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Rearranging The Chairs
Category Archives: Merger policy
Decide Well In 2025
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Testing Times For CMA Merger Cases
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Christmas Promise For Merging Firms
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It’s not often that the CMA comes bearing Christmas news of great promise to dozens of future merging companies. But this Christmas could be the one.
I’m talking here about the CMA’s ‘de minimis exception’ which has previously allowed the CMA to clear problematic mergers that it deems too small to merit the costs of a Phase 2 investigation (as long as clear-cut Phase 1 remedies are not available to deal with the competition problems identified).
Glad Tidings Of Joy
The CMA‘s proposal to double – to £30 million – the maximum size of market that it may exempt from further investigation or intervention (under its so-called ‘de minimis exception’) heralds glad tidings to many companies contemplating future mergers.
The change looks set to bring the ‘de minimis exception’ within reach of dozens of merging companies over coming years. The CMA doesn’t publically put a number on it but figures compiled for my ‘CMA At 500’ project suggest no mere Christmas bauble when compared to existing case numbers.
Even under the previous thresholds there have been 42 public cases to date in which parties mounted ‘de minimis’ arguments – nearly 10% of all cases to date.
In addition, the figures suggest that a large number have been screened out at briefing paper stage or gone ahead without any CMA scrutiny.
By looking at the market size profile across cases the CMA will know just how big a change the doubling of the market size threshold could make to these numbers.
And this doesn’t allow for the fact that the new proposals also bring hopeful news to many firms in small-to-medium-sized markets who have previously screened out deals because of perceived merger control risk.
For the many of you who have considered ‘de minimis’ policy as part of your risk assessment it may soon be time to have another look at the deals you’ve so far rejected or put on the back burner.
A Heavenly Song
The proposals also sweep away the long-established cost-benefit framework for assessing whether the harm from a ‘small market’ merger exceeds the CMA‘s costs of a Phase 2 in-depth investigation – a key part of previous ‘de minimis’ policy.
This change is connected to the doubling of the threshold to include medium-sized markets, as the threshold will now be at a level where potential cost to consumers of problematic mergers in markets under the threshold will routinely exceed the costs of further CMA investigation or intervention – and by orders of magnitude.
The change also means that merging companies will save time and costs through shorter investigations and more cases able to proceed without public scrutiny.
Ding Dong Merrily On HIgh
And better still…..
In future the ‘de minimis’ exception may be considered even where clear-cut Phase 1 remedies are available that would avoid the costs of a Phase 2 reference – again, consistent with dropping the cost-benefit framework.
Given the proportion of cases that result in Phase 1 remedies that looks like a another significant benefit to merging parties and another bold change to the rules on a narrow cost-benefit view.
Again, analysis of past ‘de minimis’ candidates that have resulted in Phase 1 remedies indicates the potential scale of the change.
Beware Scrooge
Before merging companies get too excited, however, there is one big uncertainty to gauge about how the new ‘de minimis’ system will operate.
In future the CMA will be able to refuse to apply the ‘de minimis exception’, where the markets involved are deemed “priority” and/or “important” for various reasons.
Looking at the 40+ past cases considered for de minimis (in public investigations) there could be good news for many merging parties if the future profile of cases resembles the past.
But much depends on how the CMA applies the ‘important’/’priority’ criteria in practice. For that reason self-assessment of merger control risk may become more difficult for a time – until sufficient case numbers allow us to see how the CMA applies these criteria that are currently rather vague.
There is another criterion too worth bearing in mind. This relates to mergers involving local markets. The CMA will continue to have regard to these in assessing whether to apply the ‘de minimis exception’, in case allowing a problematic deal through opens competition risks in other local markets. The good news for merging firms is that, on past form, only a handful of de minimis candidate cases have involved local markets.
Joy To The World
In the hopeful spirit of the season – and leaving these important uncertainties aside – further Christmas generosity to merging firms at hand.
The new arrangements contain none of the simple and cost-free measures that could have been proposed to restrict the scope for the more concerning deals (from a competition view) to go through unscathed – as well as clearing the way for future increases in the market size threshold.
In the words of the song, for merging firms
“It’s Beginning To Look Like Christmas”.
Who Needs To Change To Make UK Merger Control Work Better?
It’s good to see the CMA continuing to adapt its merger control processes with a view to making them work even better than they already do.
