ANNUAL ECONOMIC COMPETITION REPORT

1995-96

The Federal Competition Commission can be consulted on legal and policy issues related to competition and free market entry through any of the following channels:

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The Plenary of the Federal Competition Commission Commissioners

Fernando Sánchez Ugarte, President

Javier Aguilar Álvarez de Alba

Pedro Bosch García

Pascual García Alba Iduñate

Fernando Heftye Etienne

Presentation

I am pleased to present the third annual report on the work of the Federal Competition Commission. By issuing and publishing it, we are complying with the provisions contained in Section III of Article 28 of the Federal Law of Economic Competition.

During the period 1995-96, the Commission's activities increased considerably. This evolution is consistent with the progress made in creating a culture of competition, with the greater alertness of economic agents to monopolistic practices, and with the structural transformation taking place within domestic markets. It is also the result of the Commission's active participation in privatization processes and in increasing competition, and of the new duties conferred on the Commission by different sectorial laws.

Thanks to the strengthening of the regulatory framework that protects and promotes competition, its coordination with sectorial authorities, and the professionalism of the civil servants who work in this institution, the Commission has effectively met its obligation of preventing those practices, both public and private, that affect the processes of competition and market freedom.

Fernando Sánchez Ugarte

President

Mexico City, November 1996

Contents

Introduction 11

I. Competition Policy 13

II. Mergers and Acquisitions 21

III. Monopolistic Practices and Other

Restrictions to Competition 51

IV. Opinions 75

V. Consultations and

Reconsideration Appeals 85

VI. International Affairs, Communi-

cation and Administration 93

Appendix

Statistics 101

Mergers and Acquisitions 105

Monopolistic Practices and Other

Restrictions to Competition 119

Consultations 121

INTRODUCTION

The 1995-96 period has been the busiest since the Federal Competition Commission was created three years ago. The number of cases concluded rose 77% over the previous year's figure. At the same time, the opinions issued reflected the major restructuring effort being made in the economic arena by the current administration.

The large increase in the number of cases attended points to both the progress made in market dynamics and a fundamental change in the attitude of economic agents. The number of Mexican businessmen who demand protection from growing competition is ever smaller, whereas those who remain alert for restrictions to the competitive process are constantly on the increase. By meeting its obligations, the Commission protects companies from anti-competitive practices that could restrict their growth, curtail their opportunities, and displace them from the market. Similarly, the effective enforcement of the Federal Law of Economic Competition brings benefits for consumers.

Unlike previous years, competition legislation and the Commission's functions are now increasingly familiar to broad sectors of the business community. This progress must be strengthened through closer links with economic agents and a broader dissemination of competition policy, as described in detail in this report. The report also includes an overview of the work carried out, and this panorama is supplemented with a brief exposition of the permanent efforts made to increase the effectiveness and timeliness of the enforcement of the competition law, based on the experience accumulated through the work of the past three years.

This document contains several innovations from the previous report. In the first place, it provides a thorough description of the reasons for the mergers and acquisitions of which the Commission received notice. The main reasons include the following: challenges faced by companies following the intensification of competition in the domestic and international markets; new opportunities arising as a result of revised regulatory frameworks; privatizations; and the need to return businesses affected by the economic crisis to a sound footing. The report then goes on to study the risks and advantages arising from mergers and acquisitions that influence market functioning, efficiency, and competitiveness.

In this section we submit a detailed review of several resolutions undertaken by the Commission's Plenary. Of particular interest here is the emphasis placed on eliminating anti-competitive elements, in order to protect competition and, at the same time, to allow the development of the social and private benefits that would arise from the operations of which the Commission received notice. In other words, the Commission has enforced the law rationally, prohibiting only those operations presenting an insurmountable anti-competitive content.

In the second place, this 1995-96 report describes a greater number of cases of interest. This is consistent both with the significant increase in the Commission's activities and with its task of reporting, with as much detail and as many examples as possible, on the enforcement of the Federal Law of Economic Competition.

In particular, attention should be paid to the presentation of cases that illustrate the criteria developed by the Commission to determine the existence of monopolistic practices, which are indicated generically in Article 10, Section VII, of the Federal Law of Economic Competition: for example, predatory pricing and granting discounts to retailers in order to unduly displace competitors. Also of special interest are the declaration regarding the existence of restrictions to the flow of merchandise into one of the nation's states, and the recommendations made to several state governments to eliminate administrative restrictions on competition.

In the third place, this report describes the Commission's participation in designing the public auction for radio-frequency concessions and in drawing up the plans for the privatization of port terminals and authorities, Almacenes Nacionales de Depósito, S.A., and the railway system. In all these cases, the report describes the measures implemented to allow the development of conditions of competition and restrict anti-competitive abuse.

Also of particular interest is the inclusion in this report of a section dealing with appeals for reconsideration, and a statistical appendix covering the cases heard. In addition, as in the previous reports, the appendix lists all the cases resolved over the 1995-96 period.

Finally, it should be pointed out that this report covers the period from June 23, 1995 to June 22, 1996. Henceforth, the Commission will meet its obligation of reporting annually on its activities in accordance with the calendar year. Thus, the next report will cover a six-month period (July to December 1996). Consequently, the following annual report will cover 1997 and will be submitted during the first months of 1998.

I. COMPETITION POLICY

The federal government has placed great emphasis on the importance of fighting monopolistic practices and promoting competition. In the 1995-2000 National Development Plan (NDP), competition policy is included within the provisions established for promoting the efficient use of resources in order to achieve economic growth. Similarly, the Foreign Trade and Industrial Policy Program states that competition policy helps "...to spread the benefits of economic growth among the country's population by opening up opportunities for everyone, and to create an environment favorable for industrial progress. Thus, fighting and preventing monopolistic practices not only increases efficiency; it also leads to better income distribution and facilitates the establishment of an economic structure that rejects the centralization of power..."1Inspired by these goals, over 1995-96 the Federal Competition Commission (known by its Spanish abbreviation, CFC) both consolidated the advances made in competition and continued to effectively enforce the relevant legislation. The following factors had a major influence in the development of that policy during the period:

The trend towards globalization within world markets and its growing influence on the evolution of business in Mexico.

The process of privatizing public companies and the increased liberalization of certain key sectors within the Mexican economy.

The financial restructuring required by some companies as a result of the financial crisis affecting the country.

The experience earned from processing complaints and ex officio investigations during the first three years' work.

As a result of the globalization of commercial activities, competition within domestic and international markets has heightened substantially. Now, local companies must face a growing number of foreign competitors within their domestic markets. To successfully adapt to these new circumstances, domestic companies have been forced to consolidate their positions in traditional markets and to expand their operations overseas. At the same time, multinational companies have developed defensive strategies to maintain their share of world markets.

The modern company meets the globalization challenge by improving its efficiency: in other words, by cutting costs, raising product quality, expanding its scale of operations, and extending or connecting to international marketing networks. Mergers and strategic alliances are often the vehicles that companies use to attain those goals.

The competition policy proposals consider the growing globalization of the world economy and, consequently, of competition. Thus, the Commission's analyses and resolutions on mergers and acquisitions and alleged monopolistic practices have taken into account the effects within the country of real or potential overseas competition. Furthermore, when dealing with mergers and acquisitions, they have also considered the gains in efficiency and competitiveness arising therefrom, the need to raise those factors to international levels, and, when appropriate, corrective measures applicable to anti-competitive threats.

In general terms, the mergers and acquisitions that have taken place in Mexico as a result of globalization fall into three categories:

International mergers and acquisitions that have effects within the country but take place abroad as a part of parent companies' global strategies.

Mergers and acquisitions initiated by Mexican companies to expand their productive efficiency and capacity in order to better meet international competition.

Acquisitions of Mexican companies by foreign investors with the aim of gaining or expanding access to domestic markets.

Within the international markets, 1995 was characterized by what have been called mega-mergers among multinational companies in different industrial sectors. Throughout the year, in the United States alone, a record number of 8,956 mergers took place, with a total value of USD $457.9 billion.

Some of these operations had repercussions in Mexico, when the companies involved also had business interests within the country. One such example is that of Kimberly Clark, which recently acquired Scott Paper; both are U.S. corporations. The chief aim of the merger was to consolidate Kimberly Clark's competitive strength, particularly with regard to consumer goods. The operation's effects were not restricted to the United States: the consequences were also felt in Mexico as well as in Canada and the European Union.

In ruling on this international operation, the competition authorities of the different nations involved acted both rationally and consistently. On the one hand, they preserved the legitimate benefits of the merger as hoped for by the companies involved while, on the other, they protected the process of competition within each of the affected regions.

Particularly notable among the mergers and acquisitions initiated by Mexican companies to expand their productive efficiency and capacity, as well as to better meet international competition, was the purchase of Univex by Alpek. The aim of this operation was to consolidate Alpek's competitive position among nylon producers.

As some multinationals merged to consolidate their global positions, certain Mexican companies also gained a greater international presence through similar processes. Such was the case with Cemex, which purchased several cement businesses in Central America and Colombia, with the chief aim of consolidating its position outside Mexico. Another example was the acquisition of control over the U.S. firm Prodigy by Grupo Carso; the aim here was to participate in providing Internet connectivity services and to open a space for corporate consolidation in the face of competition from mergers involving U.S. and Mexican telecommunications companies.

Recent years have seen growing Mexican involvement in the globalization process. Mexican companies have now acquired a greater presence on the international arena. Recently (on July 8, 1996), Business Week magazine reported that 16 Mexican corporations have now grown to become multinationals within the markets in which emerging countries participate. Mexico is thereby in an advantageous position when compared to other nations with a similar level of economic development, such as Brazil or Argentina.

Among the acquisitions of Mexican companies by foreign investors --whose aim is to gain or expand access to domestic markets and even use Mexico's comparative advantages to strengthen their international operations-- one notable example was the operation involving Paccar Inc. and Vilpac, S.A. Such operations strengthen competition in domestic markets and help develop the country's export potential.

The new international trends in market deregulation and liberalization reflect the interest of national authorities in raising the efficiency and competitiveness of sectors that traditionally have been regulated or managed by the State. Mexico is at the forefront of these efforts, in that it was one of the first countries to open up key sectors of its economy to competition. Thus, during 1995 and 1996, Mexico enacted new versions of its Federal Telecommunications Law, Civil Aviation Law, Railroad Service Regulatory Law, Airports Regulatory Law, and Natural Gas Regulations. The new regulatory framework either allows or substantially expands private investor participation in those sectors. The Commission's work in creating an environment favorable for competition in those areas has been intense. It has been active in preparing drafts of bills, decrees, and other regulatory provisions, and it has participated at different inter-government forums organized to study and design liberalization and privatization mechanisms suitable to Mexico's needs.

The design and implementation of the measures and actions needed to strengthen market forces and incentives in those sectors set major challenges for competition and, consequently, for the Commission. Indeed, there is a need to propose realistic formulas that will allow increased competition and market freedom within sectors that currently involve only one or very few participants or that are highly extensive and largely indivisible. Given this state of affairs, the Commission has striven to insure that the legal and administrative provisions, along with the privatization and deregulation processes themselves, include criteria for safeguarding competition. These criteria include the following:

Establishing rules that strengthen the Commission's role in developing and protecting conditions of competition. For example, in the sectorial legislation outlined above, companies interested in participating in those activities are required to obtain the Commission's prior approval. These laws also allow the establishment of official prices when, in the CFC's opinion, true conditions of competition do not exist.

Privatization schemes designed to favor the development of conditions of competition in the provision of services. For example, the railway legislation provides for the establishment of rights of way in order to allow rail companies to compete with each other.

Transfers of rights granted under concessions or permits for exploiting nationally owned property and for providing public services must receive the Commission's approval. In this way, the new sectorial legislation strengthens the preventive role of the competition authority.

To summarize, competition policy has helped enable divestitures to take place within a framework of fairness and transparency. It has also insured an adequate balance between competition and the pursuit of the goals of efficiency and modernization that underlie the privatization program.

