Victim or Aggressor? - Volvo-Scania: Mergers and Competition Policy

Business mergers tend to have fairly dicey odds of success. Failure rates are generally reported to be roughly 50%; poor culture fit or difficulties aligning systems to create efficiencies tend to stand out as culprits. But a closer look at the economics of mergers reveals that the motivations of corporations, among them increasing market power, can be in direct conflict with the rules upheld by competition law. In this Case Study, Philip Krinks and Professors Daniel Traça and Vanessa Strauss-Kahn look at the attempted Volvo-Scania merger from a competition policy perspective.

by Vanessa Strauss-Kahn, Philip Krinks,Daniel Traça
Last Updated: 23 Jul 2013

The trend toward mergers which began in the US and UK in the mid-1980s reached Europe not long afterwards. From a few billion dollars annually in the mid 1980s, the value of mergers in the EU rose to over a trillion dollars by the end of the 1990s. As the number of mergers involving EU countries soared, so did the number of rejections issued by the EC Competition Commission. One of those was the intended merger of Volvo’s truck division with Scania in 2000.

Authors Daniel Traça and Vanessa Strauss-Kahn, both Assistant Professors of Economics, and Philip Krinks, INSEAD student, begin this Case Study with a look at Volvo’s market position in 2000 in the truck industry. Given trends toward globalization, intensifying competition, and the increasing need to innovate in order to meet customer and regulatory demands, Volvo’s management believes a merger with Scania is their best move forward. The merger would make Volvo/Scania a major player in the truck industry (specifically the heavy truck segment) and offer enormous scope for cost savings given the many overlaps between the companies. The merger would bring their combined share to 8.7% and create the third-largest manufacturer in the world, with a rumoured annual cost savings of $500-600 million.

From the corporate perspective the merger made sense, from the perspective of the Competition Commission, which concerns itself with the social repercussions of a merger, the deal did not look appetizing. Believing it would give the new entity a virtual monopoly in Sweden, the Commission asked Volvo to make a number of concessions – concessions Volvo felt would all but squash any hopes of the deal succeeding. After several rounds of negotiation with the Commission, Volvo walked away from the table, opting instead to enter into an agreement with Renault’s truck division.

The authors help make sense of these events by first outlining the history of competition law in the EU, starting with the Treaty of Paris in 1951, the Treaty of Rome in 1957, and most recently, a Merger Regulation agreement, enacted in 1990 in anticipation of the Treaty of Maastricht in 1992, which removed the remaining trade barriers in the EU. Through the Merger Regulation agreement, the Commission will only permit mergers that neither create nor strengthen a dominant position. This is determined by seven criteria:<UL>

<LI>Structure of markets concerned and actual and potential competition from players inside or outside the EU;

<LI>Market power of companies involved;

<LI>Substitutes available to suppliers and customers;

<LI>Access to markets and barriers to entry;

<LI>Supply and demand conditions for goods involved;

<LI>Interests of intermediate and ultimate consumers; and

<LI>Innovation, so long as this is to the consumer’s advantage and not an obstacle to competition.</LI></UL>

The EC law also refers to market dominance and the abuse of a dominant position. The second half of the Case looks at Volvo’s arguments against these criteria and the EC’s differing interpretations.

The story of the failed merger attempt raises some important questions: Why is competition policy needed? How do you measure market power? How do you define the market?

INSEAD 2003

Vanessa Strauss-Kahn, Philip Krinks,Daniel Tra&#xe7;a recommends

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