I’m hoping that the new processes will be a great success for UK consumers.
Most commentators seem to think, however, that the onus is solely on the CMA to make the system work better than before.
Really?
From what I’ve seen many of the problems experienced with the current system have occurred because of
- what some participants believe about how UK merger control works,
- the choices they have made (e.g. regarding merger notification) and
- the strategies and tactics they have chosen to deploy during and around the investigation.
Indeed, some of the problems encountered at Phase 2 go right back to choices made earlier in the merger process.
Through the changes it is making the CMA is providing different opportunities for interested parties to engage better with the investigation process.
It seems to me that an awful lot is riding on how well some companies and their advisers will use the changes being made and improve how they interact with the process more generally.
The new system won’t greatly benefit UK consumers unless some of those participants change too.
As the song once put it – ‘It takes two to tango”
So here’s a key question for companies and advisers as they approach future investigations under the revised investigation process:
What specifically will you do differently to make the new arrangements work well?
- In how you prepare for an investigation?
- In understanding how the UK system works?
- In how you assess your case prospects?
- In how you think about potential merger remedies?
- In how you use better the time available at investigation hearings?
And how will you go about reviewing and challenging your previous way of doing things?
How Much Tougher On Mergers Has The CMA Become?
As discussed in an earlier post, there is a widespread view that the CMA has taken a much harsher view of mergers over the past few years.
There are many different ways of trying to measure this.
Here’s one based on my ‘CMA At 500’ analysis……
The CMA has just published it 500th merger decision. What is the picture if one compares the first 250 with the second 250?
Three striking aspects to consider
1. Number of mergers not cleared unconditionally at Phase 1 –
- Up 29 ……………(from 67)
2. Number of mergers referred for an in-depth (Phase 2) investigation –
- Up 26…………….(from 33)
3. Number of these Phase 2 mergers not surviving Phase 2 –
- Up 22…………….(from 10)
These rises look dramatic in the context of 250 cases.
On further examination they show:
- A big swing in Phase 1 cases towards those meriting remedy or a reference to Phase 2
- A big swing towards reference, rather than remedy at Phase 1
- A big swing from clearance to termination at Phase 2
But what do these movements actually mean?
To assume that changes such as these are wholly down to a tougher CMA stance would be a very big assumption – and one with the potential to deter more deals than it should or encourage firms to misdirect efforts in making their case.
How much, for example, might instead reflect change in
- the composition of cases coming forward, and/or
- the composition of the cases that the CMA chooses to investigate, and/or
- the behaviour of merging parties, rather than harsher decisions by the CMA?
And to what extent are the changes evenly spread, rather than concentrated in particular parts of the case portfolio or particular periods of time (e.g. the Covid years)?
And maybe the answers vary for each of the three ‘swing’ movements listed above.
Searching For Answers
The only way to approach these questions is to delve below the headline statistics published by the CMA and look at the features of the cases themselves.
In my ‘CMA At 500’ research I have used my assessment of the features of all 500 cases to examine these questions, including through the type of analysis discussed in this blog from 2019.
Click here if you’d like me to say more about this topic in future posts.
Do get in touch if you’d like to know more about my ‘CMA At 500’ project
Looking Into Carving Out
It’s been a great pleasure working with my friends at Aldwych Partners and NOCON on a study of merger remedies that the CMA has published today, alongside its own report.
The focus has been on so-called ‘carve out’ merger remedies.
These remedies involve the divestment of a combination of assets, contracts and staff, which were not previously a self-standing business or business unit.
Overall, our case studies show that carve-out remedies carry significant risks to their
effectiveness and that risk mitigations, such as fallback remedies, may only be of limited use.
Where the CMA concludes that a carve-out remedy is likely to be effective in addressing
competition concerns, the case studies indicate that additional safeguards may be warranted to address their risks.
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Key learning points from our five case studies, include the following:
- Carve-out remedies that unwind or undermine economies of scale, density or scope can be expected to significantly increase the risk to the remedy’s effectiveness.
- Carve-out remedies can provide merger parties with greater opportunities to influence the content of a divestment package and, through this, limit future competition.
