PCC Issues Review Guidelines on Non-Horizontal Mergers

The Philippine Competition Commission (“PCC”) recently released the Review Guidelines on Non-Horizontal Mergers (the “Guidelines”). The Guidelines provide the process undertaken by the PCC in determining the effects of non-horizontal mergers and acquisitions to Philippine trade, industry, or commerce. The Guidelines are supplementary to the 2018 PCC Merger Review Guidelines.

Non-horizontal mergers are those which combine entities or assets that do not directly compete in the same relevant market. Unlike horizontal mergers where the participation of a player in the market can effectively eliminate a competitor, non-horizontal mergers involve entities that operate in different markets and do not compete directly with each other. Thus, non-horizontal mergers do not eliminate a competitor. The main issue that the PCC aims to address is whether a merger is likely to lead to anti-competitive behavior. Through the release of these Guidelines, the PCC seeks to enforce measures to prevent competition issues before they arise.

The Guidelines mention two types of Non-Horizontal Mergers, the: (1) vertical merger and the (2) conglomerate merger. 

A vertical merger involves the combination of entities that operate at different levels of the same production or supply chain. These entities typically engage in the supply or purchase of goods or services from one another. For instance, a vertical merger could occur between an upstream wholesaler, such as a digital payment technology provider, and a downstream retailer, such as an e-commerce website.

A conglomerate merger refers to the combination of entities that do not operate within the same supply chain. For instance, conglomerate mergers can involve the integration of suppliers offering complementary products on the demand side. An example of this would be a merger between a laptop manufacturer and an operating system developer.

A vertical merger, on one hand, may impact competition through several ways such as: 

1. Input Foreclosure – this occurs when an upstream supplier limits the availability of a crucial product or service to the downstream competitors of the merged entity.
2. Customer Foreclosure – this occurs when the upstream supplier merges with a downstream customer, the merged entity’s downstream business unit could potentially refuse to buy from the rivals of its upstream business unit.
3. Raising a Downstream Rival’s Costs – this happens when an upstream supplier raises the input’s price or reduces or downgrades the goods supplied.
4. Raising an Upstream Rival’s Costs – this occurs when the downstream business unit of the merged entity exclusively purchases from competitors of its own upstream business at a lower price.
5. Coordinated Effects and Gaining Competitive Advantage from Obtaining Access to Confidential Information – a vertical merger allows the merged entity to attain information on the market dynamics at both levels (upstream and downstream). This information may be abused to monitor agreements to the prejudice of their competitors.

Conglomerate mergers, on the other hand, may produce anti-competitive effects through Unilateral Effects and Coordinated Effects. 

1. Unilateral Effects refer to the consequences that arise from a change in individual incentives and the anticipated responses of all market participants to this alteration, without any impact on the strategic interaction between the participants. 
2. Coordinated Effects occur when firms, which previously did not coordinate their actions, exhibit a significantly higher likelihood of engaging in coordinated behavior to increase prices or undermine effective competition.

The PCC will consider the above anti-competitive behaviors in assessing non-horizontal mergers.