Re: Comments on the Draft Bulletin on Efficiencies in Merger Review ("Efficiencies Bulletin")

October 7, 2008

Dear Mr. Durocher:

The Forest Products Association of Canada (“FPAC”) welcomes the opportunity to comment on the draft Efficiencies Bulletin. 

FPAC is the national voice of Canada’s forest products industry. The forest products industry is an important component of Canada’s economy, operating across the country and supporting over 300 communities that are dependent upon local forestry operations.

Canada, as a small, export-dependent player in a brutally competitive global marketplace, is facing unprecedented challenges. These challenges are no more evident than in the forest products industry. In adapting to today’s new economic reality, the industry is in the midst of a tremendous, and very unfortunate, rationalization. Achieving greater efficiencies and reducing costs of production are at the heart of these efforts.

FPAC believes that Canadian public policy should encourage, whenever possible, efficiency-enhancing mergers. While FPAC understands the mandate of the Commissioner of Competition (“Commissioner”) and the Competition Bureau (“Bureau”) is to enforce the Competition Act, it believes that the discretion that is inherent in this enforcement function should be exercised in light of the broader economic interests of the country. It is with this philosophical backdrop that FPAC offers the following comments on the Efficiencies Bulletin.

The Efficiencies Bulletin indicates that the Bureau will not consider efficiency gains in the assessment of the competitive effects of the transaction. In FPAC’s view, an integrated approach that considers efficiencies as a factor in the competitive analysis, should be considered. As the Competition Policy Review Panel noted¹:

“Indeed, the Panel is of the view that the achievements of efficiencies through mergers is sufficiently important for the Canadian economy that the Competition Bureau should review mergers with this in mind from the outset, rather than limiting its assessment of efficiency considerations to cases where it has determined that the merger is likely to prevent or lessen substantially.”

There are a number of reasons why an approach that considers efficiencies as part of a competitive analysis, as well as an exception to otherwise anti-competitive mergers, makes good sense. First, as a practical matter, merger review is by its very nature a subjective, future-predicting exercise. There are a range of cases where it is not at all clear if the anti-competitive threshold is crossed or not. In such cases, it is entirely appropriate to consider gains in efficiencies when exercising enforcement discretion. Second, if efficiencies are large enough, there may not be significant price increases, or any price increases, resulting from a merger. In such cases, there would be no anti-competitive effects as it relates to price, which is typically the main focus of the Bureau in relation to competitive effects. Third, by limited efficiencies to essentially a defence, it creates uncertainty and reluctance among merger proponents to claim efficiencies when, at least implicitly, they would be suggesting their merger may be anti-competitive.

The Efficiencies Bulletin indicates that the Bureau will generally use the balancing weights standard when considering the efficiencies trade-off. FPAC believes that such a policy makes an already imprecise exercise subject to such subjective judgement that it makes the entire approach to efficiencies unworkable. Trying to determine what value what each shareholder or each customer places on income, as is required under the balancing weights standard, is too complex and too subjective to be useful as a guide for merger review. Accordingly, FPAC recommends that the Bureau do not use the balancing weights approach but revert to the enforcement policy it followed for many years, namely the total surplus approach. 

FPAC notes that the Efficiencies Bulletin introduces a new concept of forgone efficiencies, that is, efficiencies that may not be achieved because of the merger. While this may be theoretically possible, it is unlikely that many firms would willingly forgo opportunities to reduce costs and increase profits.
The Efficiencies Bulletin encourages merging parties to come forward with any efficiency claims as early as possible and in the fullest detail possible. The Bureau should recognize, however, there are some real practical limitations that the merging parties may have, not the least of which is the constraints on pre-merger information sharing that limits the analysis of possible efficiency gains that may be achieved or, in auction-type transactions, where time and information is limited prior to making a bid. While FPAC understands that the Bureau needs sufficient information to exercise its judgement, it should recognize that, just as with competitive effects, the Bureau will likely not have as much information as it would have if it were to litigate a case, but it can and should make a judgement based on the information reasonably available.

Conclusion

FPAC supports the affirmation in the Efficiencies Bulletin of Commissioner Scott’s policy statement that the Bureau will consider efficiencies in its determination of whether or not to bring a case as opposed to relying solely on adjudication of this issue by the Competition Tribunal. FPAC believes that in order to give that policy meaning, the Bureau should adopt a flexible, integrated and pragmatic approach to efficiencies that consider such efficiencies both during the review and at the end of the review.  Moreover, it should return to a straightforward, total surplus approach to the trade-off analysis. Finally, given the importance of efficiencies to the Canadian economy, the Bureau should bear this in mind when exercising its enforcement discretion in close cases.

Yours very truly,

Marta Morgan
Vice-President, Trade & Competitiveness

¹ Competition Policy Review Panel, “Compete to Win”, Final Report-June 2008, p.56