About Adrian Payne Consulting

Specialist in merger analysis

How The CMA Merger Numbers Are Made Up

There’s been a big overall decline in the percentage of CMA cases cleared unconditionally (at Phase 1 or Phase 2)* in recent years.

It’s been much commented on and interpreted.

But it’s not quite what it seems when you look behind the headline numbers.There are very different patterns when looked at by case type.

In fact, arithmetically at least, the aggregate change is accounted for by just one type of case.

Here’s the overall pattern for 2019 and 2020 cases, with the size of the different elements proportional to the number of outcomes in each category – where

  • green = unconditional clearance at Phase 1 or 2
  • yellow = remedies at Phase 1 or 2
  • red = prohibited or abandoned …….

Source: Adrian Payne analysis of published CMA decisions

It illustrates how important it can be to look behind the aggregate numbers when considering past or potential case outcomes and when interpreting ‘trends’ in the aggregrate numbers.

In one of my next Merger Insight briefings I’m going to be discussing the reasons behind these patterns and what they mean for companies planning mergers.

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(* Percentage of publically-investigated cases. Takes no account of cases the CMA chooses not to investigate publically, on which no meaningful data are published.)

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The Surprising UK Share Of Supply Test

Surprise, surprise

Why are so many companies surprised to find their mergers investigated by the CMA?

It’s partly down to the elasticity with which the CMA exercises its ‘share of supply’ jurisdictional test.

Over the past year of two I have featured some persuasive articles on this in my UK Merger Spotlight.

Perspective

It’s important, however, to keep a sense of perspective:

The share of cases examined under the share of supply test is well towards its CMA low, as the diagram here shows.

Growing Unease

Maybe there are other reasons why unease among merging companies and their advisers has been growing about ‘share of supply’ cases?

Here are three:

  1. Collapse in Phase 1 ‘share of supply test’ clearances

As the following diagram shows, since mid-2019 the proportion of ‘share of supply’ cases cleared at Phase 1 has nose-dived.

By contrast, the proportion of clearances among cases investigated under the CMA’s £70m turnover test has continued to climb – up to a CMA record of nearly 75%.

2. More referrals of ‘share of supply’ cases for in-depth Phase 2 investigation

The proportion of ‘share of supply’ cases referred for a Phase 2 investigation during the second half of the CMA’s case portfolio has been double what it was in the first half. (Meanwhile the proportion for ‘turnover test’ cases has stayed about the same).

3. Worsening outcomes at Phase 2 for ‘share of supply’ cases

The proportion of ‘share of supply’ cases cleared at Phase 2 has also dropped sharply between the two periods (though here there has also been a smaller but significant drop in the proportion of turnover test cases cleared at Phase 2).

In 2020, these three developments have culminated in

  • ‘Share of supply’ cases accounting for three quarters of the Phase 2 investigations completed to date
  • Just one clearance  among these ‘share of supply’ Phase 2 cases and
  • Over half prohibited by the CMA or abandoned by the parties.

So What?

1. Increases pressure for change

Well, for a start, the ‘share of supply’ case outcomes may explain some of the current criticism of the UK’s ‘voluntary’ notification regime.

Some would like the UK to move to a more ‘mandatory’ notification regime, with no share of supply test or with a share test that gives the CMA much less discretion. (It would, of course, be ridiculous to think that some such calls might also have anything to do with views on Brexit !)

2. Demonstrates the contribution of the ‘share of supply’ test

Second, the figures bring home how important the ‘share of supply’ test has been and continues to be to the UK merger control regime.

There is considerable onus therefore on those who advocate change to show how the contribution that the ‘share of supply’ test has made to the protection of UK consumers can be preserved or enhanced in any new system without adding unduly to the burden on merging parties or the taxpayer.

3. Provides important lessons for merging firms

And finally, for companies who may be considering merger in coming months the figures show how important it will be to take ‘share of supply’ test considerations fully into account in assessing UK merger control risk.

