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135/08 19 November 2008
The OFT has today referred the completed acquisition of IBS OPENSystems plc (IBS) by Capita Group plc (Capita) to the Competition Commission (CC) for further inquiry.
The OFT has significant competition concerns in relation to the supply of revenue and benefits software services to UK local authorities. Bidding data, supported by strong customer concerns, indicates that the merger combines two of only three successful competitors supplying such software, and that with the removal of IBS as an important rival, Capita would be likely to find it profitable to offer its own and/or IBS' products and services at less favourable terms in future bidding opportunities.
Although Northgate Information Solutions (Northgate) will remain a substantial rival to Capita, the OFT was not persuaded that two successful bidders competing head to head would give customers the same value for money as three, and new entry to restore local authorities' supply options is unlikely.
By contrast, the OFT recently cleared Northgate's acquisition of Anite Public Sector Holdings (Anite), a further supplier also present in this software market, because there was strong evidence that this particular merger did not remove an important independent supplier of various software to local authorities.
While the total annual value of the market at issue in this case was estimated to be in the region of £20 million, and therefore presumptively outside the OFT's range of possible de minimis treatment, Capita argued that the limited value of the contracts coming up for renewal in 2008 meant that a reference was disproportionate and the OFT should apply its 'de minimis' exception to the duty to refer.
The OFT acknowledges that its theory of harm relates to adverse effects on customers when new contracts come up, rather than on the supply of maintenance services on existing contracts. However, given the uncertainty around the number and value of the contracts for which the parties could compete in the future, and the extent and duration of the competition concerns the merger will create, the OFT considers it proportionate that the CC investigate further, and so its duty to refer remains.
Simon Pritchard, OFT Senior Director of Mergers said:
'In the relevant market in this case, following two parallel mergers the number of successful bidders has been reduced to two. The fact that we have referred this case, but recently cleared the parallel Northgate/Anite merger, was not based on timing issues, but based on the likely competitive effect of this merger, and the lack of significant effect of the other. This demonstrates the OFT's focus on using a range of evidence to measure the degree of constraint each merging party places on each other, and on the market as a whole, rather than simply focusing mechanically on a reduction in the number of bidders from, say, 4 to 3 or from 3 to 2. The constraint that Capita and IBS have imposed on one another to date, when combined with the very low probability of new entry to the market, is key to why customers are concerned and why the OFT believes the CC should scrutinise this case and, if appropriate, impose remedies.'
1. On 27 October 2008, the OFT cleared the anticipated acquisition by Northgate Information Solutions UK Limited of Anite Public Sector Holdings Limited.
2. This is the latest in a series of completed mergers that were not notified to the OFT but which the OFT investigated on its own initiative and were subsequently found to raise competition concerns. In August of this year the OFT accepted undertakings from Home Retail Group, owner of Homebase, to sell an acquired Focus DIY store back to Focus (see press release 94/08) and, in the same month, the OFT referred the completed acquisition by Nufarm Limited of AH Marks Holdings Limited to the CC. While the majority of mergers reviewed by the OFT arise from voluntary notification by the parties, the OFT's own-initiative inquiry programme has led to remedial action by the OFT or CC in a significant number of cases under the Enterprise Act 2002 regime. In some of these cases, it is always possible that the parties would have voluntarily notified the OFT of their merger at a later date, in other cases, it was clear to the OFT that this would not have been the case. The OFT has a dedicated Mergers Intelligence Officer responsible for monitoring non-notified merger activity and liaising with other competition authorities. That person can be contacted confidentially at email@example.com if any interested party wishes to make the OFT aware of a merger that it considers might potentially be anti-competitive.
3. The OFT has a duty to make a reference to the CC if it believes that it is or may be the case that a relevant merger situation has been created, and the creation of that situation has resulted, or may be expected to result, in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services.
4. Under the Enterprise Act 2002, a relevant merger situation is created if two or more enterprises have ceased to be distinct enterprises, and the value of the turnover in the United Kingdom of the enterprise being taken over exceeds £70 million, or as a result of the transaction, in relation to the supply of goods or services of any description, a 25 per cent share of supply in the UK (or a substantial part thereof) is created or enhanced.
5. The full text of the decision will appear in the mergers section.
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