- Carve-out remedies that transfer customers to a new supplier will depend on
customer consent and this can pose a substantial risk to these remedies’
effectiveness. - Carve-out remedies pose additional challenges for purchasers’ ability to carry out
effective due diligence as the divestment package is not based on a pre-existing
business unit. - Merger parties may be able to weaken future competition through their influence over the choice of purchaser for a divestment package. This is a greater risk in carve-out remedies, where fewer prospective purchasers have the ability to become effective
competitors. - Fallback remedies may not significantly mitigate the risks associated with carve-out remedies given the low probability of their use and their limited assistance to
prospective purchasers in negotiating divestment packages.
Full reports here
UK Merger Insights: 2023 No. 5
Here’s a selection of some of the best articles I have read recently that are relevant to UK merger control………….
1. Spend, Spend, Spend
How much did the CMA spend on the first part of its investigation into the Microsoft/Activision merger? In this article, Justin Cash looks at the numbers.
2. The Dye Is Cast
Ben Lask and Thomas Sebastian consider here the CAT decision regarding the Dye and Durham merger.
3. What Is ‘Dynamic Competition’?
Andrew Swan and colleagues discuss the matter here.
4. More Hype Than Reality?
In this paper Marc Ivaldi and colleagues examine whether so-called killer acquistions are as common or problematic as merger control authorities seem to think.
5. Rarity Value
Here Stephen Smith and colleagues present a rarity – a balanced assessment of the long-running Microsoft/Activision saga. Do let me know if you’ve spotted others.
6. Tougher Than The CMA
Nicole Kar and colleagues look here at the Bookings/Etraveli case, cleared by the CMA but prohibited by the EC.
Strange that noone has been moaning about the ‘divergence’ between the two agencies in this case, unlike other ‘divergent’ examples. I wonder why. Thoughts?
The CMA At 500 – What’s Trending – And What’s Not
In June the CMA published its 500th merger decision.
There’s little doubt that the profile of UK merger decisions has developed a lot since the CMA began. No surprise there, as a great deal can happen over 9 years.
It seems that many readers (especially advisers) are sympathetic to the first of the somewhat tongue-in-cheek narratives I set out in my previous blog, although with a more measured overarching headline, along the lines that the CMA has become much stricter on mergers.
But what lies below that sort of headline?
What exactly does it mean? And for whom?
And what call to action should it have for merging parties, investors and others?
The reason these questions are important is revealed when one looks below the aggregated statistics that the CMA publishes by using data published in case decisions.
In future blogs I plan to say more on all of this, based on recent research I have been doing looking at the CMA’s first 500 merger cases – ‘The CMA At 500’.
Comparing the first 250 and the second 250 brings out many unexpected similarities and differences.
The ‘stricter enforcement’ narrative, it turns out, is much more nuanced that it might first appear from the headline numbers and applies unevenly across different types of case.
Many companies relying on the simple headline ‘stricter trend’ in thinking about merger control risk will be well wide of the mark. The average is different from the typical.
If interested, do watch out for my blogs on ‘The CMA At 500’ or contact me to find out more about my presentation on the research.
Merging Storytime And Fairytales
Has the CMA become too tough on mergers?
There’s been an outbreak of commentary on this question in the aftermath of the CMA’s decision to prohibit the Microsoft/Activision merger.
Not only by those with direct skin in the game – but also by those using the controversy to lobby for a different UK approach to mergers, those drumming up business and those wishing to make wider political points.
But, as always, statistics can support competing narratives.
Which of the following stories is most insightful?…….
Story 1
From between 2015 and 2018 the CMA blocked 34% of mergers that were subject to an in-depth investigation.
From 2019 to 2022 – it blocked 58%.
Headline: How about – ‘The CMA is out of control and needs to be reined in’?
Story 2
Comparing the two periods the percentage of investigated mergers that the CMA blocked went up by fewer than four percentage points.
Headline: How about – ‘Move along. Little to see here’?
Story 3
The CMA considered around 4000 merger cases between 2015 and 2022. It prohibited 13 of these. Fewer than one third of one per cent.
Headline: How about – ‘The CMA is very light touch – It needs to be a lot tougher’?
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Each of these narratives uses correct information but presents it very differently.
When reading articles about UK merger trends – especially when written on the back of an individual case outcome – here are three key questions well worth asking:
- What’s in the picture? And – often more to the point – what’s not?
- Who’s saying it? And what’s their interest?
- To what extent does the conclusion put forward actually follow from the statistics presented?
Adrian Payne 