Question

1. Megaphone is a cellular telephone service provider with 40% market share of the telephone service market in the United States. The CEO, Schubert Purdoch, has achieved that share in large part by acquiring small competitors. Megaphone is seeking to acquire Vinaphone which provides cellular telephone service as well. Vinaphone has become a household name in large part because of their ads making fun of Megaphone as an “out of touch dinosaur” of a company, featuring a dinosaur with the head of Schubert Purdoch. After this merger, Megaphone will not only be able to pull those ads off the air, but will also have 60% market share for telephone service. How would the FTC analyze this merger? What question(s) would be asked?

Answer 1

Companies are now required to take into account certain factors when they consider an M&A of a competitor operating in the same market. Such transactions are scrutinized heavily for any breach of provisions under the Fair Competition Act or the FCA Act, if there is scope of reduced competition in the market. The Fair Trade Commission has authority to secure a court order levy fines and penalties if they find any violations.

Under section 17 of the FCA, it can make an agreement unenforceable if it has the potential to substantially reduce the competition in the market. A merger between competitors can thus be investigated by the FCA to determine whether the entities involved in a merger are likely to reduce competition in the market. The FCA has the authority to over-rule existing approvals sanctioned by other government bodies like – the sector regulator. Since the proposed merger between Megaphone and Vinaphone falls under the peripherals of the above mentioned situation, the FCA would most likely conduct an investigation.

The following questions may be asked during the investigation:

• Do the involved entities exercise market power i.e.. significant market share?

• What is the structure of agreement between the companies?

• What is the market covered by the agreement?

• Does the agreement have the potential to affect the entry of a third party?