The CMA’s first year – Mergers


On March 31st Competition and Markets Authority (CMA) completed its first year. In those 12 months the new agency took 84 Phase 1 and 3 Phase 2 merger decisions.

This article summarises some of the main points of interest. These focus on the pattern of decisions and the analysis underlying them (as opposed to how the changes to the merger control process have worked – which merits an article in its own right).

  1. Case numbers recover

As the graph below shows, Phase 1 case numbers were nearly back up to the annual average under the Enterprise Act, the highest number of cases since 2007/08.

This was despite a sharp reduction in the number of non-notified mergers that the CMA ‘called in’ for investigation –  one reason why the proportion of cases found not to meet the qualifying tests for jurisdiction was well below average (as also shown in the graph).

Is the CMA being more selective than its predecessor, particularly when it comes to smaller transactions (see also point 4)? Or were there simply fewer problematic non-notified deals among the 600-or-so transactions screened by the agency’s Mergers Intelligence team during the year?

Phase 1 Merger Control: 2014/2015

(Please click on the graph to enlarge it)

 150331-Phase 1 stats

There were only three Phase 2 decisions made during the year, the second lowest number in any year under the Enterprise Act and well below the average. This reflects in part the dearth of references to Phase 2 in the CMA’s first six months –  described in my earlier article – together with only two references being made in the OFT’s final six months.

  1. The 80/20 rule rides again

Around 80% of Phase 1 cases were cleared. Nearly 20% were found to give a reasonable prospect of in a substantial lessening of competition. This proportion is very much in line with the average level under the CMA’s predecessor Phase 1 body, the Office of Fair Trading.

  1. No take-off in remedy numbers

As can be seen from the graph there is little sign so far that the CMA’s new arrangements for remedying competition problems at Phase 1 have resulted in significantly more remedies being proposed and accepted, the main objective of the change.

Of this year’s three Phase 2 decisions, one (Breedon Aggregates/Aggregate Industries) involved a divestment remedy and a price cap remedy where divestment was not possible.

  1. Small is beautiful

By contrast more SLC decisions than usual were deemed too small (so called ‘de minimis’ cases) to justify the costs of a Phase 2 enquiry, including one (WGSN/Stylesight) involving a market of over £6m – the largest so far since the de minimis policy was introduced.

In addition to these, four cases were cleared on de minimis grounds without a final decision being taken on their competition merits (Eden/Riders, Vitec/Autocue, Phonak Comfort/Audio and Key Publishing/Kelsey). This is not entirely new but has not happened on this scale before. Is it an approach that will be expanded further?

De minimis arguments were rejected in only two cases: Reckitt/K-Y and InterCity Railways/Intercity East Coast Rail Franchise. In the former, the CMA worried about the fact that similar deals might happen (so-called ‘replicability’) – a contrast to the ‘wait and see’ approach in some other cases.

Overall, the CMA seems to be taking a more expansive approach to de minimis policy. As the new agency has to demonstrate benefits to consumers that are at least ten times its costs (previously it was five times costs) it would not be surprising if the balance of its case portfolio (within mergers and beyond) was to shift.

  1. Horizontally-challenged

Horizontal ‘theories of harm’ remained the overwhelming focus for the CMA’s analysis as usual. However 23 cases also involved so-called ‘vertical theories’. Once again coordinated effects were out of fashion, featuring in only one Phase 1 case (Ballyclare/LHD).

  1. Exit closed. Please try an alternative route.

As usual, exiting asset/failing firm arguments cut little ice with the CMA at Phase 1 – rejected in all 11 cases in which they were put forward (one of the most interesting being Roanza/Enza).

At Phase 2, however, these arguments played a key part in the clearance of the Alliance Medical/IBA deal , despite representations by one of the party’s competitors that they would have bought or supported the target business in the absence of the merger.

  1. Feeling the pressure

‘Upward price pressure’ measures combining ‘diversion’ and financial margin data turned up in only one Phase 1 case (Asda/Coop) this year. This somewhat understates the importance of the price pressure approach, however, as measures of diversion carried weight in numerous cases (see number 12 below) and financial margins continued to be examined, even though (somewhat puzzlingly) that analysis is not always evident in the CMA’s published decisions.

  1. Signs of entry

While entry arguments were often made by parties and (as usual) were mostly rejected or superfluous, there were nevertheless three Phase 1 examples where the CMA gave weight to timely, likely and sufficient entry by rivals (Ballyclare/LHD, Care Monitoring and Management/Pantzel and Coopervision/Sauflon Pharmaceuticals).

In addition the potential for innovation to enhance competition was given a lot of weight in Cirrus Logic/Wolfson.