Various companies have faced burgeoning financial difficulties since the economic crisis began in 1995. This phenomenon has led to changes in business ownership and in market structures. Thus, in the worst-case scenario, the elimination of companies --fewer participants-- could negatively affect the competitive environment. At the same time, mergers and acquisitions represent both risks and advantages for competition, since they can equally lead to either a lesser number of participants with greater power or the preservation of threatened companies. The Commission has responded creatively to these challenges. The policy followed over 1995-96 allowed mergers and acquisitions to go ahead under conditions guaranteeing real protection for competition and it enabled socially and privately efficient solutions to be identified.

To solve their financial problems, many companies have adopted merger or association plans. This has been particularly noticeable in the financial sector, where several banks and financial institutions have been recapitalized by accepting new partners, mostly of foreign origin. Mergers and acquisitions are unquestionably a useful mechanism for helping companies out of critical situations. When it made no objections to such operations, the Federal Competition Commission took into consideration the factors favoring competition that derive from returning companies to a sound financial footing and insuring the continued presence of competitors.

The Commission's resolution in the operation involving Aeroméxico, Mexicana and Cintra is one of the most useful examples of applying solutions of this kind to such problems. The two airlines had been going through difficult times financially and were in need of thorough restructuring. The Commission analyzed this case in depth and resolved the matter in a way consistent with competition: preserving the number of competitors and the commercial independence of the airlines, establishing safeguards, and enabling the companies to carry out the necessary financial and administrative restructuring.

There are other interesting examples. The auction of Asemex --a company privatized a couple of years ago and subsequently subjected to government intervention on account of inappropriate financial management within Grupo Asemex-Banpaís-- required a detailed analysis of its effects on competition and on the efficiency of the insurance industry. In this case, as in the bank operations, the Commission took into consideration the financial soundness of the sector and the heightened competition therein that had resulted from its liberalization.

Experience shows that the Commission has been effective in adapting competition policy to changing conditions in the economy. Its investigations and resolutions have responded to both immediate and long-term circumstances faced by markets and companies alike. Competition policy has therefore become, in and of itself, a key economic policy instrument, capable of helping overcome crisis situations without losing sight of the correct road ahead for the long term.

The processing of complaints and ex officio investigations during the Commission's first three years, together with its involvement in deregulation and privatization processes, has been a source of invaluable experience and has contributed to the Commission's consolidation. During that period a great number of cases involving both monopolistic practices and mergers or acquisitions were dealt with. The diversity of these cases and the complexity of some of them required an analysis of all the practices and operations covered by competition legislation. Using the lessons learned over the previous three years, the Plenary has defined criteria that facilitate the interpretation of competition law and the judicial and economic analysis of monopolistic practices and of mergers and acquisitions. It has also striven to expedite investigations of cases and strengthen compliance with the law.

Experience shows that competition policy must be viewed within the new openness of the domestic economy and the globalization of trade and investment flows. Thus, the Commission considers that domestic companies compete against other firms established in the country and, to an increasing extent, against those located in other countries. When appropriate, its studies into the markets affected by the relative monopolistic practices and mergers or acquisitions investigated include imports of similar or substitute goods. Similarly, in determining the market power of the economic agents investigated, the Commission also considers the foreign companies that are either directly or indirectly involved in the Mexican market or that represent a potential source of competition for domestic producers. In this way, although under the terms of the competition law the relevant market cannot go beyond national borders, the determination of power within that market does require a regional or global approach. Failure to include this aspect can lead to overestimating the market power of the companies against which complaints are made, or which are involved in mergers and acquisitions and, consequently, to mistaken perceptions and resolutions. In effect, even a company of considerable size within the domestic market does not necessarily have the capacity to manipulate it when competing against much larger companies with major shares of global markets.

At the same time, although experience has shown that the competition law is an effective instrument, the Plenary believes that procedures for complaints and ex officio investigations could be expedited by following the mechanisms contained in the Federal Civil Proceedings Code. This is an attempt to bring about a greater streamlining of the administration of justice while fully observing all the legal details that guarantee sound, balanced proceedings.

The actions undertaken by the Commission during its first three years show that it is an important instrument, supporting competitors in their defense against monopolistic abuses or market power situations that could unduly affect their performance. That role still needs strengthening, but major progress has unquestionably been achieved.

Finally, it would be useful to make a series of comments on the distinction between protecting the competitive process and free market access on the one hand, and income distribution on the other. Misconceptions regarding this matter usually arise from confusing the companies participating in markets with their owners. The Federal Law of Economic Competition was created to insure that companies participate competitively in different markets and not to improve income distribution, although the positive effects it indirectly has in that area should not be ignored.

Occasionally the belief is voiced that the accumulation of wealth by companies or a particular individual automatically reduces competition, but that is not necessarily the case. The accumulation of companies is one matter, while a company or monopoly that hinders competition by retaining or gaining substantial power in a market is quite another.

The purpose of the competition law is to protect competition and free market access, regardless of to whom the company involved belongs. It would, of course, be desirable for there to be a more equitable distribution of wealth in Mexico, for company ownership to be spread more widely across the board, and for a greater number of investors to be involved. Unfortunately, our country has not attained a true democratization and breakdown of corporate ownership: the largest companies, some of which now have an international dimension, belong to a small number of stockholders. But this fact, while not a desirable state of affairs, is not necessarily of relevance to competition policy or, at least, to the way in which that policy is defined and structured within current legislation.

To summarize, the experience earned by the Commission during its third year of work has been wide-ranging and fruitful. Competition policy has become an important instrument within Mexican economic policy. There is no doubt that its role still needs to be strengthened. However, the work of the past three years has set the foundations for the consolidation of this policy, for it to become a powerful tool in establishing competitive economic development with opportunities for all, and for attaining the goals of equality, justice, and a balanced distribution of wealth.

Economic Competition within the Foreign Trade and Industrial Policy Program

The chief aim of the 1995-2000 National Development Plan is to "...promote vigorous and sustainable economic growth to strengthen national sovereignty and to further the social well-being of all Mexicans and their coexistence based on democracy and justice."2 Among the five main strategies for achieving this growth proposed in the NDP, the following are worthy of special note: Promoting the efficient use of resources for growth; for this, it is necessary to address shortcomings in infrastructure and in the quality and cost of basic components, technological backwardness, and the problems of excessive regulations and restrictions on competition. The effective enforcement of the Federal Law of Economic Competition will allow the creation of the conditions necessary for solving these problems.

Applying relevant sectorial policies; this will strengthen the action of general instruments in the sectorial sphere, interconnecting them and complementing the sectorially specific instruments that already exist. Among its other general proposals, the Foreign Trade and Industrial Policy Program includes provisions dealing with economic competition, deregulation, and the upgrading of technology and infrastructure.

The chief aim of the Program is to create an internationally competitive industrial plant. With this in mind, industrial policy must insure that a growing number of regions, sectors, productive chains, and companies make good use of the competitive advantages available within our economy. In order to make progress toward this goal, the Program is centered around three main strategies:

"I. Creating conditions of high and permanent profitability within the direct and indirect export sectors, and expanding and strengthening domestic products' access to export markets.

"II. Creating mechanisms to accelerate the development of regional and sectorial industrial groupings with high levels of international competitiveness, and promoting the growing involvement within those groupings of very small, small, and medium-sized businesses.

"III. Promoting the development of an internal market and efficient import substitution, as the basis for domestic industry's incorporation into the international economy."

Competition policy is centered around these guidelines, and is also related to other more general strategies intended to boost the efficiency of the domestic economy: deregulation and the upgrading of technology and infrastructure. Similarly, it also contributes to the pursuit of the following sectorial policies:

Promoting the integration of productive chains.

Promoting external competition by addressing tariff and duty issues, fighting unfair international trading practices, and setting technical regulations for foreign trade.

Competition policy helps create the conditions for establishing and consolidating a profitable export sector, developing the domestic market, and encouraging efficient import substitution. Indeed, the elimination of anti-competitive practices within the nation neutralizes distortions restricting the development of the domestic market, reducing the profitability of exporters, and limiting the competitiveness of Mexican companies. This is of particular relevance in those sectors only recently opened up to competition: communications, transport, and the supply of energy. The Commission's actions in those areas, along with those of the regulatory authorities, help create and preserve the competitive environment necessary for expanding and modernizing infrastructure and raising the efficiency with which those services are provided.

The removal of regulations that unnecessarily increase the cost of doing business, impose artificial barriers to entry or grant preferential treatment helps the proper functioning of markets and, more particularly, the competitiveness of domestic industry. With this aim, the Commission is working closely with the Secretariat of Commerce and Industrial Development (Secofi) on economic deregulation.

Preserving a competitive environment with clear, transparent, and predictable rules stimulates the technological modernization of industry. The Commission assists the development of this important issue by enforcing competition law. Therefore, when dealing with mergers and acquisitions that have an anti-competitive slant but would nevertheless lead to technological improvements, the Commission assigns top priority to identifying solutions that will eliminate their anti-competitive aspects but not affect the gains in competitiveness arising therefrom.

Competition policy combats the undue displacement of competitors and the establishment of barriers to market entry, regardless of whether such actions come from public or private agencies. In addition, the Commission helps remove restrictions to the free transit of goods between the nation's states and administrative measures that restrict free market access. In this way, it creates conditions that, (1) allow a growing number of regions, sectors, productive chains, and businesses to take advantage of our economy's competitive advantages, and, (2) that enable very small, small, and medium-sized companies to compete against or negotiate with larger, more powerful firms on an equal footing.

Finally, special mention should be made of the Commission's role in trade liberalization. The CFC cooperates with Secofi on competition issues involving commercial defensive and protective measures on international markets. The Commission will also fight monopolistic practices occurring abroad that have repercussions within Mexico. To this end, it is establishing closer communications with our main trading partners' competition authorities, and is encouraging cooperation on competition issues within international forums.

II. MERGERS AND ACQUISITIONS

In recent years there has been a substantial increase in the number of mergers and acquisitions taking place across the world. This trend is basically a response to the process of globalization that the international economy is undergoing. This phenomenon explains many of the mergers and acquisitions of which the Commission is notified. In addition, in Mexico a great number of these operations are the result of the reviewed regulatory framework for economic activities, the privatization of nationalized industries, and the financial restructuring that has taken place to counter the effects of the economic crisis facing the country. The volume of cases studied by the Commission increased substantially over 1995-96, with the following results of particular interest:

Notifications were received regarding 164 cases,3 an increase of 67.3% over the previous year. This number is close to the 190 cases of which the Commission received notification during its first two years of existence. A total of 166 cases were concluded,4 of which 152 arose from notifications served by the parties involved, 12 from ex officio investigations into operations for which no notifications were served, and 2 from complaints. This number represents an increase of 82.4% over those concluded in 1994-95. Furthermore, it is particularly noteworthy that the number of notifications concluded with a resolution during the period covered by this report is similar to the total resolved during the whole of the two previous years.

The value of the operations for which notification was required under the competition law totaled more than 82.432 billion pesos. To put the figure in perspective, this amount is equal to 4.6% of 1995 GDP.

A careful analysis of the goals and possible effects on the market of the mergers and acquisitions arising in the conditions described would be useful. Among the goals, the following are particularly notable: (a) growth and creation of companies or groups that are more efficient and able to meet international competition; (b) exploiting opportunities arising from the removal of legal barriers to entry and the opening up of new areas to private participation, the development of which demands experience, specialized technology, and major investment; (c) tackling financial problems that threaten companies' performance or survival. Achieving these goals would bring unquestionable benefits for strengthening the domestic economy and the population's well-being, provided that they do not occur along with negative repercussions on efficient market functioning.