On this point it’s worth noting too that over a third of ‘share of supply’ cases examined so far this year were selected for investigation by the mergers intelligence function (a much higher proportion than for turnover test cases).

Especially in the new post-Brexit environment it is important for companies – even those with limited activities in the UK – to consider more carefully whether the CMA might take an interest in their deal, even where potential grounds for that interest might not be immediately obvious.

If that happens maybe the ‘share of supply’ test will spring fewer surprises in 2021 ?


In January 2021 I will be running a Merger Insight briefing discussing:

”The Extra Questions Merging Companies Need To Ask About The UK Share Of Supply Test.”

Details will be posted here. Do drop me a line if you would like to register interest now.


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CMA Phase 2 Decisions: The Long And Short Of It

There is a lot of interest at the moment as to what governs extension of the CMA Phase 2 timetable and whether extension has been a ‘good or bad sign’ for merging parties.

In my latest Merger Insight briefing yesterday I therefore looked at the Phase 2 cases to date for which the CMA extended the timetable for review – usually by up to eight weeks.

Below is a key chart that informed the discussion.

From left to right it ranks the Phase 2 final outcomes in ascending order of the duration of the Phase 2 process.

Each case is coloured as follows:

  • Black – merger abandoned
  • Green – unconditional clearance
  • Orange – clearance with remedies
  • Red – prohibition

The chart rather explains itself….

 

About a third of Phase 2 investigations to date have been extended. With one or two exceptions these are concentrated in the right-hand third of the chart.

It’s immediately apparent therefore that the proportion of cases unconditionally cleared has been very low for extended cases – less than half that for cases that ran to the usual timetable.

However it’s not all bad news for parties involved in extended cases. Extension can lead the CMA to become comfortable with a relaxation of remedies proposed at the provisional findings stage and enable late-emerging evidence to be explored in full.

Even so – the fact remains that only just over one in five extended cases have ended up being cleared.

Or – to put it another way – over two-thirds of mergers that have been prohibited or remedied at Phase 2 have involved extended investigations.

The other talking point yesterday was the proportion mergers that parties have decided to abandon. But that’s a story for another day….


For details of my free Merger Insight briefings please click here.

 

 

More Mergers Going Nowhere?

There’s been a lot of attention recently on a flurry of merger transactions that have been abandoned at Phase 2 of the Competition and Market Authority (CMA) merger control process.

Some say that this is because the CMA has got tougher on mergers, especially under the leadership of Andrew Tyrie.

Overall, however, the proportion of investigated transactions that do not proceed – either because they are abandoned by the parties or prohibited by the CMA – has been almost identical under the CMA to the proportion under its predecessor body, the Competition Commission (CC).

However, the CMA allows certain deals to proceed without formal investigation that would once have been reviewed under its predecessor agencies.

If the figures were adjusted to allow like-for-like comparison it is arguable that a lower proportion of deals are abandoned or prohibited following CMA scrutiny than was previously the case.

Nevertheless, it is also the case that the percentage of investigated deals abandoned or prohibited has been at record high levels over the past couple of years, contrasting with very low levels in the CMA’s first four years.

The key question is the extent to which recent figures represent normal annual variation, a sign of tougher CMA policy or a sign that companies have attempted riskier transactions.

My own analysis suggests that the profile of cases has played an important part.

In particular, compared to previous years, there have been notable increases in the percentage of cases involving:

  • high shares of supply – and/or
  • few remaining competitors – and/or
  • close competition between the merging parties.

In 2019, for example, nearly 10% of cases involved all three features – much higher than previously.

At the same time a sharp fall in the proportion of cases involving assets with potential for divestment to solve competition problems fed directly through to:

  • more reference cases
  • more Phase 2 prohibitions
  • more companies deciding to abandon their merger.

Looking ahead, a big question is whether the fall out from the Covid-19 crisis will further embolden firms to undertake deals with significant levels of merger control risk.

