EU Regulations of Merger between EU and Chinese Companies

Words: 993
Topic: Politics & Government


While examining mergers and acquisitions, European regulators pay close attention to the risk of dominance. In this context, the term dominance can be defined as the ability of the organization to prevent the competition in a certain market (Geradin, Layne-Farrar,& Petit 2012, p. 43). It should be noted that the bargaining power of this company is stronger than the power of clients, competitors, or suppliers (Rosenbaum 1998). Furthermore, much attention is paid to restrictive practices and monopolistic behavior that limit the choices of consumers. Finally, the merger of two companies will also be scrutinized because this new company can acquire the position of dominance. Provided that such a risk does exist, the regulators can impose restrictions that limit the ability of this corporation to dictate its terms to consumers

The tests used by the European Commission

It is possible to identify four tests that are used to determine whether a merged company can acquire the position of dominance and these tests are related to various aspects. First of all, one should focus on the entry barriers in a certain industry or the ability of new firms to enter the market. The governmental officials will examine the obstacles that businesses can encounter. In this way, they will try to determine whether this industry can become monopolistic. Secondly, the regulators will look at the market share of the company or the percentage of annual sales in the entire industry (Kokkoris 2010, p. 39; Dabbah 2004, p. 330).

Furthermore, the EU Commission will pay much attention to such an issue as vertical integration or the situation when a business takes control over its major suppliers and distributors. These actions can enable a company to gain competitive advantage over others. Finally, the regulators will examine the effects of the company on the relevant market or the set of products that makes “the monopolist price increase profitable” (Katlin 2005, p. 113). In other words, they will determine whether the newly-created company has the products which cannot be offered by other firms.

The application of the tests

Overall, these tests can be applied to the hypothetical merger of two media companies such as RTL Group which is based on Germany and China Media Group Corporation or CMGC. It should be taken into consideration that this corporation will have the market share of 30 percent and the turnaround of €5bn.

First of all, one should focus on the relevant market test. The merger of RTL Group and CMGC will lead to the creation of corporation that can offer a variety of media products such as game shows, television and radio programs. Furthermore, it will possess such affiliates and brands as VOX, RTL-TVI, M6, and so forth (Plunkett 2009, p. 505). Nevertheless, this organization will not be able to make significant profit by raising the prices, because other media companies can offer similar media products.

Secondly, the EU commission will pay close attention to the market share of the new corporation. As it has been said before, this organization will have approximately 30 percent of the market share which means that this company will acquire the position of relative dominance (Colin 2011, p. 271; Gormsen 2010, p. 150). The regulators can accept this relative dominance provided that the company will not have the opportunity to increase prices for its media products. To a great extent, this argument is relevant to this merger.

Apart from that, the legislators will examine the risk of vertical integration. In many cases, companies attempt to acquire companies that participate in the supply chain, and this strategy can weaken the competitive strength of other firms working in the industry (Wessels, 2006, p. 469; Hill & Jones 2009). Nevertheless, vertical integration is more widespread in media industry since companies can incorporate production studies or channels. More importantly, one should take into account that CMGC and RTL will not have control over the cable networks. Therefore, one cannot say that these companies will not be able to take control over the entire supply chain.

Finally, one should note that the EU Commission will examine the entry barriers existing in the media industry. Overall, it is possible to argue that this market has very significant entry barriers because a new company will need significant capital in order to open a new channel, produce a new show and so forth. Moreover, this organization will have to take significant risks because their products may not enjoy popularity (Albarran, Chan-Olmsted, Wirth 2006, p. 334). These are the challenges that prevent new-comers from entering the media market. Nevertheless, this situation emerged in the media industry long before this merger.

The risks involved

European regulators can take several steps if they believe that the merged corporation can impede the competition in the industry. In particular, they can impose the fines that may constitute approximately 1 percent of the total turnover (The European Commission 2010, p. 29). Additionally, the EU Commission can require this corporation to make periodic penalty payments that can equal 5 percent of the daily turnover (The European Commission 2010, p. 29). Apart from that, it is possible that the merger will be blocked, if the new company will acquire the role of the so-called game-keeper that prevents from competition (Varona 2005; Colino, 2011).

Different outcomes

It is possible to identify different outcomes. First of all, the regulators can accept the merger without imposing any restrictions. Secondly, they can impose certain restrictions on the corporations, for example fines. Finally, the EU Commission can block the merger. In this case, the main goal of the management is to demonstrate that the company will not turn into the dominant power in the market. Overall, one can argue that the Chinese company should proceed with the merger because the European Commission will not regard the merged corporation as a monopoly. Yet, this goal can be achieved if the management pursues the policy of transparency and discloses every aspect of the merger to the governmental regulators.


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