In protecting competition and free market access, the Commission has enforced the Federal Law of Economic Competition rationally and with precision. In strict accordance with the law's terms and spirit, mergers and acquisitions are not objected to per se. In other words, objections are made only when their aims or effects are clearly anti-competitive. Operations with neutral or favorable effects on competition are invariably approved. With the aim of assuring the greatest benefits for the country, the Commission has established the policy of approving mergers and acquisitions with anti-competitive elements when those elements can be eliminated by subjecting the operations to certain conditions. The goal is clear: achieving solutions that are competitively neutral or favorable without sacrificing the ability of companies to enter into partnerships that would allow them to meet the challenges present in the current economic environment and take advantage of its opportunities.

Thus, the resolutions issued during 1995-96 included one case that was objected to on account of its adverse effects on competition within a recently deregulated sector, 14 in which conditions were imposed to remove anti-competitive risks, and 146 that were not objected to on account of their having neutral or favorable effects on the process of competition and free market access.

Without exception, the cases notified in accordance with the law were resolved within the time scales established therein. Resolutions on mergers and acquisitions arising from participation in auctions of public companies were issued within the periods stipulated in the corresponding requests for bids and auction rules.

The efficient processing of notifications has allowed competition to be protected without hindering business development or market dynamics. These results reflect the priority given to administrative measures intended to reduce costs associated with enforcing and observing the competition law. The Commission has persevered with its policy of administrative simplification, reducing response times, cutting back on formalities, and streamlining its paperwork. In addition, it has established internal procedures that substantially expedite resolutions on operations that are merely administrative restructurings. Thanks to these measures, greater resources can now be channeled into solving the more complex cases.

In order to illustrate the application of the policy guidelines described above, the following pages outline the most representative cases resolved during 1995-96. The choice of cases was made in accordance with the factors most often behind the operations notified to the Commission. The first set of cases features responses to economic globalization; the second group relates to the new regulatory framework; and the third includes situations that arose because of financial problems caused by the economic crisis.

A. Globalization of economic activity

1. International Mergers

Mergers between companies with subsidiaries in several countries are one of the most notable features of economic internationalization. In general terms, these operations are a response to intensified competition in global markets and the need to redistribute activities in order to adapt to new conditions in national and regional markets. Thus, the merging companies restructure their international production, distribution, and marketing strategies in terms of their strengths in those processes and the different geographical markets in which they participate.

International mergers generally lead to a wave of notifications being submitted to the competition authorities in the markets of countries where subsidiaries operate. In Mexico, the law requires notification when operations have an effect within the country, regardless of whether the operation originates at home or abroad. As a result, during the period covered by this report, notifications regarding the following operations were received: Kimberly Clark and Scott Paper, Interbrew and John Labatt, Robert Bosch and Allied Signal, Walt Disney and Capital Cities, and others. On account of their particular interest, each of the cases cited is described below.

Interbrew, S.A./N.V. / John Labatt, Ltd. / Femsa Cerveza, S.A. de C.V.

In July 1995, the Belgian company Interbrew, S.A./N.V., through its Canadian subsidiary John Labatt, Ltd., informed the Commission of its plans to carry out an acquisition. Although the operation took place in Canada, notice was given to the Mexican authorities on account of its effects within this country. The operation involved the purchase of John Labatt, Ltd. by Interbrew, S.A./N.V. John Labatt had a 22% holding in the capital stock of Femsa Cerveza, S.A. de C.V.

The relevant market of this operation was that of the production and marketing of domestic and imported beer in Mexico. This market involves Femsa Cerveza, S.A. de C.V. and Grupo Modelo, S.A. de C.V., which have established alliances with John Labatt, Ltd. and Anheuser-Busch, respectively, in order to take advantage of their distribution networks in the countries in which they operate, thus enabling their products to more easily penetrate international markets.

Since John Labatt, Ltd. and Interbrew, S.A./N.V. do not command a significant share of the relevant market, and since Femsa was already distributing both foreign companies' products prior to operation regarding which notice was served, it was decided that the acquisition would not have a significant effect on conditions of competition. The Commission therefore resolved neither to object to the operation nor to impose conditions on it.

Kimberly Clark de México, S.A. de C.V. / Compañía Industrial de San Cristóbal, S.A.

In 1995, Kimberly Clark Corporation (KCC) announced its intention to carry out a merger with Scott Paper Company. Both companies, incorporated under U.S. law, have major investments in that country and in the rest of the world. As a result, they control a significant share of the markets for tissue paper byproducts in the United States and in those countries in which they have subsidiaries.

The merger of these two U.S. companies threatened to cause high levels of concentration in certain Mexican markets, because of their stakes in Kimberly Clark de México (KCM) and Compañía Industrial de San Cristóbal (Crisoba). On account of the major market power that would have arisen from the operation, the Commission decided to place conditions upon it, involving the divestiture of productive capacity, brands, and products. This served to protect the benefits of the merger while eliminating its threats to competition.

Under the merger in the United States, KCC would acquire 100% of Scott's capital stock. Thus, the 49% stockholding in Crisoba belonging to Scott Worldwide Inc. (a Scott subsidiary), as well as its option over 3.1% of the Mexican company's capital stock, could end up in KCC's hands. As a result, the merging U.S. company could obtain control over Crisoba and the other companies in its group.

As indicated in the notification, the operation would involve a merger between Crisoba and KCM. After the operation, the corporate structure would be as follows: 55% of KCM's stock would be in Mexican hands and the remaining 45% would be under the control of KCC (31% directly and 14% through Scott Worldwide Inc.). In turn, KCM's corporate responsibilities would expand after incorporating Crisoba and its subsidiaries into its group.

KCM and Crisoba have a major share in the production and marketing of feminine hygiene products, tissue paper byproducts, writing and printer paper, and disposable baby wipes. On account of the different market shares of the two companies, the impact of the merger on conditions of competition would vary in each affected market.

Feminine hygiene products. The sanitary towel market is characterized by expanding demand, but demand that is relatively inelastic because there are only distant substitutes made with cotton or cloth. Sanitary towels, tampons, and panty-liners have different levels of substitutability. However, panty-liners and sanitary towels are generally complementary. Marketing takes place throughout the country through different channels. The relevant market is that of the three products at the national level.

The two merging companies were estimated to have a 63% share of this market. The remainder was mostly covered by Procter & Gamble (22%) and by other manufacturers and imports (15%).

Technological and promotional expenses raise market entrance costs for new companies, protecting the shares of the three main domestic producers. Competition from foreign articles can be largely discounted because domestic production is more advantageous as a result of import costs. As a result, this merger would grant substantial power over the relevant market and would facilitate monopolistic practices.

Tissue paper byproducts. The derivatives of tissue paper include toilet tissue, facial tissues, table napkins, and absorbent kitchen towels. Although each is intended for a specific purpose, the possibility of substituting one for another does exist. Since these products are sold nationwide, their relevant markets cover the entire nation.

KCM and Crisoba supply more than two-thirds of domestic sales of tissue paper products: a combined total of 331,000 tons a year. This volume, while important for Mexico, is not significant globally: in volume terms, the operation would rank KCM/Crisoba 110th among the world's largest paper companies. This fact and the relationship between scale and efficiency were taken into account during deliberations on the operation's favorable effects on competition. However, consideration was also given to the high domestic market share of the two companies (67.4%), which did threaten competition.

The following facts are relevant to this matter: (a) KCM alone has a 70% market share in facial tissues and kitchen towels; (b) in the facial tissue market, Kleenex and Scotties (belonging to KCM and Crisoba, respectively) account for 98% of domestic demand; (c) in napkins, KCM's Regio brand covers 12% of demand; (d) the brands of absorbent paper towels with the largest market shares are KCM's Kleenex and Vogue and Crisoba's Pétalo; and (e) most of the two companies' business comes from toilet tissue, where they handle the two major brands sold domestically (Pétalo and Regio), each of which accounts for slightly over 20% of total market volume.

KCM/Crisoba's substantial share of the tissue paper market must also be seen in conjunction with their highly integrated productive processes, the extensive coverage of their distribution networks, and the high market penetration of their brands. This situation would be a major discouragement to the consolidation of existing competitors and the entry of new companies, on account of the investments that would be necessary to set up a nationwide industry and of the high outlay, in terms of both time and resources, required to establish new brands. All these factors would grant the two companies substantial market power, threatening competition and free market access.

Writing and printer paper. This includes a wide range of paper types and products made from paper, the characteristics of which depend on their intended use. Substitutability between them is subject to certain restrictions. Similarly, paper products manufactured for other purposes are not a reasonable alternative. For this reason and on account of its national distribution, the relevant market covers the entire country. Of this market, KCM/Crisoba have a 36% share, with imports supplying another 50%. To meet foreign competition, the Mexican industry must raise its quality standards and levels of efficiency. The merger could increase KCM/Crisoba's efficiency without threatening competition among most of the products that make up this market. However, competition in the notebook segment would be threatened, where KCM and Crisoba respectively cover 80% and 6.5% of domestic demand. Given these conditions, the merger would raise, but not drastically modify, the structure of the relevant market. Nevertheless, the market power arising from such stakes in the total volume would hinder competition.

Other products. In the disposable baby wipes market, the following facts were noted:

KCM and Crisoba supply 38% of the market through imports.

70% of domestic demand is covered by imports from the United States.

The two companies are major producers in that country.

Considering this, the Commission decided that the merger would restrict competition in the affected market.

To summarize, the merger between KCM and Crisoba posed threats to or imposed restrictions on competition and free market access in the above markets. As a result, its completion in the way described in the notification would have facilitated the displacement of competitors and the unilateral imposition of prices, to the detriment of consumers. To prevent this, the Commission took steps to reduce the merger's market power and facilitate immediate participation by new competitors. With this in mind, and after hearing the opinions of the main competitors, the Commission decided to impose the following conditions on the operation.

Feminine hygiene products. Divestiture of Sancela and Comercializadora Sancela, which also meant the divestiture from Grupo Crisoba of the brands produced and marketed by Sancela (Saba, Confort, Evax). With this, KCM's share of the relevant market was kept at 38%. The 25% previously controlled by Crisoba was opened up to competition.

Tissue paper derivatives. In this sector, the Commission ordered (a) the sale of all rights over Regio brand toilet tissue and napkins; (b) 25-year transfer under license, extendible indefinitely in 25-year increments, of all rights over Scotties brand disposable tissues; and (c) cessation of Suavel brand napkins. These steps were supplemented by the divestiture of sufficient assets to produce at least 67,000 tons of tissue paper, and of the converters necessary to manufacture toilet tissue, facial tissues, and paper napkins in proportions equal to the market shares of Regio and Scotties. In addition, the purchasers of those assets would be offered the option of entering into a supply contract for 13,000 tons of tissue paper a year. In this way, competitors would be able to enter the market with a supply of 80,000 tons of tissue paper derivatives, already supported by known market brands.

As a result of these measures, KCM/Crisoba's share of the tissue paper derivatives market could be limited to 50%. In terms of specific products, this meant that a good proportion of KCM's supplies of toilet tissue and table napkins would be transferred to the competition. It also meant that the merger would have no effect on facial tissues, since other economic agents were to acquire Crisoba's share of that sector.

Writing and printer paper. Sale of all Mexican rights over Shock, Crisoba's main brand of notebooks. This measure would reduce the entry costs to be met by new competitors in the corresponding market.

Other products. 25-year transfer under license, extendible indefinitely in 25-year increments, of all rights in Mexico over Baby Fresh brand baby wipes.

Similar measures were introduced in other countries. The Mexican response was perhaps of greater scope, since it obeyed the need to prevent the negative effects from operations much larger than those occurring in other countries. The ruling, while appearing harsh, was consistent with the need to effectively eliminate threats to competition in domestic markets.

To insure that the implementation of these conditions would favor competition and free market access within as short a space of time as possible, the Commission granted the merging companies a period in which to submit a transparent, non-discriminatory scheme that would allow the participation of other economic agents with a real capacity to compete in the affected markets.

The Walt Disney Company / Expansión, S. de R.L. de C.V.

On December 11, 1995, the Commission was notified of an operation involving The Walt Disney Company and Expansión, S. de R.L. de C.V. This operation was the result of an international merger between Disney and Capital Cities/ABC, Inc. in the United States. Following this merger, control over Expansión, held by Capital through its subsidiaries (Business Publishing, Inc. and Mexican Publishing Company, Inc.) was to be transferred to Disney.

