Germany's competition authority prohibits Phonak’s takeover of GN ReSound

Implications: The block placed on the Phonak/ReSound merger in the hearing aids market by the German competition authorities although significant should not be seen as the rule but as an exceptional event. The nature of the market and the existence of a vociferous complainant competitor that is headquartered in Germany were decisive factors. The statistical evidence does not suggest that the German authorities are in any way predisposed to block so-called foreign-to-foreign transactions.  This article examines the background to Germany's intervention and provides a view with regard to its implications. 

Analysis: In a controversial decision that effectively overturned the decisions of a large number of competition authorities around the world (including those of Brazil, Greece, Spain, Norway and the United States) the German Bundeskartellamt (“BKartA”) in April 2007 prohibited the acquisition of the hearing aid business of Denmark’s GN Store Nord A/S (trading as GN ReSound) by Switzerland’s Phonak Holding AG (now Sonova Holding AG). In August 2007, the OLG Düsseldorf, dismissed the parties’ appeal for injunctive relief, effectively holding that it did not have jurisdiction to allow the acquisition to go ahead pending appeal. The parties subsequently decided to abandon the concentration rather than engage in prolonged litigation in the German courts. In its prohibition decision, the BKartA took the view that the acquisition would result in a collective dominant position of Phonak, Siemens and Oticon in the German market for the production and sale of hearing aids. The decision went further and hinted that an oligopoly already existed the market and referred to Phonak, Siemens and Oticon as oligopolists jointly holding approximately 80% of the market which the BKartA classified as the second largest hearing aid market after the United States. The BKartA concluded the oligopolists’ share of the market would rise to approximately 90% market share should the acquisition be permitted, thereby further weakening competition within the market to the point of insignificance. The BKartA indicated that the existence of an extensive market research system run by an industry organization, existing cooperation between the oligopolists in basic patents and technologies as well the structure of the German health care market had influenced its decision.

This decision has caused some consternation. A sense is developing in the market that the BKartA is in the habit of prohibiting foreign-to-foreign mergers already approved by other competition authorities. This perception, however, is not matched by the reality. During the period July 2006 to June 2007 (the last for which full figures are available), a total of 1829 mergers were notified to the BKartA which launched an in-depth investigation into 39. Out these five were approved subject to commitments and only five (or less than 0.3%) were prohibited outright. The high volume of merger notifications in Germany is due to the combination of a mandatory notification system with low filing thresholds, comparatively speaking. This particular intervention has some special characteristics. Whilst not apparent from the text of the decision, it is hard to avoid the impression that Siemens, having previously failed with its own bid for GN Resound, briefed the competition authority in its home market against a deal which would have dethroned it as the German market leader. If this was indeed the case, Siemens appears to have done itself few favors in the medium term given the BKartA’s findings on the current state of the market which read like a blue print for investigative action. In summary, the prohibition must not be seen as the rule but as a rare, exceptional decision influenced by a potentially self-defeating intervention by a highly motivated national champion. That being said, however, it does demonstrate that while the BKartA may not contradict its peers regularly, it certainly does not appear afraid to break ranks when it feels that the situation calls for it (including cases involving foreign-to-foreign mergers where the parties achieve a relatively small proportion of their turnover in Germany). A proper perspective, however, has to be maintained. The Phonak/GN ReSound intervention by the BKartA is significant but not earth-shattering. If it does anything, it confirms that the regulatory risk for a transaction is not helped when parties have to make multiple filings in the EU, as opposed to a single notification to the European Commission in Brussels. Otherwise, there is little need for arbitrage advisers and others to adjust their headsets.

It is worth noting that in what is a relatively novel move, the parties to the transaction have brought an action for damages against BKartA.  Although such an action recently succeeded against the Commission in another case, as far as this author is aware should that parties succeed in this case it would be a first in Germany.