Merger remedies are important tools in the hands of competition authorities, allowing them to take corrective measures to ensure that markets are not vulnerable to anti-competitive outcomes, when firms grow inorganically. Recently, the Competition Commission of India reviewed the acquisition of 100 per cent shareholding of WABCO Holdings Inc., headquartered in Berne, Switzerland, by ZF Friedrichshafen AG , a German global technology company, pursuant to a global business transfer agreement.

The global merger had an effect in India as both the companies were present in the country through their subsidiaries and joint ventures.

The global acquisition was notified in several jurisdictions where the ability and incentives of the combined entity to affect the market, was reviewed. In India, ZF (49 per cent) and TVS (51 per cent) had a joint venture (JV) in Brakes India, a significant player in the brakes and clutch components. WABCO and its subsidiaries are similarly engaged in India. With its acquisition of 100 per cent shares in the rival WABCO, ZF would have common ownership in both entities.

Market share

The merger was notified to the Commission on November 7, 2019. Preliminary assessment indicated that the combined entity would hold substantial market share in India. This would go up to 70-85 per cent in some braking systems, thereby making it difficult for any player to compete in terms of price, quality and innovation. The proposed combination appeared to result in the loss of a strong independent player that had the ability and aspiration to innovate and offer alternative braking and clutch systems to the automobile industry both in India and abroad.

In response to the prima facie concerns expressed by the Commission, ZF offered to divest its 49 per cent shareholdings from the Brakes India JV to ensure that it is independent of ZF going forward and remain as an effective competition to WABCO. The remedy would alleviate the primary concerns in the market for foundation brakes and clutch systems for commercial vehicles in India. Further, ZF offered to divest its global steering business as remedy to the Department of Justice in the US. The divestment of the steering business would address any concerns in similar markets in India. The Commission approved the proposed combination subject to ZF carrying out modifications to the transaction.

The effectiveness of the remedy is subject to risk regarding its composition and implementation. The composition of the remedy should be such that it addresses the harm to the competition in the market. A common method is divestiture of certain carved-out assets to third parties which is commonly known as structural remedy. Such remedies are clean, efficient and allow market forces to retain competition in the market.

The composition of the divestiture assets should allow new player or the surviving entity to compete independently in the market. The parties can also offer remedies to get their merger approved. The remedy voluntarily offered by the parties enabled Brakes India to be independent of control of ZF and that it would become a viable competitor in the market.

The other risk associated with remedies is implementation risk. A time limit is prescribed to complete the divestment process and ensure timely correction of the market. If the implementation risk is higher, then the remedy requires an upfront buyer before the transaction is consummated. A monitoring agency is deployed, especially in cases that require divestment of assets. In this case, considering low implementation risk, the Commission neither insisted on an upfront buyer nor deployed a monitoring agency, keeping with its philosophy of trust-based regulation.

The JV partners had governance structures to determine the severance of their arrangements where the other JV partner had the first right to refusal of the shares. The implementation risk in the matter was compounded by a delay on account of the Covid lockdown as well as disagreement between the JV partners regarding the valuation of shares and the matter was litigated in courts, the parties were able to arrive at a consensus and close the Brakes India divestment in June 2021.

The Global Competition Review adjudged ZF Friedrichshafen/WABCO as the Merger Control Matter of the Year for Asia-Pacific, Middle East and Africa. This is a positive development for competition professionals and has demonstrated that the Commission is an agile regulator. Since merger review is an ex ante regulation, only time will tell how competition in the markets for automobile parts in India spurred innovation, improved quality and constrained prices. But the message is loud and clear that emerging economies such as India need to be vigilant so that concentration does not have an appreciable adverse effect on competition, and a professional merger review framework is a harbinger for such a change.

The writer is Adviser & Head, Combination Division, Competition Commission of India. The views are personal

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