Rival entry was also said to meet the ‘timely, likely and sufficient’ criteria in the Phase 2 Omnicell/Surgichem clearance decision.

  1. A rare sighting

Countervailing buyer power arguments appear to have played a part in just one Phase 1 case (Herstal/Manroy), though the summary of the decision gives more weight to this than the main text of the decision.

  1. No smoke without smoking guns

Third party views, internal documents and bidding/tendering data (in that order) were particularly important sources of evidence, with problematic internal documents cited especially frequently in the Phase 1 SLC decisions (a notable example being Pure Gym/The Gym).

However…as every year, seemingly hottish documents do not always mean SLC – witness the Multipackaging Solutions/Presentation products case.

On evidence more generally it is worth noting that the CMA used its new information-gathering powers on 23 occasions at Phase 1, applied to third parties as well as to merging parties themselves.

  1. Competitor concerns do matter

Interestingly the Phase 1 SLC decisions strongly tended to feature complaints from both customers and competitors (as compared to the clearance decisions).

Once more the simple and often-heard ‘conventional wisdom’  that competitor complaints tend to encourage agencies to clear mergers turns out to be pretty wide of the mark.

  1. Best bids

One quarter of all Phase 1 cases involved the use of data on the bids and tenders that the parties had been involved in, primarily to examine the degree of diversion of business between the parties and others.

Particularly interesting cases include: Sonoco/Weidenhammer, Ballyclare/LHD, Multipackaging Solutions/Presentation Products, and Xchanging/Agencyport.

Two points stand out:

  • One – bidding analysis is not as straightforward as it may seem.
  • Two – the results (and the reading of past cases involving this type of analysis) need careful interpretation.

To sum up

In summary, while case numbers recovered, there were few if any that offered great potential for a major policy change. Forthcoming decisions look much more interesting in that regard!

Arguably the main questions raised are:

  • whether there will be a  greater use of Phase 1 remedies in future
  • where de minimis policy is heading and
  • whether the CMA is becoming more selective about the non-notified deals it calls in for investigation.

As usual, however, there have been many interesting lessons for parties about to merge in terms of how to assess their merger and the approach the CMA will adopt.

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Links to cases referred to above can be found on the CMA’s web pages .

 

Recent UK merger control: from soft drinks to hard cheese

UK merger control over the past year – and looking ahead

On April 1st the Competition and Markets Authority (CMA) took over UK merger control responsibilities from the Office of Fair Trading and Competition Commission.

In this article I

  • take a high-level look at trends in UK Phase 1 and Phase 2 merger cases in the final year leading up to the new CMA
  • note some developments in assessment methods
  • set out in brief a few of the lessons that future merging parties may want to consider from the past year’s cases – and
  • look ahead to how the changes in the regime might affect future analysis.

Phase 1

The following chart compares the year to the end of March 2014 with the average across all cases in previous years under the Enterprise Act.

The figures focus on those cases that the OFT decided to qualify for assessment under the jurisdictional tests – hence the term ‘qualified cases’.

140508-Oft-stats-13-14

The key points are as follows:

  • Case numbers have been significantly down on previous years
  • The proportion of ‘substantial lessening of competition’ (SLC) findings was in line with previous years
  • No undertakings-in-lieu of reference were accepted, the first time this has happened (though with one remedy still outstanding)
  • Use of the de minimis discretion was in line with past averages
  • There has been much greater use of initial ‘hold separate’ undertakings, something that looks set to continue under the CMA.

The signs are that the low case numbers have continued (though activity seems now to be increasing):

  • Only 19 Phase 1 decisions up to May 1st this year

…. 50% down on the same point last year.

This should come as no surprise. Merger decisions occur with a time-lag and….

  • There were just 99 domestic and cross border transactions involving UK companies (excluding outward disposals) in the final quarter of 2013…

… the lowest number since quarterly figures were first collected in 1987.

  • For 2013 as a whole such deals were down 50% on 2011 (450, compared to 965).

As in previous years, the number of competitors and low increment to share of supply have been the most important factors in clearance decisions. Buyer power and entry arguments were important, however, in a small number of cases.

Phase 2

Of the references to Phase 2 made in the year up to 31st March to date there have been

  • 4 clearances (including a dissenting opinion in one case)
  • 2 SLC decisions involving remedies – one of them a price cap remedy (a pretty rare animal in the UK these days!)
  • and 2 other decisions are awaited.

