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What’s Behind The Major CMA Shift From Phase 1 Remedies To Phase 2 References?
Category Archives: Merger research
How Much Tougher On Mergers Has The CMA Become?
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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
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.
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
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)
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:
- 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
- No SLC finding where the parties’ combined share of supply is below 40%
- 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.
Merger Research: What’s new in 2013 ?
It is that time of the year when newspapers and magazines are full of ‘book of the year’ recommendations.
Well, by way of contrast……
….here is my selection of ten of the most interesting new (freely-downloadable) research papers I have read in 2013.
A great antidote to an overdose of turkey and tinsel !
The selection covers both theory and practice and ranges from hospital mergers….to topical issues in merger policy…. to what makes for successful mergers.
Do drop me a line if you think there are other papers as deserving of a read as those on the list.
So, here are my ten (in no particular order)……
1. Quality matters
Most studies of the effects of past mergers focus on price. Here is that rare beast – one that looks at how two past mergers affected quality.
‘Mergers and Product Quality: Evidence from the Airline Industry, Chen and Gayle, MPRA, November 2013
Click to access MPRA_paper_51238.pdf
2. Going forward
Here is another paper looking at an often overlooked issue: how the prevalence of forward contracting in a sector affects the impact that horizontal mergers may have. Maybe one to consider when that next electricity merger comes along?
‘Forward Contracting and the Welfare Effects of Horizontal Mergers’, Miller, EAG, May 2013
3. Could hospital mergers be good for you?
Hospital and health mergers are very much in the news these days. Here’s a paper that shows how price, quality, coinsurance and regulation can interact to produce some surprising results.
‘Hospital Mergers: A Spatial Competition Approach’, Brekke, Siciliani and Straume, NHH, April 2013
4. Bad news for R&D?
This paper uses a differences-in-differences approach to look at the effect of over 200 mergers on R&D.
On the face of it, it looks like bad news for R&D. But is it actually harm to consumers?
‘M&A and R&D – Asymmetric Effects on Acquirers and Targets’, Szücs, DIW Berlin, October 2013
http://www.diw.de/documents/publikationen/73/diw_01.c.429740.de/dp1331.pdf
5. Judging books by titles
Don’t let the title put you off. This is one of the most important papers of 2013. Its results should give merging companies and competition authorities a lot of food for thought.
‘Merger Externalities in Oligopolistic Markets’, Gugler and Szücs, DIW Berlin, June 2013
6. Timing is everything
I can think of several UK cases where the fact that the deal has been investigated after completion has helped clarify aspects of the case!
This paper puts the issue into a wider policy context and highlights the main factors that should influence timing. But is it really a case of either/or?
‘Ex post or ex ante? On the optimal timing of merger control’, Cosnita-Langlais and Tropeano, Economix Working Papers, June 2013
Click to access WP_EcoX_2013-22.pdf
7. Are cartels and mergers substitutes?
The short answer is ‘yes’, according to this paper. Clues perhaps for the Merger Intelligence function in a voluntary regime?
‘Do Cartel Breakdowns Induce Mergers?’, Hüschelrath and Smuda, ZEW, June 2013
8. A new demand-side efficiency
Some interesting new arguments in this paper, of particular interest where search costs are high.
‘Search Costs, Demand-side Economies and the Incentives to Merger under Bertrand Competition’, Moraga-Gonzalez and Petrikait, February 2013
Click to access Moraga_Petrikaite_3.pdf
9. Culture clashes
Clash of cultures often gets blamed for mergers that don’t deliver. But how strong is the theory and evidence supporting this view?
This paper contains some interesting insights into one of the most important questions about M&A.
‘The Role of Corporate Culture in Mergers and Acquisitions’, Bouwman, May 2013
Click to access BouwmanCorpCultureM&A%20Dec2012.pdf
10.Mergers that matter
An interesting approach to measuring what affects propensities to merge and who benefits from merger.
Mergers that matter: The Value Impact of Economic Links’, Harford et al, July 2013
Click to access Paper%20-%20Jarrod%20Harford.pdf
Happy reading…and Merry Christmas one and all
Adrian Payne 