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Testing Times For CMA Merger Cases
Category Archives: Phase 2
A Prime Source Of Groupthink In CMA Merger Cases
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What’s Behind The Major CMA Shift From Phase 1 Remedies To Phase 2 References?
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Who Needs To Change To Make UK Merger Control Work Better?
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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
Phase 2 In 2022
In my previous posts reviewing 2022 I have focused on Phase 1 outcomes.
To complete the picture here are the key figures regarding the CMA’s completed Phase 2 merger investigations in 2022…………………..
The Most To Date…
In 2022 there were 14 final decisions, the highest under the CMA and well above the previous years’ average of 10.
But for some of the merging companies involved there was good news……
Good News?…
First, the deal survival rate (8 out of 14) was the highest since 2017, the last time that survivors outnumbered terminated deals.
Second, the number of Phase 2 remedies accepted (5) was the highest number since 2016.
As I noted in my review of Phase 1 outcomes, remedies at that phase were also at their highest since 2017, a theme I’ll return to in a forthcoming post.
And third, the five Phase 2 remedies included two of the new ‘fast-track’ Phase 2 remedies that are now potentially available to merging parties – Sika/MBCC and Carpenter/Recticel.
Quick Fix Questions…
It will be interesting to see how this new policy works in practice.
Here are two questions about it worth keeping in mind….
1.How will this new fast-track process affect the incentives of the parties to offer undertakings at Phase 1 and overall case strategy at Phase 2?
2. And how might it affect the substantive competition assessment at Phase 2 and thereby change the overall enforcement pattern at Phase 2?
If you have thoughts on this, do feel free to comment.
Click here for an interesting piece on Phase 2 fast-track cases by Sofia Platzer and colleagues
An Unusual Call Of Duty?
Last week the CMA announced that it has provisionally found so-called ‘vertical’ competition problems with the Microsoft/Activision deal, centring on the popular game ‘Call of Duty’.
A vertical problem is one that results from of the coming together – or greater coming together – of different levels in a supply chain, rather than a combination at the same level.
In the past few days there has been a lot of commentary on last week’s announcement, some of it suggesting that this case is somehow unique or unusual.
So – How unusual is this outcome?
As always, it depends how you measure it. But here are a couple of thoughts………
1……………..
This case is one of 14 where the Phase 1 investigation identified vertical competition problems sufficient to justify reference to an in-depth Phase 2 investigation.
To put this is context, there have been around 90 completed CMA Phase 2 investigations to date.
Five of the previous thirteen survived the CMA process.
This is a very similar survival rate to other Phase 2 cases
2………….
In my assessment, the Microsoft/Activision CMA Phase 2 investigation is one of eight to focus primarily or exclusively on vertical matters.
If the CMA decided to prohibit the current transaction it would mean that three of the eight did not survive the CMA process.
If, instead, the CMA accepted a remedy to the competition problems identified, this would the first among these eight cases.
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There may well be other ways of looking at the question of how distinctive this case is.
Do comment below or drop me a line if you have other perspectives.
This post builds on data from a briefing on this case held in the first week of the year which also looked at the detail of the Phase 2 process and the significance of the extension to the Phase 2 timetable.
The Great Bake … Off
Cérélia/Jus-Rol
On January 20th the CMA announced its first merger prohibition of the new year by concluding that merger between Cérélia andJus-Rol is likely to reduce competition substantially and that Jus-Rol needs to be sold to an independent buyer.
It is unusual to see a case in the food manufacturing sector referred to a Phase 2 inquiry. In fact it’s only the second time for the CMA, out of 29 cases to date.
And this is the first to be prohibited.
According to the CMA, Jus-Rol is by far the largest supplier of branded ready-to-bake products in the UK, while Cérélia is the largest supplier of own-label ready-to-bake products, making these items on behalf of some of the nation’s largest grocery retailers.
Key to the CMA’s Phase 2 conclusion were the following findings:
- the merger brings together the 2 leading suppliers in the market by a considerable margin – ready-to-bake items supplied by Cérélia and Jus-Rol account for nearly two-thirds of all such products sold to grocery retailers in the UK.
- Jus-Rol items compete with supermarkets’ own-label products supplied by Cérélia for the same space on many supermarket shelves.
- grocery customers regard the companies’ products to be important alternatives to one another – particularly because there are few credible alternative suppliers of either branded or own-label products.
- the merging businesses face limited competition, with all other suppliers being far smaller and many of them lacking the capabilities held by Cérélia and Jus-Rol.
So is this food sector prohibition as unusual as it might seem?
Not if you look more widely than this particular sector.
According to my analysis there have been 10 previous deals with the same pattern of key evidence, across all sectors. Only two have raised no significant competition problems and none have so far survived the Phase 2 process.
The link to the CMA’s Phase 2 report is here.
Adrian Payne 