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<nettime> The myth of competition

Newsletter from the transnational corporations observatory
Tuesday, February 19, 2002

1. From fragmentation to cooperation:Industry consolidation and long-term

 A study from the conculting firm AT Kearney based on data collected from
25,000 listed companies in 24 industries and 53 countries shows that
companies' acquisitions, mergers and alliance strategy leads to a
consolidation where the three largest companies of a given industry
account for 70-80% market share.

2. Mergers and competition

In 2001 the Commission has taken 10 decisions against cartels. In all,
fines have been imposed on 56 companies in 2001 (3 of which have been
fined twice), totalling €1 836 millions.

EU says increased Interbrew, Danone fines due to severity of case (IP/01/1739)
Commission fines eight companies in graphite electrode cartel (IP/01/1010)
Commission fines six companies in sodium gluconate cartel (IP/01/1355) 
Commission imposes fines on vitamin cartels (IP/01/1625) 
Commission fines Luxembourg brewers in market sharing cartel 
Commission fines five companies in citric acid cartel (IP/01/1743)
Commission fines five German banks for fixing the price for the exchange of euro-zone currencies (IP/01/1796)
Commission fines six companies in zinc phosphate cartel (IP/01/1740)


1. From fragmentation to cooperation:Industry consolidation and long-term

Regardless of industry, consolidation activity follows a distinct pattern,
according to a study conducted by A.T. Kearney. It progresses through four
phases of different lengths. In addition, the number of mergers varies in
reverse proportion to the extent of consolidation.

Drawing on our value-building growth database, which includes 25,000
listed companies in 24 industries and 53 countries, we analyzed
consolidation activity from 1988 to 2000. The study determined the change
in the Hirschmann-Herfindahl index, which reports on the CR3, or the
market share of the three largest enterprises within an industry.

Hidden beneath the chaotic surface of mergers and acquisitions lies a
distinct pattern that resembles an S-shaped curve (see figure 1)*. Each
consolidating industry passes through four stages: o Opening o Focus o
Accumulation o Alliance

The time frame from the first stage, in which an industry is somewhat
fragmented, to the final stage, which is marked by significant alliance
activity, stretches over approximately 20 years. Starting at a low level
of concentration, an industry increases its merger and acquisition
activity until saturation is reached. Toward the end of the cycle,
streamlining and ultimately the formation of alliances move into the
foreground. We describe in detail the characteristics and drivers of each
phase in the following sections.

Opening phase

During the first phase of industry concentration, the fractured market is
filled with players of all sizes. As a rule, the three largest suppliers
account for a mere 10-30 percent of the market.

The emergence of new businesses or the advent of deregulation typically
lies behind the fragmentation of market suppliers. Banks, airlines and
utilities exemplify this trend. Telecommunications is another classic

Until the 1990s, telecommunications markets in most highly industrialized
countries were largely regulated. But with the deregulation and
liberalization of the telecommunications business, erstwhile monopolists
lost their position as sole operators in the market. As obstacles to
market entry began to fall, more and more competitors flooded the market.
Then as cell phones gained popularity, even more rivals came onto the
scene. Soon, the industry was highly fragmented.

For telecommunications, the largest mergers still lie ahead. The
consolidation wave will be driven largely by the need to reduce costs via
economies of scale. Fixed costs are unusually high in telecommunications,
an industry whose infrastructure accounts for 50 percent of telephone
costs. In response, the global telecommunications industry has already
made its first moves toward the accumulation phase. Companies that act
quickly as the next stage begins are more likely than their counterparts
to come out on top.

Judging by telecommunications' growth portfolio, we expect consolidation
to intensify and follow a pattern similar to what we have witnessed in
other industries. More specifically, three to five large European service
providers in the fixed-line business are anticipated to survive. The
winners will most likely be those that can leverage their existing
business, succeed with their chosen strategies and implement their plans

British Telecom is expected to lose influence in Europe, but France
Télécom and Télefonica are potential winners. Smaller and mid-sized
companies will either be wholly merged or join alliances. For them, the
choice of when and with whom to merge will play a decisive role in their
future success. The three major players will be surrounded by networks of
large regional players, namely Telecom Italia, British Telecom and KPN.
Small local companies are likely to merge. Télefonicás early move to get
into relevant future markets has given the company an enviable headstart
of about 10 years. Unfortunately, prospects are not as bright for Deutsche
Telekom and Mobilcom. After roaring off to a fast start in the liberalized
European market, the latter is now encountering growing difficulties.
Mobilcom's partner France Télécom is financially strong but is not
capitalizing on its full potential. Deutsche Telekom is an ambitious
global player in cell phone services and has entered into partnerships in
the Netherlands and ustria, but it is not considered a strong entry in the
United States.