Disney and Expansión are active in different markets. For its entertainment business, the former has three subsidiaries in Mexico. Of these, only Disney Consumer Products, S.A. de C.V. is currently operating; its business involves granting licenses for manufacturing and marketing merchandise that exploits the image of Disney characters. In turn, the corporate purpose of Expansión is the production of financial and economic magazines and publications. It controls a 18.9% share of this market. Considering these points, the Commission determined that the operation as notified would have no effect on the markets referred to, and consequently resolved neither to object to the operation nor to impose conditions on it.

Robert Bosch, GmbH / Allied Signal Automotive de México, S.A. de C.V.

In February 1996, Robert Bosch, GmbH and Allied Signal Automotive de México, S.A. de C.V. gave notice of their intention to carry out a transaction involving the sale of 48.2% of Allied's assets to Bosch. With this operation, Bosch would acquire Allied's production facility located in San Luis Potosí, which specializes in hydraulic brakes.

The Mexican transaction of which notice was given was part of an international operation carried out by the parent companies of the merging firms. Its aim was to specialize in the production and sale of hydraulic brakes, in order to take advantage of economies of scale and raise the efficiency of this business line to international standards.

The market affected by the operation was that of hydraulic brake production and marketing within Mexico. The structure and market power of the companies involved would not be modified by the operation. By completing the transaction, Bosch would be a new participant and Allied would withdraw from the market. Consequently, the Commission resolved neither to object to the operation nor to impose conditions on it.

2. International Mergers in the chemical/pharmaceutical industry

During 1995 several major mergers took place in the international chemical/pharmaceutical industry, most notably the operations involving Upjohn and Pharmacia, Roussel Uclaf and Latin American Pharmaceutical, Glaxo and Wellcome, and Hoechst and Marion Merrell Dow. International experience indicates that the recent mergers between companies in this industry were basically intended to diversify their products in order to raise competitiveness when negotiating with wholesalers, hospitals, etc. An additional aim was to rationalize operating costs.

In Mexico, the two operations first listed above led to mergers between Roussel and LePetit and between Upjohn and Pharmacia de México. Both cases are described below.

Roussel Uclaf, S.A. / Latin American Pharmaceuticals, Inc.

On June 23, 1995, Roussel Uclaf, S.A. and Latin American Pharmaceuticals, Inc. gave notice of their intention to carry out an international transaction that would have effects in Brazil, Argentina, and Mexico. In this country, Roussel would acquire 100% of the capital stock of LePetit de México, S.A. de C.V., a subsidiary of Latin American Pharmaceutical, Inc. One of the conditions in the purchase contract was a no-competition clause, under which the selling party would not be able to compete against products manufactured by Roussel for a period of five years.

The investigation revealed three relevant markets, identified by therapeutic classifications: anti-obesity preparations (except diet products), gonadotrophin, and throat preparations, all with nationwide coverage. In the first of these, Roussel had a share of 52.6%. Following the transaction, this amount would increase only marginally, on account of LePetit's small 2.3% contribution to the market. In the last two markets, the three competitors of the companies involved in the transaction controlled a total of 70% of all sales.

Since the operation as notified would increase the efficiency and competitiveness of Roussel, thus leading to a deconcentration of those markets and, consequently, of the process of competition, the Commission resolved neither to object to it nor impose conditions on it.

Upjohn, S.A. de C.V. / Pharmacia de México, S.A. de C.V.

On March 18, 1996 the Commission was notified of a planned merger between Upjohn, S.A. de C.V. and Pharmacia de México, S.A. de C.V. in which Upjohn, S.A. de C.V. was to be the merging company. The operation was part of a global strategy adopted by the parent companies.

The market affected by the transaction was that of non-steroid anti-inflammatories produced and distributed across the nation. Within this market, the three main competitors of the merging companies had a joint share in excess of 47%, while Upjohn and Pharmacia's share totaled 5.1%. Given these conditions, the operation posed no threats to competition and free market access; the Commission therefore decided neither to object to it nor to impose conditions on it.

3. Strategic Alliances

The opening up of the Mexican economy and the signing of agreements to allow domestic products greater access to the markets of our main trading partners have provided opportunities and set challenges for Mexico's established businesses. As a result, many strategic alliances with foreign companies have been established or modified. The aims of these include strengthening the local company in the face of the arrival of new, international-level competitors and expanding domestic industry's sales into other countries.

The cases described below all involve such strategic alliances. The operation involving General Electric Co., Axa, S.A. de C.V., and Prolec, S.A. de C.V. was aimed at exports in the North American Free Trade Agreement (NAFTA) region. In contrast, the operations involving Alpek, S.A. de C.V. were with the purpose of adapting to intensified competition in the regional and internal markets.

General Electric Co. / Axa, S.A. de C.V. / Prolec, S.A. de C.V.

On June 1, 1995 notice was received regarding a planned operation between Axa, S.A. de C.V., and General Electric Co. The transaction was to involve a joint investment agreement between the two companies, aimed at creating a new company with the name Prolec-GE Power Transformers, S.R.L. de C.V. Its entire capital stock was to be subscribed to, in equal parts, by General Electric Co. and Axa, S.A. de C.V.

The new company would be created from the power division of Prolec, S.A. de C.V., a subsidiary of Axa. To this end, GE would transfer its transformer production line to Mexico. Additionally, the two companies would attempt to share their competitive advantages. Axa would contribute its distribution network and the infrastructure, technology, quality systems, and design of Prolec, S.A. de C.V.; in turn, GE would contribute its prestige, technology, product lines, and distribution networks in the U.S. and Canadian markets.

This operation was a strategic response to the lifting of barriers to trade and the intensification of competition under NAFTA. The aim of the companies involved was to consolidate their position in Mexico and to export 75% of the output of Prolec-GE Power Transformers to the United States and Canada. Despite Prolec's major market share in Mexico (46%), the operation did not pose any threat to competition in the relevant market, that of electric power transformers produced and sold within Mexico. This conclusion was further supported by the presence of domestic and foreign firms with sufficient installed capacity and technology to compete against the new company.

The Commission therefore resolved neither to object to the operation nor to impose conditions on it.

Alpek, S.A. de C.V. / Grupo Centek, S.A. de C.V. / Inversora de Valores del Norte, S.A. de C.V. / Grupo Celanese, S.A. de C.V. / Univex, S.A.

On August 8, 1995, Alpek, S.A. de C.V. and its subsidiary Grupo Centek, S.A. de C.V. gave notice of their intention to carry out an operation involving, initially, the purchase of stock and assets belonging to Grupo Celanese, S.A. de C.V. The operation as notified involved the following transactions and participants:

First stage:

Centek to purchase from Celanese 51% of the capital stock of Univex, S.A. Univex is the sole domestic producer of caprolactam, and one of only four producers in the North American Free Trade Agreement area.

Inversora de Valores del Norte, S.A. de C.V., a Centek subsidiary, to purchase all assets corresponding to Celanese's Ocotlán plant, which produces polymers for nylon and nylon textiles.

Second stage:

Following conclusion of the above transactions, Alpek to transfer to E.I. Dupont de Nemours & Co. shares representing up to 50% of the capital stock of Centek.

There were three markets affected by this operation: the nationwide production and marketing of (a) caprolactam, (b) nylon textile polymers, and (c) nylon polymers. The latter two are synthetic fibers. Caprolactam is a component used in the production of both.

In light of the vertical relationship between the market for caprolactam and the markets for nylon polymers, the operation would have the following effects:

It would intensify the scale of the vertical relationships and integration that characterize this industry. Alpek would have plants producing the components and nylon fibers, and Celanese would have the assurance of committed supply from Alpek. This would allow the production of a component that is widely sold for nylon production, a product marketed worldwide. In addition, Celanese would not have to divert resources into a non-competitive activity and would instead be able to channel them into sectors in which it is more efficient.

On the supply side, Alpek would have control over 100% of domestic production of caprolactam and of nylon polymers, and over 64% of nylon textile polymer production. Celanese, in contrast, would maintain a significant influence over domestic demand for those products. Given those circumstances, none of the companies involved in the transaction would acquire substantial power in the affected markets. The supply commitment included in the transaction reflects that fact.

The high level of concentration did not necessarily mean that there would be no competition in the affected markets. Neither would it help eliminate competitive pressures on them, since import duty levels allowed caprolactam and nylon synthetic fibers to enter the country at competitive prices. On the other hand, there would be an increase in efficiency. At the same time, these products are widely marketed across the world.

For all these reasons, the Commission made no objection to the operation. However, to prevent possible increases in Alpek's market power, it decided to set a condition under which prior notification would have to be given of any complaint about unfair international trading practices.

4. Purchases of Mexican Businesses by Foreign Companies

Most notable among the operations of this kind of which the Commission received notification during 1995-96 was the one between Paccar, Inc. and Vilpac, S.A. With this operation, Paccar would increase its stockholding in Vilpac from 55% to 100%. The reasons for it had to do with the ongoing liberalization of the Mexican economy, particularly in the automobile industry.

The operation's relevant market was that of heavy goods and passenger vehicles produced in Mexico belonging to classes 6, 7, and 8 (weights from 8,846 to 14,969 kg). These were all taken as being the same relevant market, given the high level of substitutability between them. Only one exception was made: vehicles with a fifth wheel and class 8 mixer trucks.

Analysis revealed that the level of concentration was moderate, albeit slightly higher in classes 6 and 8 and lower in class 7. This situation allowed competition between existing industries. In addition, in spite of the high entry costs in this industry due to the funds required to install a heavy vehicle plant and the cutting-edge technology needed to efficiently compete in this market, recent years have seen an intensification of competition with the entry of Volvo, Oshkosh, General Motors, and Chrysler.

In this regard, the proposed operation would allow a higher level of competition between Mexican producers of heavy vehicles; the reason for this was Vilpac's capacity to make investments, acquire up-to-date technology, and participate in the domestic and overseas markets.

The Commission concluded that the planned operation did not grant substantial market power and, consequently, did not threaten competition. It therefore resolved neither to object to the operation nor to impose conditions on it.

B. Deregulation and Privatization

1. Deregulation

The new opportunities available following the deregulation of natural gas distribution, electricity generation, and telecommunications have led to the creation of several kinds of strategic alliances. This is the logical outcome of these sectors' high entry costs, particularly with regard to investment, experience, technology, and understanding of the market, together with the need to combine several advantages in each of those areas.

As a result, the success of deregulation efforts and, consequently, the efficient provision of those services largely depends on mergers and acquisitions. However, the size of the companies involved, a characteristic of deregulated sectors, can hinder the promotion of competition and allow monopolistic practices, giving the concentrated companies exclusive profits to the detriment of the benefits that deregulation should bring consumers and society in general. In situations such as this, market dynamics have to be replaced with intervention by regulatory authorities.

Nevertheless, it must be pointed out that as the deregulated sectors stand today, concentrations generally favor competition or its development on account of their being associated with the incorporation and entry of new companies. Thus, in the telephone sector, the entry of new participants will allow the development of competitive pressure in this industry, which has traditionally been dominated by one company. Private participation in electricity co-generation schemes will also have positive effects in that market, by encouraging the development of greater efficiency in the Federal Electricity Commission (CFE). Finally, the involvement of the private sector in gas distribution services requires a careful assessment of future participants, on account of the impact on the market for industrial fuel.

Careful analysis of these operations allows their disadvantageous effects to be prevented, thereby using deregulation to benefit of society. To this end, the sectoral legislation generally requires the Commission's prior permission before public concessions and permits can be granted.

