Portfolio effects arise when the products of the merging firms are not in the same product market, nor are they inputs or outputs of one another. Merging entities in conglomerate mergers typically operate in what are often termed ‘neighbouring markets’ that are closely related, e.g. for complementary goods or weak substitutes. Simply put, portfolio effects refer to the potential positive or negative effects caused by mergers of firms that deal in products that are a part of the same broad portfolio but not direct substitutes. Such mergers are often known as conglomerate mergers.

Conglomerate mergers are known to generate positive externalities for the merged entity as well as for consumers in most cases, and thus, had not attracted much attention from antitrust authorities until recently. The benefits of conglomerate mergers arise in the form of increased efficiency for the merged entity, which enables it to lower its prices and offer a wider portfolio of products that may appeal to customers.

At the same time, the merger of such firms lead to the concern of a merged entity with an expanded portfolio of products that may have the ability and incentive to engage in practices like mixed bundling or tying. This is a common effect checked when assessing conglomerate mergers. The analysis involves examining whether the merged firm’s broader product range gives it a significant advantage that could be used for adversely affecting competition in the market. 

The primary theory of harm surrounding conglomerate mergers relates to foreclosure of at least one of the relevant markets where the pre-merger entities operate, by strategies of forced tying/bundling. The post-merger entity may, in theory, be able to force its customers to purchase together different products by making the supply of one product conditional on the customer purchasing another product or ranges of products. Rivals in competing products could then be excluded by lowering prices, enabling the merged entity to increase prices in the future and eventually hurting competition. Thus, the dilemma posed by portfolio effects is of balancing short-term benefits to consumers against potential long-term harm to competition.

Tying/Bundling can be technical, pure or mixed, though the last category is the most common. Pure bundling has significant costs and can potentially reduce revenue for a pre-merger high-value product. Technical bundling, as discussed by the European Commission in GE/Amersham, is only relevant to products where compatibility can be limited.

The strong potential to develop economies of scope in digital markets encourages project proliferation. Network effects are especially pronounced in digital markets, increasing incentive for companies to engage in tying/bundling. The degree of foreclosure is also high in such cases. An extension of this is technical tying and interoperability concerns, which pose a real threat of foreclosure in newly developed technology.

One of the pertinent concerns of portfolio effects is bundling and tying. The merged firm may bundle products from its newly combined portfolio. While bundling can benefit consumers through lower prices, it can also be anti-competitive if it makes it impossible for competitors selling only a single product to compete effectively. 

The Competition Commission of India (CCI) assesses portfolio effects as part of its inquiry into whether a combination is likely to cause Appreciable Adverse Effect on Competition (AAEC) under the factors laid down under section 20(4) like market structure, extent of vertical integration, entry barriers etc. 

On the basis of the decisional practice in other jurisdictions such as the EU, a three-step check is required for determining portfolio effects in a given case are anti-competitive in nature:

1. Are tying and bundling strategies possible and feasible for the merged entity?

An affirmative assessment requires the existence of significant market power (if not dominance) in at least one of the relevant markets, presence of a large common pool of customers for the goods sought to be bundled, and feasibility of the strategies in the given markets.

2. Is there sufficient incentive for the merged entity to adopt tying and bundling strategies?

Incentive for adopting such strategies is usually found where the goods sought to be bundled are complementary in nature, and may be bought together/at similar frequency. Further, both/all goods must be high-value to effect significant increase in profits so as to offset the costs of bundling. Finally, producers are likely to engage in tying/bundling if it enables price discrimination.

3. Will competitors be effectively marginalised by such strategies, if adopted?

This assessment requires an analysis of the capacity of and incentive for similarly placed competitors to adopt similar counter-strategies (by merging, reducing prices, entering other contractual supply arrangements etc.). As noted in GE/Amersham, mere reduction in profitability for competitors is not sufficient to establish marginalisation or foreclosure of the market.

It has been argued by many that antitrust authorities are better placed to conduct an ex post analysis of activities like tying/bundling under the abuse of dominance regime by the merged entity, than to assess conglomerate mergers at the ex ante stage. The growing recognition of pro-competition portfolio effects also advocates for a significantly higher standard of proof for an ex ante analysis, after accounting for detailed economic analysis of market conditions and competitor behaviour.

Factors that are generally likely to indicate adverse effects of conglomerate mergers and minimisation of welfare include, but may not be limited to:

• higher degree of market power in the “tying” product (or one of the bundled products);

• weaker efficiencies, if any, associated with the impugned practices;

• greater increase in rivals’ costs induced by the post-merger tying/pure bundling strategy;

• larger number of buyers interested in purchasing only the tied product (or a subset of the bundled products); 

• rivals finding it unprofitable to match the tying/bundling strategy;

• degree of certainty of a rise in prices above pre-merger levels due to foreclosure effects (i.e. a higher probability that buyers will be unable to prevent such a price rise, firms will be unable to profitably enter or re-enter after prices have risen above pre-merger levels, and the tying firm will have an incentive to raise prices above pre-merger levels);

• expected long term price increases above pre-merger levels will be sufficiently large, quickly realised and durable that the tying/bundling firm will be able to re-coup any opportunity losses it might incur in reducing its rivals’ sales.