Assessment methods – some points of interest

Before looking at some of the lessons for future merging parties I note here a few of the points of interest across the year in terms of the analytical approaches and techniques used by the merger authorities. These include:

  • A customer survey containing both a price rise question and a store closure question, enabling direct comparison of results as to how customers respond to each. This is often a bone of contention in cases where only the store closure question is asked and it is assumed that the answers carry across to consumer behaviour in response to price changes. There is only a handful of UK cases in which both questions have been asked.
  • Use of ‘uplifts’ to create ‘extended’ catchment areas, much larger than the often-used ‘80%’ catchment areas. These extended catchments can increase the number of overlaps between parties but, at the same time, can bring additional competitors into the analysis
  • Use of concentration ‘hotspot analysis’ to pick up concerns relating to particular areas/groups of customers within a catchment
  • Development of GP referral analysis methods, including analysis focused on the GPs most likely to switch referral hospitals.

More generally, there has been relatively little use of price pressure analyses this year and merger simulation has been rarely used.

By contrast, many cases have involved the use of ‘catchment area’ analysis and  analysis of internal documents has been important to a number of decisions.

It is worth noting that the new (much-enlarged) CMA notification form for Phase 1 has expanded the set of internal documents that are requested upfront.

Lessons for future merging parties

Within the scope of this article it is only possible to give a brief overview but below I set out some of the lessons for future merging parties drawn from published material on  Phase 1 and Phase 2 cases over the past year.

Many of the lessons have implications for pre-merger planning, both in terms of:

  1. assessing the risk of a deal being referred to Phase 2 and
  2. planning ahead so that the strongest case can be put within the Phase 1 timetable (which is changing under the CMA).

Here are some of the most notable points arising from the 2013/14 cases:

  • Be aware of the dangers of over-estimating rivals’ shares of supply – but try not to underestimate them either, as happened in one case.

– Large discrepancies between the parties’ figures and those obtained by the authorities in their enquiries of customers and competitors can undermine confidence in other material the parties put forward

  • Remember that the set of companies judged to be competitors can differ from case to case, even in sectors that have been examined previously….and many times over.

– This is important in pre-merger planning, in assessing the risks of a merger being referred to Phase 2 and the risk of it being found to be problematic at Phase 2.

  • Bidding data and data on sales won and lost were used across a large number of cases, more frequently than in previous years (though this may be due to the mix of cases rather than an underlying shift in approach).

– Bid data can be time-consuming to assemble so that it is sufficiently comprehensive. Early planning and gathering of material is therefore important.

  • Bear in mind capacity constraints that rivals may have, an important consideration in one of the 2013 references

– It is particularly important to distinguish between ‘theoretical capacity’ (which may be very large but may be costly to deploy in full) and that capacity that it may be realistic and economic to bring on stream.

  • Modelling of the merger impact on comparative tendering costs among rivals can be very powerful, as one clearance case this year showed.

– In some markets the key constraint on prices is the bidder who comes second. The key question is therefore what the merger does – if anything – to that player’s bid.

  • Once again this year, several cases have shown how important it is for parties to engage with the competition authorities if they are planning their own consumer survey work.

– This will become even more important looking ahead given the new merger timetables.

  • Ensure that in comparing branded and private label products – and the extent to which they compete – that the effect of price promotions is properly considered.

– For example, how close might be the price of branded goods that are heavily promoted to the price of private label products that are not?

  • Past failures can be very helpful !… especially if they relate to past attempts by one of the merging parties to enter a market against the other party.

– This helped dampen concerns about the potential for the parties to compete in one case this year.

  • Though on average they raise the probability of a case being seen to be problematic, customer complaints are not of themselves a good predictor of the outcome of a case

– For example, one notable case was cleared this year despite most customers complaining about it. Equally, many cases have been referred to Phase 2 in previous years without there being significant levels of complaint.

  • They may be rare, but successful efficiency arguments are possible when there are real synergies, backed with the right analysis

– as shown in a ‘3 to 2’ merger where plant location and logistics opened up new opportunities for the merged firm to reduce its costs – opportunities that would not otherwise have been possible.

  • Post-merger price increases – projected or actual (in the case of completed mergers) – often cause difficulties but sometimes evidence can be successfully put forward to justify even very large post-merger price increases

– as happened in one completed merger case this year – in which the increases were judged to be investments in quality

  • There appears to be continuing development in the use of ‘de minimis’ policy (i.e. policy that avoids referring to Phase 2 cases that raise significant competition concerns but are thought to be too small to merit further investigation)

– especially in exercising the discretion not to refer cases to Phase 2 in sectors in which similar deals are possible (perhaps even likely) in other local areas.

Looking ahead

Although much will stay the same, the arrival of the CMA brings a number of changes to UK merger control the effects of which will not be clear for some time.