Liberalization of the telecommunications sector

The opening up of telephone services to competition was consolidated with the enactment of the Federal Telecommunications Law (LFT) in 1995. Prior to this event, several economic agents had expressed their interest in participating in the sector. The formalization of their initiatives, however, depended on the creation of a regulatory framework that would allow them to obtain concessions in a transparent fashion, would guarantee ownership rights and broad, non-discriminatory access to telecommunications networks and, finally, would insure interconnections between all service providers. In order to help establish those conditions, so necessary for the development of competition in the sector, the Commission worked in close collaboration with the Secretariat of Communications and Transport (SCT) in drawing up the draft version of the LFT.

The LFT's slant in favor of competition,and the Commission's resolution in the application of competition legislation and in complying with its duties under the law, have provided a strong impulse for the materialization of initiatives by companies interested in participating in this sector. The change in conditions intensified the potential competition against Telmex, to the immediate benefit of consumers. The signs of this favorable evolution can be seen in improved customer service, in the new services being offered, and in the expansion and modernization of the telephone network.

The establishment and effective development of conditions of competition placed new challenges and responsibilities on the Commission. First of all, it had to insure that the procedures and guidelines for granting concessions did not include artificial restrictions to entry by new telephone service providers. In this regard, the Commission has adopted a systematic stance against limitations on competitors. Working with this principle, the SCT granted concessions to Avantel, Unicom, Alestra, Iusatel, Cableados y Sistemas, Marcatel, Miditel, and Investcom.

Following the conclusion of that phase, the Commission enforced the law to prevent mergers and acquisitions that could reduce or hinder competition or free market access. It studied the notifications received regarding operations between Banco Nacional de México, S.A. de C.V. and MCI Communication Corporation, and between Valores Industriales, S.A., Bancomer, S.A., and GTE International Telecommunication Incorporated, the purposes of which were to create Avantel and Unicom, respectively. Similarly, it investigated the operation involving Grupo Alfa and American Telephone and Telegraph Corporation to create Alestra. In these three cases, the Commission's rulings were favorable. However, a condition was placed on Alestra, requiring it to give notice upon reaching the limits beyond which notification of operations is required under the law.

The Commission does not object to mergers and acquisitions intended to create efficient companies that are capable of competing in the new markets in accordance with the law. The three cases approved during 1995-96 adequately reflect the application of this policy. In fact, by undertaking such operations, the banks can make better use of their internal networks and access to financial markets, bringing a favorable outcome for competition in a sector previously characterized by its low number of participants. This phenomenon has also been observed in other countries.

At the same time, defending competition and free market access forces the Commission to carefully analyze the impact on domestic long-distance services caused by horizontal mergers and acquisitions in this sector. The same attention would be required by any future alliances with foreign telecommunications companies that operate as monopolies in their own countries.

The strengthening of competition in domestic markets and its development in the telephone industry go some way toward explaining the corporate restructuring of Grupo Carso, S.A. de C.V. Its split into two new companies - Carso Global Telecom, S.A. de C.V. and Invercorporación, S.A. de C.V. - is intended to improve management of its different business areas. In this way it will ensure better performance by the group in the increasingly competitive telecommunications sector. The operations to create the new companies were approved by the Commission, on account of their being administrative restructurings that did not threaten competition in the markets in which Carso participates.

To conclude, mention should be made once again of the challenge facing the Commission and the regulatory authorities in establishing and developing efficient telecommunications markets. In the short term, the structure of this market will be highly dynamic. New suppliers will surely emerge, along with mergers and acquisitions involving the recently created telecommunications companies and more sophisticated strategies to capture and control markets. With that in mind, the Commission has made preparations to insure customer satisfaction and corporate access to this essential service under the best possible conditions available on the market.

Motorola Inc. / Mocel Inc. / Celcom Inc.

On June 20, 1995, Motorola Inc. gave notice of a planned operation involving the purchase of 100% of the stock of Mocel Inc. and the option to purchase the same proportion of shares in Celcom Inc.

The companies participating in this merger were either directly or indirectly involved in Celular de Telefonía, S.A. de C.V. (Cedetel). Motorola was the owner of 40% of Cedetel's stock. In turn, Mocel and Celcom were stockholders in Grupo Corporativo del Norte, S.A. de C.V., which also held stock in Cedetel. Following this operation, Motorola would acquire control over Cedetel.

The relevant market of this operation was that of cellular telephone services provided in Region IV (Monterrey, Saltillo, Nuevo Laredo, Reynosa, and Matamoros), which had been granted under concession to Radiomóvil Dipsa, S.A. (Telcel) and Cedetel.

It should be pointed out that for technical reasons there are only two bands available for cellular telephones. Band A is distributed regionally among different companies, while Band B has been granted under concession to Telcel across the nation. This situation limits the participants in the relevant market to the two companies mentioned above. Thus, the Motorola operation would not cause changes in market distribution, which was divided 60-40 between Telcel and Cedetel respectively.

However, the mechanics of the cellular concessions does not lead to balanced competition between the participants, on account of the advantages granted thereunder to the national operator. In such a situation, Motorola's capacity and experience would help strengthen competition in the relevant market and in the telecommunications sector. For that reason, the Commission resolved neither to object to the operation nor to impose conditions upon it.

Enserch de Monterrey, S.A. de C.V. / Compañía Mexicana de Gas, S.A. de C.V. / Operadora de Gas Cerralvo, S.A. de C.V. / Gas Natural de Apodaca, S.A. de C.V. / Gas Natural de Santa Catarina, S.A. de C.V. / Gas Automotores, S.A. de C.V.

On October 27, 1995, Enserch de México, S.A. de C.V. (Enserch) gave notice of its plans to acquire 49% stockholdings in Compañía Mexicana de Gas, S.A. de C.V., Operadora de Gas Cerralvo, S.A. de C.V., Gas Natural de Apodaca, S.A. de C.V., Gas Natural de Santa Catarina, S.A. de C.V., and Gas Automotores, S.A. de C.V. (collectively, "the companies").5 Following the Commission's resolution, Enserch reported that the shares in question would be acquired by its subsidiary Enserch de Monterrey, S.A. de C.V. (E. Monterrey). Since this modification did not alter the substantive content of the original notification, the Plenary ratified its resolution.

Both Enserch Corporation (EC) and Enserch Development Corporation (EDC) are U.S. companies whose business includes the acquisition, transportation, distribution, and sale of natural gas, butane, and propane in that country. They are both owners of Enserch. In turn, EDC and Enserch respectively hold 0.01% and 99.99% of the capital stock of E. Monterrey. The Mexican subsidiaries were created in 1995 to do business in the domestic natural gas market, following the opening of that sector to competition.6 Nevertheless, as of the day the notification was served, Enserch and E. Monterrey were not active on that market.Two Mexican shareholders controlled 75% of the stock of Compañía Mexicana de Gas, S.A. de C.V., Operadora de Gas Cerralvo, S.A. de C.V., and Gas Natural de Santa Catarina, S.A. de C.V. In turn, the first of these companies controlled 99% of the stock of Gas Natural de Apodaca, S.A. de C.V. and Gas Automotores, S.A. de C.V. These companies' majority shareholders would continue to be involved in them after the operation.

The interested companies had authorization to distribute natural gas in the Greater Monterrey Area (GMA), even before the enactment of the Natural Gas Regulations (RGN) in 1995. For this, they had a network of 223 kilometers of gas mains. In order to continue their operations under the new regulations, the companies obtained the provisional permits provided for in the RGN.7 The final permits (renewable indefinitely for periods of 15 years) were due to be issued by the Energy Regulating Commission (CRE) within the following months.The aim of the operation was to combine capital, experience, and technology, to expand the gas main network in the GMA, to raise the quality of the supply service, and to improve the financial situation of the companies involved. To define the corresponding relevant market, the Commission considered the possibility of replacing natural gas with fuel oil for industrial use or with liquid petroleum gas (LP) for domestic and business use. As for the geographical area of the relevant market, it was defined as being areas specified in the permits. Except for the possibility of modifications being contained in the final permits, the area of influence of the companies making the notification was defined as being the GMA.

Based on this, the Commission ruled that the operation's relevant market was that of natural gas, LP gas, and fuel oil distributed in the GMA. In this context, in the long term, a major increase in the share controlled by natural gas was predicted, as a result of its greater effectiveness in observing ecological standards, the high efficiency within its distribution, and the forthcoming removal of government subsidies from LP gas consumption.

On account of the nature of natural gas distribution, the incipient level of development within this service, and the applicable regulatory framework, determining the economic agents' power in the relevant market required an analysis of three temporal dimensions:

Short term. As of the date of the notification, the merging companies were competing against the Federal Electricity Commission (CFE), private companies,8 and Pemex in the distribution of natural gas, LP gas, and fuel oil. With specific reference to natural gas, the sales of Compañía Mexicana de Gas, S.A. de C.V. and Gas Natural de Apodaca, S.A. de C.V. accounted for less than 30% of the market volume; the remainder was supplied was CFE and Pemex (households and direct sales to industry, respectively). This situation had to be seen together with the fact that the remaining companies were not active in the market and that a major proportion of the gas consumed by industry was supplied by Gas Industrial de Monterrey, S.A. de C.V. This company is made up of business groups in the area, which are its exclusive customers. Given these conditions, the operation as notified did not grant substantial market power in the short term.

Medium term. The companies involved were looking at a period of exclusivity for a period of five or twelve years over the construction of the natural gas distribution, reception, transportation, and delivery system, depending on the procedure chosen to obtain the final permits. However, the RGN were already allowing marketing companies to enter the market, together with the construction of mains for gas self-supply. These developments, together with the presence of the fuel oil and LP gas distributors, could partially reduce the market power granted by the exclusivity. Thus, the competitive effects of marketing and self-supply would depend on viable access to sources of supply outside the area covered by the permits, perhaps even outside the country. After considering these factors, the investigation concluded that the granting of the final permit and, consequently, the corresponding period of exclusivity would give the merging companies significant power over the market.

Long term. After the end of the period of exclusivity, the companies could face competition from other distributors. Their entry into the market would depend on their experience and technical ability to provide an efficient and safe service in accordance with the guidelines established by the competent authority, and on their access to resources needed for infrastructure investments. Despite these restrictions, it is hoped that the market power of the merging companies will fall over the long term.

Based on this thorough analysis, the Commission decided not to object to the operation. It did warn, however, that the possibility of monopolistic practices in the medium and short terms would depend on the evolution of the significant market power of the merging companies over the market during the period of exclusivity. Similarly, it took into consideration the fact that, in accordance with article 81 of the RGN, rates could be regulated by the CRE, following the CFC's ruling on the prevailing conditions of competition.

The Plenary resolved not to object to the operation, but it informed the companies involved that since it was possible for them to obtain exclusive distribution rights over the relevant market for a specific period and, consequently, significant market power, they were required to inform the Commission of any request for exclusive distribution permits and of any change in the area of influence not provided for in the operation.

Cogeneración Mexicana, S.A. de C.V. / Cogentrix México, Inc. / Mecánica La Peña, S.A. de C.V. / Celanese, S.A. de C.V. / Messer Griesheim de México, S.A. de C.V. / Univex, S.A. de C.V.

On April 28, 1996 the Commission was notified of the plans of Cogentrix México, Inc., Mecánica La Peña, S.A. de C.V., Celanese, S.A. de C.V., Messer Griesheim de México, S.A. de C.V., and Univex, S.A. de C.V. to incorporate a company called Cogeneración Mexicana, S.A. de C.V. The main activities of the new company were to be the generation of electricity and steam, and to exclusively supply those products to the economic agents involved in the operation. In other words, it would provide co-generation services as provided for in the Public Electricity Service Regulations.

The operation was intended to combine the experience, resources, and needs of the participants. Their complementary abilities and interests would allow the new company to develop healthily to the benefit of all its owners. Thus, Cogentrix and La Peña would contribute most of the capital, together with their experience in the electricity and capital goods sectors. It should be pointed out that Cogentrix is a subsidiary of Cogentrix Energy Inc., a leader in the U.S. electricity industry, while Celanese, Messer, and Univex are major users of electricity and steam.

