New merger laws a double-edged sword for businesses and investors

Competition is vital for all Australians that want to enjoy fair prices and good quality goods and services – which is almost all of us.

Which is why the beefing up of the merger laws by Treasurer Jim Chalmers is such a big deal in a country that is absolutely dominated by industries in which a couple of big companies are so powerful they form an effective oligopoly.

Arguably, this massive ramping up of Australia’s merger laws – the biggest in 50 years – could stand as the biggest economic reform brought in by the Albanese Government, which has admittedly been fairly shy about pursuing major changes during its first term.

ACCC to get greater powers to halt mergers

In broad terms the changes will give the Australian Competition and Consumer Commission (ACCC) much greater power to block anti-competitive mergers which should be good news but there are some problems and one big exception for share market investors and some small business owners, which I will get to later.

The biggest problem is that there is nothing in these changes that will quickly increase competition in those important industries that are already dominated by a couple of big players such as supermarkets, telcos, banks, airlines, insurers and many other industries.

That is because ACCC chairwoman Gina Cass-Gottlieb got most of what she asked for from Dr Chalmers except for the power to mandate the break up of existing dominant market players.

However, when the new system begins in the middle of 2026 it will greatly increase the power of the ACCC to stop mergers which it considers will decrease competition.

These might be a big company snapping up a promising minnow to retain its margins and profitability or own a promising new technology or even creeping small acquisitions which over time allow a company to increase its pricing power within an industry.

Chair knows exactly how the merger game works

Interestingly, because ACCC chairwoman Gina Cass-Gottlieb is an experienced corporate lawyer who was highly successful in fighting on behalf of merging companies, her granted wish list should be quite successful in blocking more mergers.

However, there could be some losers under the new system, with share market investors who own shares in companies prone to takeover particularly vulnerable.

Shareholders in target companies could be disappointed

Some of the acquisitions that have gone ahead in recent years – such as the $11 billion Tabcorp (ASX: TAH)-Tatts Group merger in 2017, the $15 billion TPG Telecom (ASX: TPG) and Vodafone Hutchison merger in 2020 or the purchase of EastLink by Transurban (ASX: TCL) in 2023 – may struggle in the new environment.

If you were a shareholder in one of the target companies, you can only imagine the chilling effect such intervention might have on the share price, particularly if other alternative suitors are nowhere near as keen to buy your company.

Similarly, shareholders in dominant companies might have to put up with lower profits if new competitors that would once have been snapped up are instead allowed to grow, reducing profits due to increased competition.

Small businesses could be hit as well

Even small business owners might be impacted, with one of the examples of a creeping acquisition given by Cass-Gottlieb being the private equity-backed expansion of PETStock, which involved numerous acquisitions of small stores and chains that were never notified to the ACCC but still resulted in the formation of the second-largest pet store chain in the country.

Stopping that sort of consolidation is probably a great idea for competition but not such a great thing if you own a small pet store and want to sell it for a good price.

All told, improving competition is a worthwhile aim even if it can disadvantage some groups but the takeaway message is don’t expect the cost of living to suddenly come down due to rampaging competitive price cuts.

The new laws are still a long way off and even when they arrive, Coles (ASX: COL) and Woolworths (ASX: WOW) are not going to suddenly start making it easy for new competitors to start emerging.