The main changes being made include:

  • New hold-separate powers
  • Much more extensive Phase 1 notification forms
  • The new 40-day statutory timetable for Phase 1 mergers
  • New information-gathering powers
  • Some overlap between the Phase 1 and Phase 2 case teams
  • A new remedies process at Phase 1
  • Access to the Phase 1 decision-maker for merger parties

For the area that I am most often involved in – merger evidence-gathering and analysis – there are many questions that the next year will start to answer, including the following:

  • What will happen to the overall Phase 1 timetable given the need for more pre-notification discussions?
  • To what extent will the changes delay third party enquiries in terms of their place within the overall process? And what effect will any delay have on the risk of new questions emerging late on and the number of cases going to Phase 2?
  • What in turn will the implications be of any change in these areas for the quality of analysis and for decision-making thresholds?
  • To what extent will the new information-gathering powers blur the distinction between Phase 1 and Phase 2 and affect the decision-making thresholds?

And that is to say nothing of the more process-based questions on matters such as ‘stopping the clock’ and remedies where the devil really will be in the detail.

It may take a considerable time for the implications of the changes to become clear, particularly any unintended consequences.

Case circumstances vary considerably so that making judgements on what the changes may mean over, say, the first 10 cases – or even the first 20 – could prove as unreliable as making judgements on SLC trends from a similarly short run of cases (a topic I hope to return to in a future article).

Much more on all this in future merger workshops….

 

© Adrian Payne 2014

 

 

 

 

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

One Question That Can Make Or Break A Merger Case

Over the past ten years hundreds of companies have made a case to the UK competition authorities seeking approval for their merger.

The way in which cases are argued and presented before the authorities varies widely. As a result, there are many lessons that can be learned from past practice, good and bad.

In this brief article I focus on one important aspect that crops up again and again. It concerns the following question:

–       How to make a case that fits together well?    –

A question to ask early

It is clearly a question that is best asked (and answered) early on in the process of developing the case for a merger.

Rubik

And yet, in the hurly burly of the deal, it is a question that is easy to overlook –  or to ask too late in the process – or to answer only partially.

Instead what tends to happen in these circumstances is that the different elements of the case emerge and evolve as the process unfolds.

Such an approach may have the advantage of flexibility  – but it also carries the risk that, once the walls are built, the roof won’t fit.

And that is indeed what happens in a surprising number of cases, resulting in

  • Wasted time and cost
  • A longer investigation –  and – in some cases
  • A poorer overall outcome for the merging parties.

A challenging question

Perhaps one of the reasons the question doesn’t always receive the timely attention it deserves is that there are a number of different aspects to it.

Here are the five I look at:

1. Are the arguments put forward internally consistent ?

  • When the individual building blocks of a case do not hang together well the credibility of the overall case suffers and the process takes longer, while inconsistencies are probed.
  • To take a simple example that has arisen many times: how well does the argument that acquisition is the only path sit with the proposition that entry into the business is easy and inexpensive?

2. How to ensure the case put forward remains consistent throughout the process ?

  • Changing tack on a major plank of a case during the process always raises questions in the agencies’ minds.
  • ‘Why”, they understandably ask, “should the new story we are being told be more credible than the old one (which we were assured was accurate)?”

3. How well is the overall story for the merger supported by the evidence advanced?

  • When these clash the agencies rightly question not only the particular piece of evidence concerned but – sometimes more damaging –  the coherence of the wider story.
  • For example: If the overarching story is that exit of the target company is inevitable in the absence of the deal, how well does this tally with the actions of the target in the past year or two?

4. Do the theory and evidence match?

  • When theory and evidence collide which, if either, will remain standing?
  • For example: where a case relies heavily on the theory that only two suppliers are needed to ensure a highly competitive outcome, how credible is that theory given the number of suppliers that customers actually shortlist?

5. How well integrated are the business, economic and legal arguments?

  • A particular risk is where separate submissions from legal advisers and economic advisers contain material that does not fit together well (or at worst is contradictory).
  • Another is when key analysis is identified and put forward too late in the day.

A powerful first step

The very process of asking each of these questions in a structured way, and with the right tools and techniques, is a powerful first step to:

  • understanding the real strength or weakness of the case right from the start
  • prioritising the evidence-gathering and analysis needed to make the strongest case
  • deciding how best to present the case
  • managing the five risks/opportunities I outlined above.

Even where it turns out that there is not an immediate or clear answer to one or more of these questions, identifying that fact can be crucial to managing the resulting risk, as well as the overall case.

                                                                                               © Adrian Payne 2013

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Material in this article is drawn from my training course – ‘Making a Merger Case: Best Practice and Common Pitfalls’.

The course examines lessons from over 500 past cases in each of the following areas: case preparation, case strategy, research and analysis, communication and presentation, and resources.