Cogeneración Mexicana would service the installations of Celanese, Univex, and Messer located in Querétaro, Celaya, Salamanca, and Toluca. In that area, as in the rest of the country, the Federal Electricity Commission holds the dominant position. Consequently, although Cogeneración Mexicana would be unable to service other companies, its creation did favor the development of efficiency, competition against the CFE, and the liberalization of this important market.

In consideration of its effects in favor of competition in the electricity market and the benefits this would bring to its client companies, the Commission resolved neither to object to the operation nor to impose conditions on it.

2. Privatizations

The privatization of nationalized industries with a major share of their respective markets has led to the adoption of measures to prevent excessive concentration. For that reason, the calls for bids and rules of public company auctions require bidders to obtain the Commission's prior approval. Thus, mergers and acquisitions related to the privatization process require notification to be given to the Commission.

In this way, the Commission helps society obtain the benefits expected under the policy of selling off nationalized companies. During 1995-96, the Commission assessed many cases, including the companies participating in the auctions of port terminals and authorities and of ANDSA's Pantaco Unit.

Privatization of Mexico's seaport system

The main elements of the divestiture strategy applied to the ports system include the establishment of competition in the provision of services. These conditions are necessary for avoiding the erection of artificial barriers to entry, the undue displacement of competitors, and the establishment of monopolistic prices. Only without such restrictions can a competitive ports system be developed, one capable of supporting national growth, establishing effective links between land and sea transport, and integrating the domestic economy into international markets. With this aim, the Commission participated in designing the calls for bids and auction guidelines for the ports sector.

Over 1995-96, auctions were held for the partial transfer of rights to exploit several port terminals and installations specializing in cargo, along with three cruise-ship terminals and the port administrations of Acapulco and Puerto Vallarta.

Within the competition criteria used in the calls for bids and auction guidelines, the determination of the following relevant markets was of particular importance:

Cargo terminals and port installations: the provision of loading, unloading, lightening, storage, handling, and haulage services along the coastline of, on the one hand, the Gulf of Mexico, and, on the other, the Pacific Ocean.

Cruise-ship terminals: services for moving passengers and for the entry and exit of vessels in the geographical region of Cozumel Island.

Acapulco and Puerto Vallarta port administrations: mainly services for local vessels providing entertainment and for cruise tourism in the Pacific Ocean coastal region. At Acapulco, loading, unloading, lightening, storage, handling, and haulage services are also important.

In addition, the restrictions imposed on the successful bidders prohibit horizontal concentrations.

In compliance with the terms of the competition law and the stipulations contained in the auction documents, the Commission assessed all parties that submitted bids. In this way, it verified that there were no illicit horizontal concentrations and it investigated the potential threats to competition from vertical concentrations. Based on the corresponding studies, it neither objected to nor placed conditions on the auctions for the cruise terminals and port administrations. In the cargo installations and terminals, conditions were placed on some participants and an objection was made to the participation of one group of economic agents. On account of their relevance and in order to illustrate the process, the resolutions on the bids are described below.

Between June 8 and July 6, 1995, the Commission received notifications from 15 companies and seven groups9 with registered tenders in the first and second calls to bid issued by several port administrations10 for the use and exploitation11 of the following port terminals and installations: Three container terminals at the ports of Lázaro Cárdenas, Michoacán; Manzanillo, Colima; and Veracruz, Veracruz (TC-LC, TC-Man, and TC-Ver, respectively). Two multi-purpose terminals at the port of Altamira, Tamaulipas (TUM-Alt-I and TUM-Alt-II). Two multi-purpose terminals at the port of Lázaro Cárdenas, Michoacán (TUM-LC-I and TUM-LC-II). Two multi-purpose port installations at Manzanillo, Colima (IUM-Man-I and IUM-Man-II).

The evaluation of the effects on competition and free market access of awarding these terminals and installations was carried out in accordance with the conditions set forth in the calls to bid and auction rules. These conditions were set with the Commission's participation, which worked closely with the sectoral authority in designing an allocation method that would favor competition - in other words, transparent, non-discriminatory, and compliant with the filters included in the law for investigating mergers and acquisitions and, when applicable, preventing any anti-competitive aims or effects. Thus, the calls for bids and auction rules implicitly contained the following guidelines:

Relevant markets. (1) The provision of loading, unloading, lightening, storage, handling, and haulage services in the geographical area covered by the coast of the Gulf of Mexico and (2) the provision of those same services along the Pacific coast.

Substantial market power. In order to limit the power of the concessionaires located along in each coast over the corresponding markets, the following conditions were placed on the bidding process:

Only one terminal or installation per bidder on each coast (relevant market). In addition, it was ruled that individuals and corporations with either direct or indirect connections to the successful bidders (concessionaires) could not bid for another terminal or installation along the coast (relevant market) in which the related concessionaires were authorized to operate.

Restrictions on the participation of concessionaires in the capital stock of port administrations.

Restrictions on subcontracting by concessionaires.

These measures simplified the administrative procedures, provided the participants with greater certainty, allowed coordination between the sectoral and competition authorities, and helped enforce the law. In investigating the bidders, the Commission determined and explicitly described the relevant markets.

Regarding the market power of the registered economic agents, the Commission ruled that the restrictions provided in the calls for bids and auction rules were sufficient to prevent horizontal concentrations that would threaten competition. With these provisions and the restrictions imposed on potential concessionaires' involvement in the port administrations, the Commission's work was mainly channeled into analyzing vertical concentrations. This aspect is of great importance in connection with transport and foreign trade services, since the integration of different transport modes and services into a single company or group could grant it the power to set prices, restrict supply, and impose barriers to entry, to the detriment of other economic agents.

Taking all this into consideration, the Commission closely analyzed the proposals made by Transportación Marítima Mexicana, S.A. de C.V. and Operadora de la Cuenca del Pacífico, S.A. de C.V. The former was involved in sea, rail, and road transport, and in the operation of private terminals and the provision of port services. The latter's shareholders included a group of customs agents operating at Manzanillo, Colima.

Based on the approach described and the investigations carried out, the Commission ruled:

Not to object to the notifications made by the companies registered with the first call for bids (TC-LC, TC-Man, TC-Ver, TUM-Alt-I, and TUM-Alt-II).

Not to object to the notifications made by the companies registered with the second call for bids (TUM-LC-I, TUM-LC-II, IUM-Man-I, and IUM-Man-II), but to inform Operadora de la Cuenca del Pacífico, S.A. de C.V. that, if awarded any of the Manzanillo installations, it would have to refrain from linking its port services with its customs brokerage services through anticompetitive actions such as discrimination, placing conditions on sales, and crossed subsidies.

The bidding process closed without TUM-Alt-II, TC-LC, and IUM-Man-II being awarded. To assign the first terminal, the Altamira port authority issued a new call for bids, which was structured along the same lines as the two previous ones.

The notifications presented by the four groups12 registered with the TUM-Alt-II auction were analyzed in accordance with the criteria used for the previous auctions. The Plenary resolved to object to the notification presented by the group Ingenieros Civiles Asociados, S.A. de C.V. and International Container Terminal Services, Inc., on account of their relationship with Internacional de Contenedores Asociados de Veracruz, S.A. de C.V., which held the concession over the container terminal at the port of Veracruz.13 In this way, a horizontal concentration in the relevant market of the Gulf coast that would have threatened competition and affected service users was avoided.Divestiture of Warehouses at Almacenes Nacionales de Depósito, S.A.'s Pantaco UnitOn June 27, 1995 a call to bid and auction guidelines were published for the divestiture of the warehouses held in condominium located at the Pantaco Unit (Pantaco) of Almacenes Nacionales de Depósito, S.A. (ANDSA). The sale of these assets, which was subject to the condition of creating the Pantaco Internal Port and Logistics Activities Center (PICALP), had the aim of modernizing infrastructure, increasing efficiency in storage services, and encouraging private participation in the provision of those services. To achieve these goals, it was necessary to commit the participating companies to the investment, development, and provision of the services provided for in the PICALP and, at the same time, to guarantee the conditions of competition and free market access that would lead to a constant improvement in service provision.

Within the ANDSA system, Pantaco was responsible for distribution and supply in the Mexico City Metropolitan Area (MCMA). To service the demand of this major center for marketing and consumption, Pantaco has a surface area of approximately 55.8 hectares, of which 26.7 were covered by 112 warehouses, with the remainder taken up by common areas and infrastructure. Pantaco stands adjacent to the railroad terminal of the same name, and all its warehouses have access to rail transport. In addition, it was being equipped with a customs module. This complex is Mexico's largest storage center, accounting for 12% of ANDSA's capacity and 6% of the nation's entire capacity.

With the creation of the PICALP, Pantaco would cease to be a storage center for distributing and supplying grain to become a single unit providing logistics, transportation, and storage facilities, together with bonded warehouses, financial services, telecommunications, and other related activities. To achieve this, a scheme involving the following elements was implemented:

Sale of 185,796 m2, corresponding to 83 of the 112 condominium warehouses, along with the proportional part of the common spaces (yards, general construction, multi-purpose building, huts, weighbridges for trains and trucks, internal streets, railway infrastructure, etc.). The area up for auction accounted for 69.6% of Pantaco's total storage area. The rest would continue to belong to ANDSA and Ferrocarriles Nacionales de México, S.A.

Owners obliged to invest in infrastructure. The implementation of this program, together with the administration and coordination of the use of common areas, would be carried out by a trust established within Nacional Financiera, S.N.C.

Encouraging the efficient introduction of intermodal transport into the storage and distribution chain, thereby taking maximum advantage of Pantaco's location.

Integration of services and involvement of companies specializing in storage and related activities within a single area.

With creation of the PICALP, Pantaco would be able to adapt to the new needs of the country and of the MCMA. Similarly, better use would be made of its installations by allowing the creation of economies of scale and scope, together with major synergy. On the other hand, excessive concentration in the provision of those services could have anti-competitive effects that would reduce or even cancel out the projected increases in efficiency. To prevent this from occurring, the Commission worked in conjunction with the Secretariat of Commerce and Industrial Development and the Secretariat of the Treasury and Public Credit to design a divestiture scheme that placed limitations on participants and emphasized their legal obligations in connection with mergers and acquisitions. Thus, requiring bidders to obtain the Commission's approval, as stipulated in the auction documents, assisted the effective application of the law and ensured better protection for competition and free market access.

In order to obtain the aforementioned resolution, thirteen companies and two groups14 gave notice of their interest in acquiring the 83 warehouses and corresponding common areas up for auction. The analysis of the proposed transactions and of the auction process allowed the relevant market to be defined and permitted an assessment of the market power that would arise from awarding the assets in question.The Commission ruled that the services of the relevant market were those involving the handling and storage of non-perishable goods, including loading, unloading, breaking and consolidation, warehousing, custody, and preservation, all integrated into a logistic scheme. These services would be offered at both storage warehouses and general deposit warehouses.

In geographical terms, the relevant market covered the MCMA region, since the services described have a "locational" value for the user on account of the logistics of moving and marketing their merchandise into, within, and from the MCMA. Thus, the services to be provided by the PICALP and, more particularly, those provided by the warehouses up for auction, would only be substitutable by other units offering similar services in the same geographical area. Investigations revealed that the other warehouses located in the MCMA only provided a part of the services to be included in the PICALP.

Despite the lack of close substitutes for the PICALP's services and the major investments necessary for constructing and combining services of this kind, the market power of the project's participants would be strongly curtailed by the restrictions imposed on the awarding of the storage areas. Thus, under the auction guidelines, each qualifying company or group could only opt for 10% of the PICALP's total surface area. On account of these conditions, and since each owner of the condominium would operate independently, the divestiture scheme would prevent concentrations of danger to competition and market forces would encourage the economic agents to take advantage of the benefits of vertical integration provided for in the PICALP, thereby benefiting society in general and users in particular.

The Plenary resolved to make no objections to the transactions notified to the Commission. It did, however, impose the following conditions:

The total shares allotted to Almacenadora México, S.A. de C.V. and Almex Jalisco, S.A. de C.V. must not exceed 10% of the total surface areas of the warehouses being auctioned. This was because the former held a 51% stake in the latter's capital stock.

