A response to Case Study, "Volvo-Scania: Mergers and Competition PolicyInsead, 2003."

           Non-market environments can greatly affect corporate strategy and knowledge of how it functions is necessary for a firm to safeguard itself against non-market issues. The case of Volvo’s attempted merger with Scania, and the European Commission’s efforts to restrict it by upholding long-standing competition policy, is an example of a firm’s strategy being disrupted by non-market activity.

            In the case at hand, the merger of Volvo-Scania was very heavily restricted, eventually leading to its cancellation due to the European Commission’s competition concern that a merged Volvo-Scania entity would be able to exercise market power, especially in the Nordic region.  In this write-up, we shall briefly discuss the origins and goals of competition legislation, provide a short comparative analysis between the EU and US in this matter, and finally, provide our analysis and possible solutions to the matter at hand.

            Competition laws (antitrust in the US), date back to the US Sherman Act of 1890, followed by the Clayton, and Federal Trade Commission Acts of 1914.  These historic acts were put in place to protect public interest against the power of the US railway system as well as John D. Rockefeller’s Standard Oil Corporation.

            Further antitrust litigation, as well as similar competition legislation was put in place throughout the world in the 20th and 21st century, where the overlying goal of such laws has always been protecting the public interest.  Either protecting the final consumer against a firm or firms, which may hold un-proportional market power or protecting competing firms against a merged monopolistic-like firm, which may use its economies of scale to drive out competition.

            Though in analyzing this issue, one must ask whether intervening in business transactions that may result in mergers do indeed benefit the public good?

            When examining the business transaction of the merger of two corporate entities, the initial goal is clear; two business entities usually merge thinking that the merger will benefit both merging entities with the result of the merged entity having a value greater than the value of the two un-merged entities.  Ideally that is the case, yet history teaches us that most mergers fail (nearly 70% according to recent quotes).  A failed merger simply means that the whole was worth less than the sum of its parts.  Yet even though the act of merging two corporations is most likely to fail, government bodies still utilize huge resources in order to “protect the public” of the possible outcomes of some mergers.

            Examination of EU competition laws vs. US antitrust laws reveals different approaches between the two.  Fundamentally, the US antitrust litigation is known to be less restrictive than its EU counterpart, adhering to the philosophy of “letting the market powers take their course.” US antitrust litigation is much older, dating back to the aforementioned Sherman Act, whereas EU competition laws date post World War II and especially after 1958.  The major difference between the two is that US antitrust tends to kick in when consumer interest are at stake, whereas EU competition laws will kick in when competing firms may be weakened by a merger. This difference is mainly due to the fact of the much more important role of the state which is evident in Europe.  Since the EU is comprised of separate countries which are not linked together by a centralized economy, competition between countries as sometimes as fierce as competition between firms, and since firms may enjoy favorable terms from their presiding country government, and central EU body (the EU Commissioner for Competition) must insure that sufficient levels of competition are maintained between firms.

            So how is a firm to react when a non-market issue arises that can potentially disrupt its competitive strategy? As in the case of Volvo, a firm’s appropriate first step is to analyze the non-market issue. This includes evaluation of what is moving the issue along and where the activity is occurring, its participants, motivations, information needed to compete, and what assets a firm needs to prevail.

            Using the (IA)3  framework we have analyzed the external market issue that Volvo and the EC are involved in (See Exhibit A and Exhibit B for the analysis and Volvo’s and the EC’s main motivation concerning this issue).

Conclusion

This failed merger helped us identify two important issues:

Considering the data supplied by Volvo, the Commission found that the price differences and Volvo margins between Member States were not as small as the company noted. The price differentials indicated that truck markets remained national. Indeed, if there had been a single European market truck, these price differences have not been sustained, as customers have purchased in those countries where it was sold cheaper, which would have forced the price convergence.


Exhibit A The framework helps us identify how a firm should address a non-market issue. In Volvo’s case, we see who the major participants include the EC, their motivations, for upholding competitive policy, the courts where the issue is being disputed, the necessary information to sway the courts, and the necessary assets (knowledge, attorneys) that Volvo needs in order to win the battle with the EC and secure the merger by acquisition of Scania.

Exhibit A

The framework helps us identify how a firm should address a non-market issue. In Volvo’s case, we see who the major participants include the EC, their motivations, for upholding competitive policy, the courts where the issue is being disputed, the necessary information to sway the courts, and the necessary assets (knowledge, attorneys) that Volvo needs in order to win the battle with the EC and secure the merger by acquisition of Scania.

Exhibit B This table clearly shows that a merger would result in better competitive standing in the highly competitive truck market for the new Volvo post merger. It also presents the courts with a potential conflict of interest, as they believe it would grant them too much power in the Nordic region of Europe.

Exhibit B

This table clearly shows that a merger would result in better competitive standing in the highly competitive truck market for the new Volvo post merger. It also presents the courts with a potential conflict of interest, as they believe it would grant them too much power in the Nordic region of Europe.

Case Analysis written with the help of Vipul Buhshan and Matan Ganani.