The experience of American telecommunications firm AT&T illustrates how
quickly strategic missteps result in a negative impact. Six years ago the
former U.S. monopoly was still a real giant, but it missed the trend
toward consolidation, and today it is focusing heavily on catching up.

Accumulation phase

The second stage, the accumulation phase, represents a reversal of the
first. The market begins to become less fragmented, and size begins to
matter. As competitors grow, they realize two advantages. First, growth in
the marketplace helps them realize their goal of reducing costs through
greater economies of scale. Second, their larger size helps prevent a
hostile takeover. This phase generally lasts for about five years until
three of the largest suppliers account for 30-45 percent of market share.

The global chemicals industry, breweries and food services businesses are
in this phase. Automobile industry suppliers are now on the threshold of a
strong consolidation movement, thus following the footsteps of the
automobile industry (which has already gone through this phase).

In the automotive supply industry, the three biggest players account for
about 30 percent of the market. Mergers and acquisitions are part of the
industry's daily fare as suppliers scramble to acquire the additional
competencies they need to respond to shifts in responsibility along the
value chain. The automakers, facing fierce competition themselves, are
demanding customers, constantly pursuing lower costs and greater returns
on investment. Today, car manufacturers increasingly outsource complete
modules of a vehicle and are simultaneously reducing the number of modules
needed to produce a vehicle. We expect that in the next five years
automobile producers will work with just 10 modules (including roof,
cockpit and doors) to build a car.

This shift in responsibility delivers a major challenge to most suppliers.
Few are able to offer complete modules (and if so, only because they have
merged). A supplier cannot assume responsibility for a module on its own
since each module represents the combination of many different

Forecasts about who will win or lose following this wave of consolidation
are based not only on growth potential, but also on the suppliers'
opportunities for adding competencies.

In coming years, the number of suppliers is likely to shrink by one-third
from the current level of 8,000. Surviving companies are also restricted
by the number of manufacturers needed to make each module (we estimate
four to five supplier conglomerates are needed per module).

Those who do not respond to industry dynamics risk being left behind. But
those who choose partners carefully and strategically, and make a strong
contribution to a module, stand an excellent chance of surviving the

Focus phase

Following the accumulation phase the three largest players typically
account for 45 percent of the market and now strive to solidify and
reinforce their hard-won position. In the second phase companies have as a
rule attained a size that puts them out of reach for a takeover. The
consolidation process at this stage is not so much a question of mega
mergers as the selective exchange of business units. The point is to
strengthen core competencies and to clean up the company's portfolio,
activities that lead to a slight linear rise in industry consolidation.
Upon concluding the focusing phase and in transition to the fourth phase,
the three market leaders have achieved a 60 percent market penetration.

Shipyards as well as the rubber industry are currently in the
consolidation phase. The liquor industry has nearly completed it, having
significantly streamlined its portfolio. Liquor companies are making
aggressive additional purchases to secure the end of the available
capacity, and they are beginning to forge the first alliances. Seagram, a
global competitor, withdrew from the liquor industry-leaving its global
whiskey labels like Chivas Regal and Crown Regal up for grabs. Diageo and
Pernod-Ricard, two major suppliers, went to war to claim them. These two
suppliers were not after growth; they were looking strengthen their core
businesses. That turned out to be the basis of their deal to jointly
acquire Seagram's wine and spirits business at the end of last year.
Diageo, which had come into being three years ago through the merger of
Guinness and Grand Metropolitan, adopted a new strategy, namely to
concentrate on liquor, wine and premium beers. It sold its Pillsbury food
subsidiary and acquired Seagram's ne business as a result. Diageo will
expand its leading position in alcoholic beverages, while Pernod-Ricard
will assume control of most of the whiskey labels, in line with its
intention to strengthen and grow this sector.

In this way other companies or parts of them are being bought
aggressively, but the growth is focused and strategic. The major players
are fighting hard for certain business units, while disposing of others.
Diageo and Pernod-Ricard demonstrate their focus on their key competencies
quite clearly. In recent years, they have acquired the strength and size
to put their strategies for product and market innovations to work.

Regional and local suppliers cannot muster such strength on their own.
Increasing concentration in the trade is leading to lower average prices
and higher marketing costs. Occupying a small geographical niche raises
chances for survival since the liquor business-like the food arena in
general-is also local and marked by highly differentiated consumer
preferences. It is particularly critical that smaller suppliers shore up
their brands and prices as a means of defending their niche for the long
run. Semper Idem practices that diligently in Italy with its Underberg
brand. Over the long term, it makes sense for local competitors to
consider four alternatives: Operate a niche business, become a national
market leader, develop a strategy of cooperation in the form of alliances
and mergers, or exit the business.