Servicargo, S.A. de C.V. and Agentes Aduanales para el Comercio Exterior, S.A. de C.V. must refrain from linking storage services with customs brokerage services through anticompetitive actions such as discrimination, placing conditions on sales, and crossed subsidies.

C. RESTRUCTURING OPERATIONS TO FACE THE ECONOMIC CRISIS

The recent economic contraction has put most of the nation's companies to the test. In general terms, businesses have suffered large reductions in their sales and increases in their costs, especially financial costs. At the same time, the banking system was affected by a rapid growth in past-due loans. Against this backdrop, corporate survival was further threatened by adverse changes in demand for their products and services. As a result, modifications have taken place in market structures following the exit of competitors and a series of mergers and acquisitions undertaken to overcome financial difficulties and other problems.

On account of the losses in social well-being and the risks to competition caused by withdrawals of competitors, the legislation of some countries provides for temporary exceptions in times of crisis. In Mexico, such an eventuality is not explicitly provided for in the competition law. However, the law does empower the Commission to implement measures to safeguard or strengthen competition, while not hindering mergers and acquisitions entered into to return companies to a sound financial footing.

1. Restructuring of the financial system

The Mexican banking system began to suffer from a shortfall in capital in 1993, the result of rapid growth in nonperforming debts. Since then, a group of financial institutions had been operating with serious problems, and in some cases had been acting outside the established regulations. To correct this situation, several institutions received credits from the Bank Savings Protection Fund (Fobaproa) and were subjected to intervention by the National Banking and Securities Commission (CNBV).

The banks where intervention took place between 1994 and 1995 were Banco Unión, Cremi, Banpaís, and Inverlat. Once they had been returned to a sound financial footing, the interventions were to conclude with a search for new investors. In accordance with this, in 1995 the Commission received notification of the intention to auction off Aseguradora Mexicana, S.A. de C.V. (Asemex), a member of the Asemex-Banpaís group. The Commission's resolution on this issue is presented below.

The weakness of the national banking system was heightened with the crisis that broke out in December 1994. The devaluation of the peso, increased nominal interest rates, economic contraction, and the excessive debt burden on companies and families led to a worsening of credit portfolios and a massive increase in nonperforming debts. This situation went a long way to reducing the capitalization of the banking system: in February 1995, the corresponding index stood at a level below 8%.

The risk of insolvency within the banking system was countered in time by several measures introduced by the financial authorities. Notable among these were the Temporary Capitalization Program (Procapte), and the Program to Strengthen Capital through Portfolio Purchases, together with legal amendments to the banks' capital structure intended to facilitate their capitalization.

Procapte has made a major contribution to tackling the financial problems of the most severely weakened banks. It has also allowed their survival, thus preventing the market from being concentrated into a reduced number of institutions. Nevertheless, faced with the possibility of the Procapte-supported banks being unable to meet their subordinated obligations, Fobaproa would have to offer the corresponding shares of stock to new investors. In this case, the Commission would have to prevent undue mergers and acquisitions in order to avoid monopolistic practices that would harm bank customers' interests.

The Program to Strengthen Capital through Portfolio Purchases and the legal amendments to the banks' capital structure have facilitated financial healing by stimulating fresh injections of resources from shareholders and other private economic agents, both domestic and foreign. Since the corresponding transactions, depending on the amounts involved, can constitute mergers or acquisitions as described in the competition law, they are subject to the Commission's approval. This was the case with the operations involving Grupo Financiero Probursa, S.A. de C.V. with BBV International Investment Corporation, and Grupo Financiero Bital, S.A. de C.V. with Banco Comercial Portugués, S.A. and Banco Central Hispanoamericano, S.A.

At the same time, the purchase of stock in Grupo Financiero Bancomer, S.A. by Bank of Montreal helped consolidate the group's finances and enabled the capitalization of Bancomer. Due notice of this operation was also given to the Commission.

The Commission's resolutions in the last two cases and in the Asemex transaction are described in detail below.

Grupo Financiero Probursa, S.A. de C.V. / BBV International Investment Corporation

Grupo Financiero Bital, S.A. de C.V. / Banco Comercial Portugués, S.A. / Banco Central Hispanoamericano, S.A.

BBV's investments in Probursa and those of Comercial Portugués and Central Hispanoamericano in Bital took place under the legal amendments to the capital structure of financial institutions. The first transaction involved the capitalization of Probursa through an increase of up to 70% in BBV's stake. In this way, Probursa became a subsidiary of the Spanish bank. The second operation was notified as an issue of subordinated obligations, convertible to series A and B stock, two-thirds of which were to be acquired in equal proportions by Comercial Portugués and Central Hispanoamericano. After this transaction, the holdings of each of the foreign banks in Bital were to rise to almost 20%.

The relevant market of these operations was that of financial services, bank and non-bank, offered within the country. The structure of that market does not present high levels of concentration, in spite of the fact that three institutions - albeit none of the companies giving notice in the present cases - have a joint market share of 50%.

In consideration of this, and of the fact that these foreign banks did not previously have a stake in the Mexican market, the operations as notified did not grant substantial power over the relevant market. On the contrary, thanks to the capital injections, Probursa and Bital would recover or even increase their competitive capacities. Thus, Probursa would expand into the retailing banking sector, and Bital would relaunch its aggressive branch opening program that had been suspended in 1994.

On account of the benefits to competition of these operations and the consequent benefits to savers and bank debtors, the Commission resolved neither to object to them nor to impose any conditions. In this way, in addition to helping strengthen the financial system, it encouraged the development of less concentrated, more competitive markets.

Sale of Aseguradora Mexicana, S.A. de C.V.

Offered by: Grupo Financiero Asemex-Banpaís, S.A. de C.V.

Bidders: Grupo Nacional Provincial, S.A. de C.V., Seguros Comercial América, S.A. de C.V., Valores Monterrey Aetna, S.A., and Liberty de México Seguros, S.A.

On February 21, 1996, Asemex-Banpaís (Banpaís) gave notice of its intent to sell 70% of the total capital stock of Aseguradora Mexicana, S.A. de C.V. (Asemex). The remaining 30% belongs to Petróleos Mexicanos (Pemex) and the Federal Electricity Commission (CFE) - two state-owned corporations that are also major clients of the company's insurance services. The sale was to be carried out by means of a public auction, following a calendar submitted to the Commission.

The operation was the consequence of a series of financial problems suffered by Banpaís, in whose operations the National Banking and Securities Commission (CNBV) had intervened in March 1995. That same month, Banpaís obtained a loan from Fobaproa, secured with stock equal to 70% of Asemex's paid-in capital. Finally, putting Banpaís back on a sound footing led to the sale of these shares.

Within the time frame indicated in the auction guidelines, notification of participation was submitted by Grupo Nacional Provincial, S.A. de C.V., Seguros Comercial América, S.A. de C.V., Valores Monterrey Aetna, S.A., and Liberty de México Seguros, S.A.

The market affected by the proposed operation is that of life, accident, health, and damage insurance offered within Mexico. In that context, the importance of Asemex and the bidding companies can be illustrated with the following facts:

With the exception of Liberty de México, the bidders and Asemex are the country's four largest insurance firms, with a joint share of 64.1% in the relevant market.

The individual market shares of the three largest bidders ranged between 11.4% and 20.7%. After the operation, these figures would increase to 25.9% and 32.1%. In the case of Liberty de México, the transaction would not substantially alter the market structure.

Unlike the three largest bidders, Asemex has a minor participation in life assurance, and a moderate level of involvement in accident and sickness insurance. On the other hand, it is the largest participant in the damage insurance market, which accounts for 23.9% of its sales. This situation is the result of this insurance company's favorable access to the public sector market.

The shares of the damage market of the three largest bidders are also significant, ranging from 8.9% to 18.4%. Following the operation, the range would be from 27.7% to 42.3%, provided that the successful bidder managed to retain the public sector's patronage, which had previously been the exclusive domain of Asemex.

Competition in the relevant market has intensified over recent years as a result of modifications to the General Law on Insurance Mutualist Societies and Institutions and the adaptations made to it as a consequence of the North American Free Trade Agreement. These changes have facilitated the entrance of new companies, both Mexican and foreign, and they have eliminated regulations that hindered the functioning of the market. This pro-competitive pressure will be felt more strongly in the medium term, affecting the insurance companies' market power.

On account of the intensification of competition in the relevant market and of the fact that the operation itself did not threaten the process of competition, the Commission resolved to make no objection to the purchase of Asemex by any of the bidders. Nevertheless, it also gave notice that it would take the steps necessary to ensure that insurance purchases by the public sector be carried out equitably.

Grupo Financiero Bancomer, S.A. / Valores Monterrey Aetna, S.A. de C.V. / Bank of Montreal

On February 22, 1996, the Commission was notified of a planned operation by Grupo Financiero Bancomer, S.A. (GFB), Valores Monterrey Aetna, S.A. de C.V., and Bank of Montreal. This operation involved Bank of Montreal purchasing 20% of GFB's stock.

This transaction was part of Bancomer's capitalization commitments. With this aim in mind, Bank of Montreal and GFB agreed on a long-term strategic alliance, which would mean a major capitalization of GFB and Bancomer.

The principal aim of this alliance was to identify and seek out areas of business in which the association of the two companies would facilitate the implementation of complete solutions to suit their clients' needs. In addition, the alliance would allow GFB and Bank of Montreal to develop new products and services in the United States and Canada, thanks to the latter's position in those two countries. With this operation, the two financial institutions were attempting to adapt to the opportunities that arose under the aegis of the North American Free Trade Agreement.

The Commission took into consideration the fact that the aim of the operation was clearly financial strengthening, as a part of Bancomer's commitment to capitalization. It also determined that the strategic alliance would facilitate that institution's legitimate growth within the NAFTA area, without leading to modifications in the structure of the domestic financial services market nor in the conditions of competition prevailing therein. It therefore resolved neither to object to the operation nor to impose conditions upon it.

2. Reinstating corporate financial wellbeing

The following descriptions are of three operations carried out to overcome financial difficulties in three sectors: one involving a group of airlines, the second a retail chain, and the third a hotel group. In each of them, the Commission's resolutions provided clear benefits for society, in that they protected conditions of competition without harming the recovery of the affected companies or their emergence from their temporary problems.

Corporación Internacional de Aviación, S.A. de C.V. / Aerovías de México, S.A. de C.V. / Corporación Mexicana de Aviación, S.A. de C.V.

On May 25, 1995, Corporación Internacional de Aviación, S.A. de C.V. (Cintra),15 Aerovías de México, S.A. de C.V. (Aeroméxico), and Corporación Mexicana de Aviación, S.A. de C.V. (Mexicana) gave notice of their intent to carry out an operation. This would involve Cintra purchasing the stock of Aeroméxico and Mexicana, giving Cintra control over the two other companies and their subsidiaries. The operation was to take place in three stages. In the first two, Aeroméxico and Mexicana would exchange shares of stock with Cintra, and in the last stage they would explore the possibility of the two airlines' subsidiaries being included in the holding company's equity.

Before this operation was planned, Aeroméxico had acquired control over Mexicana, with the authorization of the Secretariat of Communications and Transport (SCT), before the Federal Economic Competition Law came into force. The worsening of the airlines' economic and financial situation led to their being taken over by creditor banks. Thus, when the notification was served, the banks held more than 60% of Aeroméxico's capital,16 which in turn, either directly or indirectly, controlled 54.6% of Mexicana's stock.Prior to the notification, Aeroméxico and Mexicana were both characterized by high levels of vertical and horizontal integration. The former's subsidiaries and associates included Aeromexpress, Aerolitoral and Aeroperú, while those of the latter included Aerocaribe, Aerocozumel, Aeromonterrey, and Aerolibertad. In addition, through SEAT, Aeroméxico and Mexicana both participated in providing certain complementary services at civil airports and, through Sertel and Sabre, in the supply of computerized systems for airline reservations. Similarly, both companies were active in other businesses related to air services and operations.

