterfactual where each company continued expanding their efforts to innovate absent the merger.
If a company’s claimed efficiency is associated with an output reduction, that is not then an efficiency, the DG Comp official said. In Dow/DuPont, the commission found that there would be a likely reduction in effort – less investment, lab closures and more. Importantly it also found that there would be a reduction in output, he said.
Depoortere and Deisenhofer disagreed throughout the panel. The DuPont lawyer insisted that the merger between the fourth and fifth largest innovators in the market would create a better competitor to BASF, Syngenta and Bayer. The commission just did not believe the parties, he said.
“The commission needs to be very, very careful” when it analyses innovation as part of merger reviews, Depoortere said, adding that he would love the commission’s findings in Dow/DuPont – and Bayer/Monsanto – to be reviewed before a court.
Arnold & Porter partner Jonathan Gleklen, who was lead counsel to Monsanto and also spoke on the same panel, said he is wary of letting antitrust enforcers predict harm to innovation based on unconfirmed and unsubstantiated concerns.
Shearman & Sterling partner Jessica Delbaum moderated the panel, which also featured University of California economics professor Joseph Farrell.
GCR Live’s 6th Annual New York conference concluded on Thursday.