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Home > Blogs > Anthony Harrington > Between a rock and a hard place—The cartel’s dilemma

Between a rock and a hard place—The cartel’s dilemma

Finance Blogger: Anthony Harrington Anthony Harrington

No one in Europe plays the psychological game better than the EU’s Competition Commission, headed up by Commissioner Neelie Kroes. Imagine you are in a cartel and have been for years. It’s nice. You know your competition are not going to undercut your prices or move in on your turf, and you’re not going to undercut theirs or try to steal their lunch.

You know too that price fixing and market fixing is illegal, but you and the competition have been playing this game for years and no one is any the wiser, and no one inside the cartel has any incentive to break the silence. Why? Because if they are found to be guilty their company will be fined up to 10% of turnover, a big number in anyone’s books. Plus there is always the likelihood that once a judgment of cartel activity has been made by the courts, then all those who have lost money through the price rigging will bring litigation to recover their losses.

Now enter the Competition Commission. They add a new dimension to the game. Anyone who breaks ranks and blows the whistle gets off free. The second one through the Commission’s door gets a substantially reduced fine. The third one through might get a few euros off the fine. Everyone else gets hung out to dry by the Commission, metaphorically, of course.

At a stroke this changes the game. Because only the first one to take the whistle blowing road gets home free, as soon as there is some trigger event in the cartel, such as a change of ownership of one of the members, everyone in the cartel has to worry that someone is going to grab first mover advantage. The “if I don’t, they will” feeling poisons the air and life, suddenly, is not so jolly in the cartel any more.

On November 11, 2009, Neelie Kroes announced a conviction in the plastics additives cartel case. The case involved 11 European and US companies and the cartel activities ran from 1987 to 2000, with the players fixing prices and allocating markets between themselves. The Commission handed out a total of €173,840,000 in fines, with Chemtura of the US getting off free as the whistle blower. It is a success that the Commission has repeated across sector after sector. Kroes’s message for cartel operators is uncompromising: “Today’s message to companies that indulge in cartels should be clear. Wherever you meet and whatever you try to do to hide your actions, if you form a cartel and rip off European customers, you cannot escape from detection or punishment.”

The Commission’s zeal for ensuring markets are free and fair is admirable, but it sharpens the need for due diligence when companies are thinking of acquiring trade competitors, or even companies in unrelated sectors. As Catriona Munro, a competition lawyer and partner with Maclay Murray & Spens points out, it is all too easy for companies to discover, rather too late in the day, that the company they have bought has been in a long-running cartel and is now being pursued by the Commission.

“The only way to escape the huge penalties that are involved is to ensure that you either discover the cartel behavior before you make the acquisition and put a stop to it immediately, or seek to be the first through the Commission’s door as a whistle blower,” she told QFINANCE. Either way, the potential liabilities associated with the company’s history of illegal cartel behavior will need to be thoroughly examined and costed—and the risks to the acquiring company fully assessed against the expected benefits from the acquisition.

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Tags: acquisitions , cartel , competition , EU
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