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What proportion of deals investigated by the CMA has been prohibited or abandoned?Click below on the figure you think is closest to the answer:

 

A Growing Source Of Evidence In UK Merger Cases

Internal business documents from merging firms have long been an important source of evidence for competition agencies investigating mergers – especially in

  • helping them assess whom the merging firms view as their competitors and in
  • evaluating the consistency of the arguments put forward by the merging parties.

Under the UK’s Competition and Markets Authority (CMA), documents have provided key evidence in just over 40% of Phase 1 cases overall – rising to 75% in cases referred for a Phase 2 investigation.

And the importance of documents has been growing.

My analysis of the evidence determining the CMA’s 300+ merger decisions to date shows that

  • In 2018 and 2019 to date business documents have been a leading source of evidence in more than 70% of Phase 1 cases that the CMA has identified as threatening significant harm to competition

– well up on previous years.

And in cases that the CMA has unconditionally cleared at Phase 1 growth in the role of business documents has been more dramatic still.

  • Between 2014 and 2016 documents were a key source of evidence in fewer than 30% of clearance cases.

From 2017 that figure has steadily increased to 60%.

One factor behind the figures is that the CMA has greatly increased the range and number of documents it asks companies to provide as a matter of course during Phase 1.

These days that includes email traffic as well as more formal documents associated with analysis and planning.

Technology now enables the analysis of documents (for example, through search algorithms) that would not have been possible even a few years ago.

One Phase 1 case involved the analysis of over 30,000 documents.

Another factor is that the CMA has been paying more attention to the potential for competition harm in cases where markets are young and dynamic.

As the CMA describes in a recent article, business documents are inevitably a more important source of evidence in these cases because of the relative lack of historic information.

Here is a recent example of this, containing over 200 references to business documents, used to inform numerous aspects of the competition assessment.

Questions For Merging Firms

Judging from conversations during cases and at my recent merger briefings, the growing importance of internal business documents is prompting some merging firms to ask some fairly fundamental questions, especially about what should they change in::

  • how they view business documents – opportunity or threat
  • how and when they prepare for mergers
  • how they communicate internally
  • what they document and in what terms
  • how they argue their case.

What’s your view of the issue? Do feel free to comment….

 

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© Adrian Payne, 2019

Better Assessment of UK Merger Control Risk

Mergers and acquisitions involve the potential for the relevant competition authorities to scrutinise a deal and, if they think it may harm competition, impose remedies or prohibit it altogether.

This article focuses on merger control in the UK, by the Competition and Markets Authority (CMA).

The better the assessment of these intervention risks (sometimes known as ‘merger control risks’) the better the judgments companies are able to make on matters such as:

  • whether to go ahead with a putative transaction or to re-shape it to mitigate the potential competition risks
  • whether or not to notify deals to the CMA
    • (it’s worth noting here that non-notified deals called in for examination by the CMA were at record numbers in 2018)
  • what they need to do to manage and mitigate risks, both before and during an investigation – recognising the potential for unwelcome surprises, including:
    • unexpected merger remedies or
    • costly Phase 2 investigations that the company hadn’t anticipated
  • whether or not to offer remedies to head off problems at Phase 1 or risk reference to a full Phase 2 investigation.

In practice companies adopt a wide spectrum of approaches, ranging from no risk analysis at all right up to a full replication of the assessment that the CMA might take.

Most lie somewhere in between but many make limited use of lessons from past cases.

As a result companies are regularly surprised by Phase 1 outcomes.

With just over 300 Phase 1 merger decisions now published there are many insights available that companies can use, and in some cases are using, better to assess and manage their  prospects.

Here are four initial steps companies can take to help utilise learning from those decisions much more effectively:

1.Take into account the full range of risk factors identified in past cases, not just some of them.

Ignoring even one of the main risk factors gives an unrealistic outlook which detracts from effective planning.

Risks unrecognised cannot be mitigated or managed.

