Court rolls back music merger

The European Court of First Instance has overturned the Commission’s 2004 decision to clear the merger of the music units of Sony and BMG Bertelsmann, putting future mergers in the music industry in question.

The 19 July 2004 decision by DG Competition cleared the way for the creation of Sony BMG Music Entertainment, which immediately became the world’s second largest music industry group, topped only by Universal Music Group, a subsidiary of Vivendi. It reduced the number of major labels controlling three quarters of the worldwide market for recorded music from five to four. 

The Court followed, on 13 July 2006, suit to a complaint against the decision, which had been filed by the Independent Music Publishers and Labels Association (Impala). It argued that the Commission had not sufficiently demonstrated that the company resulting from the merger was not going to have a dominant position on the music market. The Court said that the Commission had also not looked sincerely enough at the market power of the two companies before they merged. 

Sony and BMG Music Publishing will now have to refile their merger request once more before 20 July 2006. The Commission will have to re-evaluate it under the stricter requirements set by the Luxembourg Court. It is uncertain whether the Court will clear the merger based on nothing more than a re-written justification. Possibly, the two companies will have to sell of some of their many sub-labels, in order to reduce the resulting company’s market power. As the most extreme option, the decision could even result in a break-up of Sony BMG Music Entertainment. 

The decision had an immediate impact not only on the stock quotes of the companies directly involved, but also on those of their competitors, Warner Music Group and EMI, which have been engaged in a fierce takeover battle over the first half of 2006. On 28 June, EMI announced a 4.6 billion US-dollar takeover bid for Warner Music. The Court’s decision makes it unlikely that the deal, which would reduce the number of top music companies in the world to three, will materialise. As a result, EMI’s quote dropped by 20% between the end of trading on 12 July 2006 and the opening ofthe New York Stock Exchange he next morning. 

The Court’s decision is set to damage DG Competition’s regulatory authority, at a time when the Commission has transposed an overall reform of its merger review process to avoid another debacle such as the one following the annulment of three major merger decisions (the cases Schneider and Legrand, Airtours and First Choice and Tetra and Didel) in 2002.

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