Why doesn't the market understand competition law?
One of the most notable things about the Commerce Commission’s decision to decline clearance for the merger between Sky TV and Vodafone was that it was precisely opposite to the market’s expectations. In the lead up to the decision, Sky TV share prices rose around 5%. Spark, a business that was understood to be disadvantaged if the merger went ahead, saw its share price decline by a similar amount. On the day of the announcement from Commission Chair Mark Berry (pictured), Sky TV shares dropped about 15% in value. It seems that the market got this one wrong.
Why is that? Investors and their advisors are smart people, and even more to the point they make their money by understanding market dynamics. They don’t tend to evidence a profound misunderstanding of basic competition law principles, like this wilfully ignorant piece from Mike Hosking. In fact, they are usually quite familiar with the sorts of issues that the Commission considers when making these regulatory decisions. I understand that this is just one data point, but in my experience as an advisor in this area of law the investment community consistently misreads the Commission’s position. Why do investors tend to get it wrong?
I obviously can’t give a definitive answer, but I think the way that competition law decisions are required to be made plays an important part. In important respects, competition law analysis approaches key market issues with a very different lens to that of business leaders. Let me give you three examples.
First, as a matter of law the Commerce Commission can only grant clearance if it is positively satisfied that there will be no meaningful harm to competition. This means that if the issue is a finely balanced one, the presumption is that the Commission will not grant a clearance. The onus is on the business applying for clearance to satisfy the Commission that no market harm will result. The way this rule works, with the burden of proof falling on the parties that want to take action, is precisely the opposite of the way that the business community tends to think about legal matters. Usually it would be presumed that the parties can order their affairs however they like unless there is a legal reason to interfere with that freedom. If you approach competition law that way, you might not get the answer right.
Second, market uncertainty tends to count against clearance. If the market could develop in a number of ways, the Commission is likely to choose the potential scenario that could do most harm to competition as a basis for its assessment. This is appropriate, because it is the Commission’s job is to avoid those harmful scenarios, not make a call on what is most likely to happen. I can’t be sure because the full reasoning for the decision isn’t available just yet, but it’s possible that this type of thinking played a part in the Sky TV-Vodafone decision. No-one knows where content and telco markets are going in the short-to-medium term, and so the most harmful possible scenario was one that the Commission assumed would eventuate. From this starting point it is not surprising that the Commission might reach a different conclusion than if it undertook the sort of the risk analysis and scenario planning that business decision makers undertake in their own markets.
Third, the Commission breaks down the issues in the application to understand how the proposed merger affects a range of “markets”. If there is a problem in only one of those markets, clearance will be declined. If there was a merger or two insurance providers, for example, the Commission would look at all the different sorts of insurance policies – life insurance, health insurance, pet insurance, travel insurance – as different “markets”. A competition problem in the pet insurance market might ruin the whole deal, even if there was no hint of a problem in the other relevant markets. How a “market” is defined for the purpose of this analysis is a technical point, and investors and businesses probably don’t break down divisions of markets in the same way in most cases, so won’t generally see the same sorts of problems that the Commission does to the same extent.
If you take those three points together, it’s not hard to see that the business and investment community might not always follow the Commission’s analysis. What does this mean in practice? Probably that we will continue to see the market get competition law decisions wrong a significant number of times. But that doesn’t mean that the Commission’s decision-making is somehow wrong or unpredictable. If understanding how a competition law decision is likely to be made is important to you, then it’s a great idea to talk directly with a competition law expert. And definitely don’t talk with Mike Hosking.