Looking across past cases, where three of the top risk factors are present the Phase 1 clearance rate has been less than 20%. (And in 2018 it was 0%).

This is orders of magnitude lower than the average clearance rate (of 67%).

What’s more, the problematic deals in this ‘higher risk’ category have been disproportionately more likely to be referred to Phase 2 investigation, rather than being remedied at Phase 1.

2. Recognise the risk in ‘low risk’ mergers

The key here is that:

Low risk is seldom no risk.

This is where CEOs have most often been taken by surprise because

  1. There is a tendency to underestimate risks in ‘lower risk’ cases (especially from factors that are largely or wholly outside the merging parties’ control) and
  2. Mergers in the ‘lower risk’ category account for a large number of cases.

Even in the 73 cases to date where none of the top competition risk factors materialised the CMA found problems in 15 of these ‘lower risk’ cases, of which 6 went on to a full Phase 2 investigation.

15 cases since the CMA began equates to 2 or 3 cases each year. That’s a lot of scope for surprise.

3. Understand the impact of different types of risk .

There are now enough previous CMA decisions to be able to gauge the influence of different factors on case outcomes and to take this into account in focusing effort on the aspects that really matter to building a stronger case.

For instance:

  • What if a transaction involves more than one type of competition issue?
  • What if customers and/or competitors complain?
  • What if a case involves many local markets?
  • What if there are unhelpful internal business documents?
  • What if these factors combine?

In an earlier blog, I looked specifically at the role that so-called ‘market shares’ have played in merger decisions.

And in this one, I showed how merging companies paid too little attention to how closely they compete with one another.

4. Learn from cases that have a similar risk profile

In preparing for a CMA merger investigation most companies take a look at what happened in previous cases in their own sector.

There’s nothing wrong with that but it does mean that a lot of relevant case-learning often goes untapped.

It can be especially insightful to look at what made the difference between clearance and non-clearance in cases with a similar risk profile to your own, including those outside one’s own sector.

In conclusion…

Understanding and managing merger control risks can help avoid costly mistakes and focus case-making effort.

The CMA’s 300 merger decisions to date provide plenty of insights that can be deployed in a very practical way in order better to manage risk and build a stronger competition case.

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This article has focused on risk management and is based on analysis from my comprehensive database of CMA merger decisions.

In addition the 300 cases to date offer many other lessons as to how best to make a merger case. These feature prominently in my merger briefings.

 

More Merger Remedies Than Ever

The Competition and Markets Authority has just completed its fourth year.

One particular development stands out, looking at the pattern of outcomes among the 250+ CMA merger decisions since 2014….

More Phase 1 remedies: Fewer Phase 2 investigations

On average, the Competition and Markets Authority (CMA) has accepted between 3 and 4 more remedy outcomes each year at Phase 1 than the Office of Fair Trading (OFT) which had responsibility for Phase 1 mergers until 2014.

At first glance that increase doesn’t look significant…. until one considers that:

  • the average number of Phase 1 remedies under the OFT was only 5 in the first place and that
  • the CMA has been formally considering 30% fewer cases than did the OFT.

The number of references to Phase 2 is on average just over 3 lower each year than it was before the CMA took over responsibility for Phase 2 mergers from the Competition Commission.

Pre-CMA the average annual number of references was 11.

While there is not be a direct one-for-one relationship between the increased average number of remedies and the lower average number of references, a  link would not be too surprising given the CMA’s stated policy of resolving more cases at Phase 1.

Overall, the percentage of problematic Phase 1 cases resolved through Phase 1 remedies, rather than reference to Phase 2, has been more that a third higher in the CMA’s first four years than for any four-year period under the OFT.

What has been the change in the pattern of outcomes at Phase 2?

The reduction in the average number of Phase 2 cases under the CMA reflects, in order of scale of change:

  • fewer mergers being abandoned on reference to Phase 2
  • fewer Phase 2 clearances
  • the near elimination of Phase 2 prohibitions and
  • a lower number of Phase 2 remedy outcomes.

