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The O’Brien- Salop thesis

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The O’Brien- Salop thesis

[19] In their article the authors are considering the competitive effects of partial ownership transactions. Because under US law, as we examine later in the postscript, merger review can apply to transactions even where control is not established, when US writers consider ‘partial stock acquisitions’ they use this term to apply to a range of transactions that fall short of a transaction in which the ‘whole’ of the stock is purchased, but included in the spectrum of partial ownership are ones our law would consider as conferring control and others not.14 The authors thus take the spectrum of partial ownership possibilities, which in control terms range from acquiring full control to having no control, and examine the different anticompetitive outcomes that they may be associated with them.

[20] The one position on that spectrum of partial ownership of significance to the present case is the authors’ view that acquisitions by one firm of a non-controlling interest in another can lead to possible anticompetitive effects. The traditional view on this, expressed by Areeda and Turner, was that unlike a complete merger, a non-controlling interest constitutes no intrinsic threat to competition.15 Areeda and Turner also expressed the view that these effects would in any event be impossible to measure. O’ Brien and Salop challenge this conventional view and respond to the Areeda and Turner thesis, by arguing that there are circumstances where partial acquisitions change the acquiring firm’s incentives, even when the acquiring firm will have no control over the target’s actions. They go on to suggest that in horizontal mergers these effects may be anticompetitive and that it is possible to provide, as they term it, a toolkit to measure these effects. They refer to two such methodologies; one a modified version of the familiar Herfindahl- Hirschman Index (MHHI) and the other, based on the work of Carl Shapiro, what they term price pressure analysis or PPI.16

[21] O’Brien and Salop set out to distinguish the consequences of acquiring control from those of acquiring a passive or what they term ‘silent’ financial interest. If a firm acquires control of another, this may have competition implications in respect of the acquired or to use our Act’s language, the ‘target’ firm. If an acquiring firm only acquires a passive financial interest in a rival, the target firm’s incentives may be unaffected, but it may alter the incentives of the acquiring firm.17

[22] O’Brien and Salop examine several forms of partial ownership ranging from the acquiring firm having a silent financial interest in the target firm, to the acquirer enjoying unrestricted control over the target, what they term ‘total control’. (Note that the latter concept is to be distinguished from a full merger where full ownership is aligned with full control. In total control a firm acquires only a partial financial interest in the target, but gets full control). In between these two scenarios – silent financial interest and full control - the authors argue there are a range of partial control scenarios. The only scenario of partial control that equates to the legal and factual circumstances of the present case is what they term ‘Coasian joint control’.

[23] We will apply two of these concepts to the facts of this merger; silent or passive financial interest and Coasian joint control. We first explain what is meant by these terms and their possible competition implications in a transaction giving rise to partial ownership in a rival, and later, we go on to apply the concepts to the facts of this case.

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