Alliance phase

As we reach the end of the consolidation wave, the three largest market
participants will have captured 70-80 percent of the market. The industry
becomes apportioned and distributed; mergers and acquisitions become a
rarity. Antitrust laws block further consolidation, and megamergers are
out of the question. In addition, potential partners have long disappeared
from the scene.

The battle for the biggest and best pieces of the market is over. Many
former competitors have either become part of the family, parent companies
or equal partners. The remaining companies become the object of alliances.
The last acquisitions in the industry are still in the offing. Alliances
are formed at all levels of the value-added chain. Cigarette
manufacturers, automation and control equipment industry are classic
examples of industries in this final phase of consolidation. The shoe
industry, in the last throes of a powerful consolidation wave, also falls
into this category (see figure S).

In the shoe industry, giants Nike and adidas-Salomon dominate the market,
which is also inhabited by many small companies. The three biggest account
for a market share of about 70 percent.

There is a distinction to be made between manufacturers in the public eye
(like Nike, Adidas, Reebok and Timberland) and those less in the limelight
(such as Salamander, Goertz and Bally). The latter have a strong regional
focus. Since consumer preferences in the U.S. market differ significantly
from those in Europe or Japan, predictions about the future of the
industry are difficult. The consolidation stage attained by manufacturers
has not been equaled by dealers, and this industry will continue to be
fragmented in the foreseeable future. On the other hand, global
manufacturers are already highly consolidated. Their keys to future
success lie in the combination of strong brand identification and their
ability to stay focused.

Not only does consolidation activity follow the same pattern and set of
laws, it exhibits a surprising parallel to the movement of stock indexes.
The Dow Jones Industrial Average moves in tandem with mergers and
acquisitions (see figure 6).

Merger activities are highly dependent on stock movements. Rising stocks
provide companies with considerable "acquisition currency." In addition,
growing globalization and massive deregulation in some economic sectors
affect consolidations to the same extent as stock market levels. They
drive consolidations and stock prices. Consolidations, in turn, boost
stock prices, for two reasons. First, top management is usually judged on
its performance in terms of growth (which is the inevitable result of
mergers). Second, mergers open access to international capital markets.

Aside from cross-industry patterns and phase-specific development, other
factors serve to accelerate industry consolidation. Among the most
significant are globalization, capital market pressures, the evolution of
the technology infrastructure required to support networking, and the
advent of the Internet.

The study reveals that globalized industries, like cigarettes or
shipyards, tend to consolidate in quick, giant steps. Companies can
achieve the greater value that capital markets demand through mergers and
acquisitions. The technology infrastructure that enables companies to
communicate outside their own walls also influences consolidation
activity. As more and more industries invest more in software and
telecommunications, economies of scale (and therefore the size of the
company) become more important. Technological discontinuity also affects
companies in every industrial sector. The Internet's communications and
integration potential facilitates the management of complex enterprises,
making larger mergers and acquisitions possible.


Within and throughout industries, there is clear evidence of a uniform
consolidation pattern: Market fragmentation is followed by a potent wave
of consolidation as companies strive to get bigger. Mergers decline once a
certain degree of concentration has been reached. At that point,
businesses focus on their core competencies until they no longer look for
mergers or acquisition at the end of the consolidation wave, but choose

Consolidation is not random. Knowing the patterns and phases of merger and
acquisition activity enables the knowledgeable players to understand the
merger chess board in their industry, evaluate the players, and even
forecast their movements. When companies consider the patterns that merger
and acquisition activity follows, and recognize where their industries
stand on the consolidation curve, they can proactively set strategic
acquisition targets, execute accordingly-and emerge as winners.

*Figure 1: the four phases of consolidation

2. Mergers and competition

In 2001 the Commission has taken 10 decisions against cartels. In all,
fines have been imposed on 56 companies in 2001 (3 of which have been
fined twice), totalling €1 836 millions.

EU says increased Interbrew, Danone fines due to severity of case The
European Commission said it increased the fines for Interbrew SA and
Danone/Alken-Maes for their role in market sharing and price fixing
cartels on the Belgian market because of the severity of the case. The
cartel operated by Interbrew and Danone/Alken-Maes included a general
non-aggression pact, the limitation of advertising and investing, the
allocation of customers, price-fixing in the retail sector, a tariff
structure in the horeca sector and the retail sector and a monthly
information exchange system, the Commission said.

Commission fines eight companies in graphite electrode cartel The European
Commission today fined Germany's SGL Carbon AG, UCAR International of the
United States and six other companies a total of € 218.8 million for
fixing the price and sharing the market for graphite electrodes, which are
ceramic-moulded columns of graphite used primarily in the production of
steel in electric furnaces. The Commission's decision comes after a
thorough investigation, which established that the eight producers, which
together account for the quasi totality of the production world-wide,
operated a secret cartel during most of the 90s resulting in considerably
higher prices than if the companies had competed against each other.  