This is consistent with the notion that, if there is some link between more Phase 1 remedies and fewer references to Phase 2, it is the more ‘marginal’ and more ‘fragile’ that may have been most affected.

If so it means that some cases that might have been cleared at Phase 2 are undergoing merger remedies at Phase 1.

This may be one reason why the proportion of cases being unconditionally cleared at Phase 1 or at Phase 2 is sharply lower under the CMA than it was under the OFT. (Another is the CMA’s greater selectivity in which cases formally to investigate.)

How Are Companies Responding?

Judging from conversations during some of my recent merger briefing sessions ,some companies considering or implementing mergers are already paying much closer attention to the potential for a Phase 1 remedy outcome than used to be the case.

This includes thinking harder about the more expansive types of Phase 1 remedy that the CMA has shown itself prepared to consider and accept.

For some it also means attending more to how they shape and scope their transactions and how they measure the degree of merger control risk they are taking on.

There are plenty of lessons merging companies can learn from the CMA’s 34 Phase 1 remedy cases so far – the subject of one of my recent briefings.

In recent months the rate of remedied cases has come back somewhat from its peak. Looking ahead, it will be interesting to see, therefore, whether we have already reached ‘peak Phase 1 remedy’.

 

 

 

 

A Closer Call – UK Merger Control Decisions in 2017

As 2017 draws to a close here are some of the distinctive features of this year’s merger decisions by the UK’s Competition and Markets Authority.

The picture I present is a bird’s-eye view, rather than a commentary on individual cases (which I will cover separately in my Merger 2017 A-Z briefings).

In particular, I focus on noticeable differences between this year’s cases (taken as a whole) and the overall pattern of CMA decisions across previous years, since the agency took over from its predecessor bodies in April 2014.

I focus on the 60 Phase 1 decisions in 2017 to date as there are too few Phase 2 cases to enable a meaningful comparison.

In what follows reference to ‘SLC’ cases means those Phase 1 decisions that found that the merger brings a reasonable prospect of a ‘substantial lessening of competition’.

Below I look at:

  • The pattern of cases
  • Decision outcomes
  • Theories of harm
  • Evidence
  • Key reasoning behind the decisions
  • Analysis
  • Implications for companies

Pattern of cases

  • Across the 60 Phase 1 published decisions in 2017 to date there has been a similar profile to the overall profile for previous years in terms of market concentration, though with more cases with 90%+ shares of supply
  • A much higher proportion of cases qualified for investigation under the ‘turnover test’ for jurisdiction, as opposed to the ‘share of supply’ test.

Decision outcomes

  • A much greater proportion of SLC decisions, almost wholly accounted for by….
  • A much higher proportion of cases dealt with by Phase 1 remedies – so-called ‘undertakings in lieu of reference’ to a Phase 2 investigation
  • A noticeably larger proportion of remedy findings among cases in which the parties had middle ranking shares of supply and/or modest increments to the share of supply

Theories of Harm

  • A much smaller proportion of cases in which a ‘potential competition’ theory was examined (i.e. the notion that the parties may compete in the future even if they have not to date). Previously such cases have proved untypically problematic for competition.

Evidence

  • Customer surveys and diversion evidence featured much more regularly
  • Clearance decisions relied noticeably more on third party evidence
  • Cases in which bidding analysis was key were much more frequently problematic than on average across previous years
  • A noticeably lower proportion of cases attracted complaints from rival firms

Key reasoning behind the decisions

  • ‘Closeness of competition’ between the merging parties featured prominently in a much higher proportion of cases than on average previously – to the extent that, in 2017, it was the most important of the three main reasons behind clearance decisions when taken as a whole. This was also the case for SLC decisions when taken as a whole
  • The number of rival firms remaining after the merger (another of the CMA’s three main decision reasons) was much less important in the reasoning behind SLC cases taken as a whole compared to previously, when it was the most prominent factor overall.

