Vahli Inc and Akzo NV: A report on the proposed merger

Summary of report (html format)
Full text (pdf format)

Adobe Acrobat Reader can be downloaded from http://www.adobe.com

Summary

On 20 August 1990, the Secretary of State for Trade and Industry asked us to investigate the arrangements proposed between Akzo NV (Akzo) and Valhi Inc (Valhi) for the merger of certain of their interests (see Appendix 1.1).

The proposed transaction involves the purchase by Rheox International Inc (Rheox International), the ultimate parent of which is Valhi, of the United Kingdom business of Akzo Chemicals Ltd (Akzo Chemicals), a subsidiary of Akzo, in organoclays, organics and organic pastes. These are types of rheological additive which affect the deformation and flow properties of fluids. They are used in two separate markets: the manufacture of solvent-based paints, other coatings, inks, greases, adhesives, sealants and cosmetics (solvent-based systems); and the production of oil-based drilling fluids (known as `muds').

In the market for solvent-based systems, the effect of the merger would be to remove the most significant competitor to Rheox International and its subsidiaries (collectively referred to as Rheox). The combined market shares in volume terms of Akzo and Rheox would be 92 per cent for organoclays, 36 per cent for organics and 67 per cent for organic pastes. The balance of evidence is that there are no close substitutes which could be used by customers to reduce Rheox's market power, without significant cost and inconvenience of reformulation. Nevertheless as the products represent only a small proportion of ultimate product costs we consider it unlikely that the larger customers will exert strong countervailing buyer power.

Akzo is the largest supplier of organoclays for oil-based muds to the United Kingdom market with a market share of 26 per cent. Rheox is a smaller supplier, and supplies a different type of organoclay: a wet process organoclay which is significantly more expensive. This product competes with the dry process organoclays (which Akzo supplies) in special applications (such as deep drilling). The merger would bring Akzo's organoclays business into the Valhi group which also has effective control of the Baroid Corporation (which, with its subsidiaries, is referred to as Baroid), a subsidiary of which is the largest United Kingdom drilling mud service company as well as itself producing organoclays. There are four other suppliers of organoclays for oil-based muds to the United Kingdom market, but the major part of the sales of two of them (as well as of Baroid) are to the drilling mud service businesses within their own corporate group. Drilling mud suppliers not linked to an organoclay manufacturer would therefore lose their main independent source of organoclay supplies.

In relation to both markets, although existing suppliers might increase their activities in the United Kingdom to some extent and imports might also increase, it would be from a very low base, and we do not consider that these factors would be likely to counteract the detriment to competition which would arise as a result of the merger. We conclude that the effect of the merger would be that prices for organoclays, organics and organic pastes for solvent-based systems and for organoclays for oil-based muds would be higher than would otherwise prevail and there would also be a distortion of competition between drilling mud service companies as a result of the loss of the major independent source of organoclay supply to them.

We consider that although there might be some benefits from the merger, such as economies of scale and technical synergy, these would not outweigh the detriments to competition.

We conclude that the proposed merger may be expected to operate against the public interest and we recommend that it should not be permitted.

Full text

Back to the top