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Merger between Suppliers of Toddler Electronic Learning Toys and Child Laptops/Tablets Approved

In January 2017, the Competition and Markets Authority, which is the UK competition authority, announced that it has approved the merger between toy company VTech Holdings Limited and rival toy supplier LeapFrog Enterprises Inc. after an in-depth investigation. On its website, VTech is described as the creator of the Electronic Learning Products (ELP) category. The website further describes VTech as a global leader of age-appropriate learning products. LeapFrog states on its website that it creates educational solutions for children.

Hong Kong businesses operating in the EU may be interested to know the reasoning behind the approval. In an in-depth (second phase) investigation, the Competition and Markets Authority conducts a more detailed analysis to determine: (i) whether there is a relevant merger falling within the UK merger control regime; (ii) whether the relevant merger situation has resulted, or may be expected to result, in a substantial lessening of competition, and (iii) whether it should take action to remedy any substantial lessening of competition identified. This review is conducted at the Inquiry Group, a group of Competition and Markets Authority panel members.

The Competition and Markets Authority concluded that the merger has not resulted, and may not be expected to result, in a significant lessening of the market. The Competition and Markets Authority found that there are numerous other credible suppliers in the supply of learning toys for 0 to 5 year olds. The Competition and Markets Authority also found that, even though the companies are close competitors in this segment, they are not each other’s closest competitor. Second, the Competition and Markets Authority found that the market for child tablets and content is evolving rapidly, with new entrants and an increasing number of alternatives available for child-appropriate content on electronic devices.

Also, it was determined that the merger would not lead to a substantial lessening of competition in respect of any future innovation of toys.

Philip Marsden, Inquiry Chair at the Competition and Markets Authority, stated that the Inquiry Group looked carefully at competition in the evolving and innovative toy industry, and in particular at learning toys and child tablets. He continued that, having consulted on the Inquiry Group’s provisional findings, they are still satisfied that even after the merger there will be a sufficient variety of learning toys for 0 to 5 year olds available, and an increasing choice available for people who want to buy electronic devices and content suitable for children.

Hong Kong traders may like to know the background to this case. As we previously reported in "Merger between Suppliers of Toddler Electronic Learning Toys and Child Laptops/Tablets Comes under In-depth UK Competition Law Review" of the Regulatory Alert-EU, VTech Holdings Limited acquired LeapFrog Enterprises on 4 April 2016. There is no duty to pre-notify mergers to the Competition and Markets Authority under UK Law. However, even if a merger between two companies has been completed, an initial enforcement order from the Competition and Markets Authority can be issued and the authority can investigate how the merger can affect competition in the UK. The issue of an enforcement order will occur when (a) the Competition and Markets Authority has reasonable grounds for suspecting that the merger will result in two or more enterprises ceasing to be distinct if the merger is carried to effect; (b) the Competition and Markets Authority is considering whether 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 in any market or markets in the UK; and (c) the Competition and Markets Authority wishes to ensure that no action is taken pending its investigation.

Following the initial enforcement order, the initial period notice was issued to the parties on 24 June 2016. During the initial period it is determined if a reference to a phase 2 in-depth investigation is necessary. The initial period has a 40 working day deadline. Consequently, the Competition and Markets Authority had until 18 August last year to announce whether it would refer the merger for a phase 2 investigation. On that day, 18 August 2016, the Competition and Markets Authority found that a phase 2 investigation was indeed necessary. Given that the identified competition concerns were not remedied, the merger was referred for an in-depth inquiry on 30 August 2016.

On 9 December 2016, the Competition and Markets Authority provisionally decided to clear the merger. This provisional approval was decided on the basis that it was found that the merger is not expected to result in a substantial lessening of competition in the supply of learning toys for 0 to 5 year olds. The Competition and Markets Authority noted that there are numerous other credible suppliers, VTech and LeapFrog are not each other’s closest competitors and the market is evolving rapidly with new entrants and an increasing number of alternatives.

Also, it was added that the merger may not be expected to result in a substantial lessening of competition in the supply of these products and  the merger may not be expected to result in a substantial lessening of competition in future innovation in toys.

Content provided by Picture: HKTDC Research
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