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.

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)

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.

 

 

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.

ten_jpg-626x875

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

http://mpra.ub.uni-muenchen.de/51238/1/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

http://www.justice.gov/atr/public/eag/296846.pdf

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

http://www.nhh.no/Files/Filer/institutter/sam/Discussion%20papers/2013/08.pdf

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

http://www.diw.de/documents/publikationen/73/diw_01.c.426970.de/dp1321.pdf

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

http://economix.fr/pdf/dt/2013/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

http://econstor.eu/bitstream/10419/74799/1/749474947.pdf

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

http://www.tinbergen.nl/~moraga/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

http://faculty.weatherhead.case.edu/bouwman/downloads/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

https://www.nhh.no/Files/Filer/institutter/fin/wp/Paper%20-%20Jarrod%20Harford.pdf

Happy reading…and Merry Christmas one and all