Analysis

  • The following topics all had a much higher profile in 2017 cases than on average previously:
    • Customer benefits through merger
    • Customer switching between rivals
    • Bidding analysis
    • Customer catchment areas
    • Customer surveys

Implications

What are the implications of the above for companies contemplating or planning a merger?

Click here for my summary assessment.

I shall be talking more about the above, as well as about the many other lessons to be learnt from individual cases within this year’s portfolio, at my customary January ‘Merger A-Z’ briefing events.

Which mergers threaten competition?

The UK’s Competition and Markets Authority (CMA) has just celebrated its third anniversary since taking over from the Office of Fair Trading and Competition Commission.

It has now made competition decisions in nearly 200 Phase 1 merger cases, enough to be able to discern some of the key factors that have informed its decision-making.

One factor that some (though far from all) companies and investors think about in assessing the chances of merger clearance is how the CMA may view the share of supply that the merged company would have in the products and services in which they overlap.

The following share of supply heatmap shows the pattern of decisions to date:

Share of supply in CMA Phase 1 decisions*

(April 1st 2014 to March 31st 2017)

170402-Share of supply heatmap

The colours indicate the proportion of cases that the CMA has found to represent a ‘substantial lessening of competition’ (SLC) at Phase 1 – ranging from:

  • brightest green at 0%
  • up through the shades of green to middle yellow (circa 50%)
  • and on through orange to the deepest red (100%).

The figures underlying the heatmap are taken from the large number of Phase 1 CMA decisions that report the merging parties’ shares of supply in the markets on which those cases focus.

Three features of the map stand out:

  1. The very high proportion of SLC findings in cases where the party with the smaller share of supply has a share of 20% or more
  2. No SLC finding where the parties’ combined share of supply is below 40%
  3. The significant proportion of cases that are found not to threaten an SLC even where the parties have a high combined share of supply.  This is where many of the cases with the most interesting lessons for companies and investors reside.

In general, as one might expect, the proportion of SLC findings increases the higher the combined share of supply and the higher the percentage increment to the larger share.

Further detail is covered in my merger briefings, including:

  • How (and how not) to interpret the heatmap
  • The most insightful parts of the map
  • Disaggregation of results, for example
    • by decision-maker
    • sector patterns
    • time period
    • remedies versus reference versus ‘de minimis’
  • Other notable patterns in the CMA’s decisions to date.

There are not yet enough Phase 2 cases to give a meaningful picture for Phase2.


 

* The share of supply heatmap is copyright Adrian Payne, 2017. The heatmap can be quoted and reproduced with the appropriate attribution.

 

 

The Most Interesting UK Merger Cases of 2016

Which are the most interesting UK merger cases of 2016 to date, as far as competition analysis is concerned?

My nominations this year include a number of CMA ‘firsts’ and plenty of food for thought on matters such as:

  • Consumer survey work – how and how not to approach it150301-CMA2
  • New methods of analysis
  • Conflicts between different sources of evidence
  • The balance between qualitative and quantitative evidence
  • Timeliness of evidence
  • What the CMA needs to show in order to find a substantial lessening of competition
  • The risks of non-notification
  • Misunderstandings about when the CMA may intervene

Here are my nominations. To access the CMA’s published decision please click on the blue text that contains the names of the merging parties:

Arriva Rail North/Northern Rail Franchise – Phase 2 divestment remedy

BCA Marketplace/SMA Vehicle Remarketing – Phase 1 divestment remedy

Celesio/Sainsburys Pharmacies – Phase 2 divestment remedies

Chemring/Wallop Defence Systems – Phase 1 clearance

Future/Miura – Phase 1 divestment remedy

Intercontinental Exchange/Trayport – Phase 2 Prohibition

Safetykleen/Pure Solve – Abandoned following Phase 1 Reference

Tullett Trebon/ ICAP– Phase 1 divestment