Commission fines six companies in sodium gluconate cartel The European
Commission today fined Archer Daniels Midland Company Inc., Akzo Nobel
N.V, Avebe B.A., Fujisawa Pharmaceutical Company Ltd., Jungbunzlauer AG
and Roquette Frères S.A. a total of € 57.53 million for fixing the price
and sharing the market for sodium gluconate, a chemical mainly used to
clean metal and glass, with applications such as bottle washing, utensil
cleaning and paint removal. The decision comes after a thorough
investigation, which established that the six companies, which together
accounted for the quasi totality of the production world-wide, operated a
secret cartel from 1987 until 1995.  

Commission imposes fines on vitamin cartels The European Commission today
fined eight companies a total of € 855.22 million for participating in
eight distinct secret market-sharing and price-fixing cartels affecting
vitamin products. Each cartel had a specific number of participants and
duration, although all operated between September 1989 and February 1999.
Because Swiss-based company Hoffman-La Roche was an instigator and
participated in all the cartels it was given the highest cumulative fine
of € 462 million. "This is the most damaging series of cartels the
Commission has ever investigated due to the sheer range of vitamins
covered which are found in a multitude of products from cereals, biscuits
and drinks to animal feed, pharmaceuticals and cosmetics" said Competition
Commissioner Mario Monti. "The companies' collusive behaviour enabled them
to charge higher prices than if the full forces of competition had been at
play, damaging consumers and allowing the companies to pocket illicit
profits. It is particularly unaceptable that this illegal b aviour
concerned substances which are vital elements for nutrition and essential
for normal growth and maintenance of life".  

Commission fines Luxembourg brewers in market sharing cartel The European
Commission today fined three Luxembourg brewers: Brasserie
Nationale-Bofferding, Brasserie de Wiltz and Brasserie Battin a total of €
448,000 for their participation in a market sharing cartel affecting the
Luxembourg "on-trade" or "horeca" sector (hotels, cafés and restaurants).

Commission fines five companies in citric acid cartel The European
Commission today fined Hoffmann-La Roche AG, Archer Daniels Midland Co
(ADM), Jungbunzlauer AG, Haarmann & Reimer Corp and Cerestar Bioproducts
B.V. a total of € 135.22 million for participating in a price-fixing and
market-sharing cartel in citric acid, the world's most widespread
acidulent and preservative used mainly in non-alcoholic beverages and in
preserved food such as jams, gelatine-based deserts and tinned fruit. "As
with the vitamins case, the behaviour of ADM, Hoffmann-La Roche and others
shows a disregard for their customers and, ultimately, the consumers which
paid more for the products concerned than if the companies had engaged in
healthy price competition," said Competition Commissioner Mario Monti.
"The fact that some of the companies have only recently been sanctioned
for similar conduct, ADM and Jungbunzlauer in the Sodium Gluconate case;
Roche in the Vitamins case, illustrates how widespread these secret
practices are, or at least used to be. I am confident that the message now
being clearly received. Companies must by now be fully aware of the risks
they are taking should they be tempted to collude."  

Commission fines five German banks for fixing the price for the exchange
of euro-zone currencies The European Commission today decided to fine five
German banks a total of € 100,8 million for fixing the charges for the
exchange of euro-zone currencies. In a clear violation of European
antitrust rules, the banks in 1997 colluded to charge no less than 3 % for
the exchange of euro-zone banknotes to compensate for the abolition of the
buying and selling 'spread' at the dawn of 1999 when the euro was
launched. "This behaviour was illegal, caused direct and irreparable
damage to consumers and also gave a blow to citizen's confidence in the
European single currency," Competition Commissioner Mario Monti said. "I
am disappointed that the five banks did not reduce their charges to make
good vis a vis consumers as was done by other banks in Germany and in
other Member States".  

Commission fines six companies in zinc phosphate cartel The European
Commission today fined Britannia Alloys & Chemicals Ltd, Heubach GmbH &
Co. KG, James Brown Ltd, Société Nouvelle des Couleurs Zinciques S.A.,
Trident Alloys Ltd and Waardals Kjemiske Fabrikker A/S a total of € 11.95
million for participating in a price-fixing and market-sharing cartel in
zinc phosphate, an anti-corrosion mineral pigment widely used for the
manufacture of industrial paints. Competition Commissioner Monti said:
"Although small, the fines represent a significant percentage of the
global turnover of the companies concerned and should deter them from
being tempted to make illegal profits on customers' and consumers' back."
Mr Monti added: "Sadly enough, today's decision shows that cartels are not
the privilege of big, multinational firms". SMEs should be in no illusion
that their size will not win them any kind of preferential treatment
should they engage in cartel behaviour."  

File mergers - competition - cartels

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