Opinion

Why the crackdown on ‘killer’ deals is no silver bullet

Clancy Yeates

April 13, 2024 — 3.30am

Australia has long been a land of oligopolies – industries dominated by a few companies. From banking, to airlines, to supermarkets, to insurers, you can often count the number of major players on one hand. Nothing new there, you say? Well, this week the government unveiled a response of sorts – but it’s not the populist answer of breaking up the corporate giants.

Treasurer Jim Chalmers this week highlighted growing market concentration in the economy, as he announced a new regime that should make it easier for the competition watchdog to block anticompetitive mergers.

Chalmers positioned these changes as a win for households and businesses alike, arguing they should be good for competition, help productivity, and ultimately feed into fairer prices for under-the-pump consumers.

But how much difference will merger reforms end up making for households and businesses, really? And why not just break up the corporate behemoths?

A general suspicion there’s not enough competition sits behind much of the recent political backlash against big business and the accusations of gouging.

When former competition tsar Allan Fells delivered a report on price gouging for the ACTU in February, one of his key arguments was that some big and concentrated industries – banking, energy, airlines – suffered from a lack of fierce competition.

This week, Chalmers argued that “competitiveness” had been slipping since the early 2000s – a period that has also included a slump in productivity. He said the largest players had grabbed a bigger share of the market in many industries during this time, and companies’ mark-ups – the difference between a business’s costs and its selling prices – have been on the rise in recent decades.

Previous work from Treasury has also shown it’s overwhelmingly bigger companies who are making the acquisitions. Says Assistant Minister for Competition Andrew Leigh: “Half of all mergers involve a firm that is in the biggest 1 per cent of firms. So there are a significant number of mergers which don’t involve a couple of minnows getting together to take on the whale, but involve the whale snapping up the minnow.”

In response, the government is convinced we need more competition between businesses – and one way to achieve this is to tighten the corporate merger regime.

Under this week’s package, Chalmers wants to bring in changes from 2026 that should make it easier for the Australian Competition and Consumer Commission (ACCC) to block anticompetitive deals.

Treasurer Jim Chalmers this week pointed to growing concentration in the economy.Credit: Dominic Lorrimer

For a start, the new regime would require the watchdog be notified of mergers above a certain threshold, and the ACCC will then have to assess the deal for any risks to competition.

That’s actually a significant development. Under the current laws, if the ACCC doesn’t like a deal it has to make its case in court, putting the onus on the regulator to prove that the merger that hasn’t happened yet will result in a substantial lessening of competition. The watchdog has had some well-known losses in court, where it’s struggled to counter evidence from executives who swear competition won’t be harmed by the deal they’re planning.

As well as requiring deals to go to the ACCC first, the new regime will allow a deal to be quashed if it “creates, strengthens, or entrenches substantial market power.” These few words could make a real difference.

The ACCC’s chair, Gina Cass-Gottlieb, hopes these changes will help the regulator deal with one of its big concerns: so-called “killer acquisitions”, often by technology giants. This is where an established player decides to buy out a nascent but promising rival – something that is indeed bad news for competition. (The ACCC would still need to prove its case in court.)

A general suspicion there’s not enough competition sits behind much of the recent political backlash against big business and the accusations of gouging.

The new regime will also make it easier for the ACCC to block companies from making “creeping acquisitions” – lots of small deals that on their own seem insignificant, but have the cumulative effect of weakening competition.

Business groups were not exactly heaping praise on these changes this week, but their complaints about red tape weren’t hugely vocal, either. That’s probably because the new merger regime won’t result in radical changes, or a dramatic rise in the number of deals that are rejected. Indeed, Chalmers was at pains to point out that most mergers aren’t bad – they can be a way for businesses to gain scale and become more efficient.

But if that’s the case, then how big a change are we talking about, really?

Quantifying the benefits of the changes is tricky, because we just don’t know which future mergers might now not happen under the new rules.

Even so, the evidence suggests that the Australian economy has become more concentrated. And we also know that companies with market power like to use it when setting their prices – indeed, this is what the sharemarket expects. So, there is a solid economic case for tighter merger laws, provided they don’t add excessive costs to businesses.

As for the debate about divestiture (forced corporate break-ups), some experts – including Fels – have made convincing arguments that this would be a useful tool for dealing with companies that have seriously breached competition laws.

But will divestiture solve the more immediate problem of high prices at the supermarket? Unlikely. As this week’s review by former Labor minister Craig Emerson pointed out, breaking up Coles and Woolies could open its own can of worms. For example, it’s hard to see how forcing one supermarket to sell some stores to another giant solves anything. But there’s no guarantee the smaller or foreign supermarkets will necessarily want to buy the stores that end up for sale in any break-up of the giants, either.

In the long-run, there’s no doubt policies aimed at boosting competition can deliver real benefits for households and the wider economy. Chalmers said Treasury and the Reserve Bank had found the economy would get a lift of between 1 per cent and 3 per cent if we returned to the levels of competition of early this century.

This week’s merger changes, while technical, are a step towards more competition. Ultimately, it is likely to become harder for oligopolists to expand by gobbling up rivals, and that’s a change that should eventually lead to better prices and more choice for consumers. But any such pay-off will take years to appear: it’s certainly not a quick fix to today’s high prices.

Ross Gittins is on leave.