Cintra was incorporated at the initiative of the creditor banks in order to put Aeroméxico and Mexicana's finances back on a sound footing. Thus, following the acquisition, Cintra would strictly be a holding company, registered with the Mexican Stock Exchange. The corporate purpose of Cintra, in addition to solving the two airlines financial problems, involved acting as a common ground between both companies' shareholders and creditors and promoting the injection of fresh resources into the airlines. In other words, the operation would allow the corporate restructuring necessary to strengthen the two airlines and guarantee their survival. The operation implied no modifications to the vertical and horizontal integration of Aeroméxico and Mexicana.

In the broadest sense, this operation was related to the supply of transportation services. Nevertheless, the relevant market was restricted to that of regular cargo and passenger air transportation services, given the scant substitutability between air travel and other modes of transport. Since Aeroméxico and Mexicana have such a small participation in the international market, the relevant market was restricted to the territory of Mexico.

In analyzing the companies' power over the relevant market, the Commission took into consideration the effects observed within it during the years the two airlines have been associated. Thus, the following facts are worthy of special note:

The two airlines have a joint market share of 65.3% in terms of passengers transported. The company ranking third (TAESA) controls 13.5%, which is lower than Aeroméxico's 37.3% and Mexicana's 28%. The two airlines' strong presence has not, however, prevented their competitors from securing significant places in the relevant market over recent years. To preserve the level of competition currently prevailing, they must be kept separate.

Following the revision of the applicable regulations, the number of market participants and the supply of air-travel services has increased notably. In fact, during 1993 the number of regional companies rose from 11 to 13, and the cities served by internal flights rose from 59 to 61. However, not all the trunk companies that developed under deregulation managed to remain competitive during the crisis. For that reason, their numbers fell from six to five over the same period.

The prevailing conditions of competition have allowed significant reductions in airfares on such routes as Mexico City to Guadalajara, Mexico City to Monterrey, Mexico City to Mérida, Monterrey to Cancún, and Guadalajara to Tijuana. However, the benefits of competition have not extended fully into less attractive routes which nevertheless must be maintained in spite of the low interest of the new participants. The strengthening and expansion of competition requires the number of suppliers and the services they offer to be maintained. The withdrawal of either Aeroméxico or Mexicana would have a negative effect on competition. The commercial integration of the two companies would have a similar result.

The entry of new domestic competitors and the expansion of existing companies is restricted by the size of the investments necessary and the problems encountered in financing them. In addition, the marketing practices normally used to ensure the loyalty of travel agents and customers, while generally legitimate, further raise the costs of entry into this market. This situation favors the position of all the companies currently doing business in the market.

The analysis of the relevant market and of the power of the economic agents involved led to the conclusion that competition would be affected by the weakening or disappearance of either Aeroméxico or Mexicana. The Commission therefore decided to allow their financial and administrative restructuring in order for them to attain adequate levels of efficiency and for capitalized debts to be recovered. Nevertheless, to avoid anticompetitive risks, steps to safeguard the independence of Aeroméxico and Mexicana's commercial activities were deemed necessary.

The Commission's Plenary did not object to the operation, but it did impose conditions on it, involving the observance of measures to prevent -- or, when appropriate, correct -- anti-competitive aspects or developments within the operation. These conditions included, inter alia, the following:

The administrative restructuring was subjected to the obligation of keeping separate accounts and independent managements for each of the two companies under the auspices of their respective Boards of Directors.

Anti-competitive actions were to be prevented by a consultant agent, appointed by the Commission, responsible for periodically analyzing observance of the conditions imposed and for preparing regular reports on conditions of competition.17 The timely correction of any anti-competitive practices that might arise, by means of:

The setting of rates by the Commission and the SCT, in cases in which the Commission rules competition to be non-existent.

The immediate suspension of any unlawful practices detected by the Commission.

The establishment of agreements between the Commission and the SCT for the implementation of steps to protect or reestablish conditions of competition.

The cooperation of the companies involved in preserving and improving the competitive environment.

If conditions deemed serious enough, the partial or total dissolution of the operation.

Grupo Situr, S.A. de C.V. / Host Marriott Corporation Airport Inc. / Aeropuerto Shareholder, Inc.

In December 1995 the Commission was informed of a planned operation between Grupo Situr, S.A. de C.V., Host Marriott Corporation Airport, Inc., Aeropuerto Shareholder, Inc., and Elcrisa, S.A. de C.V. This operation was to involve an association between Situr, Marriott, and Shareholder to incorporate Elcrisa, which would then purchase the Continental Plaza Aeropuerto and Polanco hotels belonging to Situr. This transaction would help improve Situr's financial situation and make possible the termination and inauguration of the Polanco hotel.

The relevant market of the operation was that of hotels and associated services in Mexico City. The Commission determined that Elcrisa's share in hotel supply was of minor importance. In addition, the investigation revealed that neither Marriott nor Shareholder were involved in the relevant market. Given these conditions, the operation would help solve Situr's financial problems and allow full utilization of the listed assets, without endangering competition or free market access. Consequently, the Commission resolved neither to object to the operation nor to impose conditions on it.

Grupo Gigante, S.A. de C.V. / Banco Nacional de México, S.A. / Seguros Inbursa, S.A. de C.V. / Banco Inbursa, S.A.

Between April 30 and May 2, 1996, the Commission received three notifications regarding plans to purchase stock in Grupo Gigante S.A. de C.V. by Banco Nacional de México, S.A., Seguros Inbursa, S.A. de C.V., and Banco Inbursa, S.A. The aim of these transactions was the capitalization of Gigante.

The amount involved in the operations would not have led to the three financial institutions gaining control over Gigante. In addition, on account of the diverse lines of business of the companies involved, the transactions would affect neither the structure of their markets nor the conditions of competition prevailing therein. Consequently, the Commission resolved neither to object to the operations nor to impose conditions on them.

III. MONOPOLISTIC PRACTICES AND OTHER RESTRICTIONS TO COMPETITION

The aim of protecting the process of competition and free market access by eliminating monopolistic practices and other restrictions to market functioning is to insure the broad, equitable, and non-discriminatory participation of all economic agents. The Commission's actions in this regard facilitate the functioning of efficient companies, suppress obstacles to job creation, promote the economic integration of the country, and help raise consumers' living standards. The achievements made during 1995-96 reflect major advances over the two previous periods:

The total number of complaints and ex officio investigations concluded during 1995-96 increased 56.3% over the previous year.

46% of the complaints concluded over the period covered by this report were brought to a close with a resolution by the Plenary.18 The remaining 54% were thrown out19 or proceedings were desisted. These results represent major progress over 1993-1994 and 1994-1995, during which the complaints resolved by the Plenary accounted for only 4.8% and 16.7% of the total and the cases thrown out or desisted accounted for more than 80%. In 58% of the complaints resolved during 1995-96, the Commission ordered the suspension of monopolistic practices and, when appropriate, applied the sanctions provided for in the Competition Law.

The number of ex officio investigations processed over 1995-96 increased 20% compared with the previous period. Of the total concluded during 1995-96, 92% involved resolutions that corrected and, when appropriate, punished anti-competitive measures and practices.

Fighting absolute monopolistic practices has a high priority. This policy, grounded on the per se prohibition of such practices contained in the law, takes into account the proven inefficiency and social harm caused by price and supply fixing among competitors. Indeed, national and international experience shows that collusion between sellers leads to higher prices and lower supply than under competition. By eliminating such practices, the Commission helps make better use of the nation's resources and furthers consumer well-being.

Most of the absolute monopolistic practices sanctioned over 1995-96 arose from price fixing between competing suppliers. Particularly noteworthy were the agreements reached by a group of egg distributors in the Federal District, by the Mexican Association of Cargo Agents (Asociación Mexicana de Agentes de Carga, A.C.), and the Cancún Association of Customs Agents (Agentes Aduanales de Cancún, A.C.). Ordering the suspension of such practices protected consumers against the establishment of monopolistic prices over basic consumer goods and benefits users of those services with lower fees. In addition, the Commission imposed sanctions on a case of collusion in public auctions carried out by a group of industrialists against Pemex Exploración y Producción. In all these cases, the fines established in the law were imposed.

Relative monopolistic practices were also effectively fought. During the period covered by this report, sanctions were imposed on several actions and agreements intended to unduly displace other economic agents from the market or to substantially hinder their access to markets. These involved refusals to trade, boycotts, and other illicit practices that are explicitly forbidden by the law. The resolutions adopted by the Plenary over 1995-96 are of particular interest, in that they establish precedents regarding anticompetitive behavior by labor organizations and the determination of generic monopolistic practices under section VII, article 10 of the Federal Law of Economic Competition.

With the lifting of the boycotts and refusals to trade carried out by the newspaper sellers of the Unión de Voceadores y Expendedores del Puerto de Veracruz and the Unión de Voceadores y Expendedores de la Prensa Miguel Hidalgo in Durango, Durango, barriers to the entry of new participants were removed. Similarly, the suspension of practices carried out by Distribuidora Cónsul S.A. de C.V. and Mabesa, S.A. de C.V. to unduly displace Singer Mexicana, S.A. de C.V. and Manufacturera Electrónica Sim, S.A. benefited consumers by preserving options in the consumer appliance market.

The Commission's resolution on the predatory pricing complaint made by Chicles Canel's against Chicle Adams, S.A. de C.V. illustrates the criteria used by the Commission in ruling on practices of this kind as provided for in section VII of article 10 of the law. It also establishes reliable accounting guidelines for dealing with similar cases in the future, thereby providing economic agents with greater certainty.

Articles 14 and 15 of the law empower the Commission to oversee compliance with section V of article 117 of the Constitution, which states that "In no instance may the States... prohibit or encumber, either directly or indirectly, the entrance into their territory or exit therefrom of any domestic or foreign merchandise." Under article 15 of the law, the Commission may, when appropriate, indicate the existence of such restrictions with a declaration published in the Official Gazette of the Federation. On this basis, during 1995-96, a declaration was made regarding the existence of barriers to the entry of flowers from other states into the state of Sinaloa.

Actions by public authorities that diminish the process of competition and free market access contravene the purpose of the law. By eliminating or correcting them, the participation of economic agents on a broad, equitable, and non-discriminatory basis is promoted and administrative barriers to efficient market functioning are removed. During 1995-96 the Commission ruled on the existence of certain restrictions to competition in the states of Oaxaca and México. In order to correct them, it served the appropriate recommendations on the local authorities.

A. Monopolistic Practices

Singer Mexicana, S.A. de C.V., Manufacturera Electrónica Sim, S.A. de C.V., and Grupo Bler de México, S.A. de C.V. vs. Vitro, S.A., Distribuidora Cónsul, S.A. de C.V., and Mabesa, S.A. de C.V.

Singer Mexicana, S.A. de C.V., Manufacturera Electrónica Sim, S.A. de C.V., and Grupo Bler de México, S.A. de C.V. filed a complaint20 against Vitro, S.A., Distribuidora Cónsul, S.A. de C.V., and Mabesa, S.A. de C.V., accusing them of anti-competitive practices, to wit:21a. Implementation by Mabe of a policy restricting the timely supply of Singer and Mabe brand refrigerators, to the detriment of Singer.

b. Unjustified and unilateral termination of commercial relations by Mabe, to the detriment of Singer.

c. Expulsion of Singer from the National Association of Domestic Appliance Manufacturers (ANFAD).

d. Complaints about unfair international trading practices against Korean refrigerators, in order to displace Singer and Sim from the market.

e. Establishment of commercial agreements and strategic alliances between the defendant companies and U.S. domestic appliance manufacturers.

f. Mabe and Vitro's shareholdings in subsidiary companies that only appear to belong to other economic agents.

g. Contracts entered into by Cónsul and Vitromatic with retailers (Salinas y Rocha, S.A. and Errsa), granting the retailers a 2% discount provided they refrained from selling appliances produced outside the North American Free Trade Agreement (NAFTA) area.

Both S