A Closer Call – UK Merger Control Decisions in 2017

As 2017 draws to a close here are some of the distinctive features of this year’s merger decisions by the UK’s Competition and Markets Authority.

The picture I present is a bird’s-eye view, rather than a commentary on individual cases (which I will cover separately in my Merger 2017 A-Z briefings).

In particular, I focus on noticeable differences between this year’s cases (taken as a whole) and the overall pattern of CMA decisions across previous years, since the agency took over from its predecessor bodies in April 2014.

I focus on the 60 Phase 1 decisions in 2017 to date as there are too few Phase 2 cases to enable a meaningful comparison.

In what follows reference to ‘SLC’ cases means those Phase 1 decisions that found that the merger brings a reasonable prospect of a ‘substantial lessening of competition’.

Below I look at:

  • The pattern of cases
  • Decision outcomes
  • Theories of harm
  • Evidence
  • Key reasoning behind the decisions
  • Analysis
  • Implications for companies

Pattern of cases

  • Across the 60 Phase 1 published decisions in 2017 to date there has been a similar profile to the overall profile for previous years in terms of market concentration, though with more cases with 90%+ shares of supply
  • A much higher proportion of cases qualified for investigation under the ‘turnover test’ for jurisdiction, as opposed to the ‘share of supply’ test.

Decision outcomes

  • A much greater proportion of SLC decisions, almost wholly accounted for by….
  • A much higher proportion of cases dealt with by Phase 1 remedies – so-called ‘undertakings in lieu of reference’ to a Phase 2 investigation
  • A noticeably larger proportion of remedy findings among cases in which the parties had middle ranking shares of supply and/or modest increments to the share of supply

Theories of Harm

  • A much smaller proportion of cases in which a ‘potential competition’ theory was examined (i.e. the notion that the parties may compete in the future even if they have not to date). Previously such cases have proved untypically problematic for competition.

Evidence

  • Customer surveys and diversion evidence featured much more regularly
  • Clearance decisions relied noticeably more on third party evidence
  • Cases in which bidding analysis was key were much more frequently problematic than on average across previous years
  • A noticeably lower proportion of cases attracted complaints from rival firms

Key reasoning behind the decisions

  • ‘Closeness of competition’ between the merging parties featured prominently in a much higher proportion of cases than on average previously – to the extent that, in 2017, it was the most important of the three main reasons behind clearance decisions when taken as a whole. This was also the case for SLC decisions when taken as a whole
  • The number of rival firms remaining after the merger (another of the CMA’s three main decision reasons) was much less important in the reasoning behind SLC cases taken as a whole compared to previously, when it was the most prominent factor overall.

Analysis

  • The following topics all had a much higher profile in 2017 cases than on average previously:
    • Customer benefits through merger
    • Customer switching between rivals
    • Bidding analysis
    • Customer catchment areas
    • Customer surveys

Implications

What are the implications of the above for companies contemplating or planning a merger?

Click here for my summary assessment.

I shall be talking more about the above, as well as about the many other lessons to be learnt from individual cases within this year’s portfolio, at my customary January ‘Merger A-Z’ briefing events.

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 .

 

2014 in Numbers : An Overview of UK Merger Control

150101-Number picture0  – The number of new merger prohibition decisions

1  – The number of appeals to the Competition Appeals Tribunal

3  – The number of Phase 2 decisions – all clearances

4  – The number of Phase 1 cases that investigated coordination between firms

5   –  The number of rail franchise cases examined

  –  The percentage of cases in which merger efficiencies or customer benefits were examined in some detail

13  –  The number of cases opened in August, the peak month of the year for new cases

16  –  The percentage of cases found not to qualify for investigation under the tests for jurisdiction

18  – The percentage of qualifying cases found to result in a substantial lessening of competition at Phase 1

19  – The percentage of cases in which parties argued that one of the businesses involved would exit if the merger did not proceed

20  – The percentage of cases qualifying for investigation under the turnover test

21  – The number of Phase 1 cases involving ‘vertical’ theories of harm

33 – The number of opened Phase 1 cases being investigated at the peak month-end of the year – October

45  – The percentage of cases involving completed deals

50  – The percentage of cases found to harm competition that were referred for Phase 2 investigation

53  – The percentage of cases in which one or more competitors to the merging parties expressed concerns about the deal

54  – The percentage of cases that investigated more than one theory of harm to competition

59 – The percentage of cases in which one or more customers of the parties expressed concerns about the deal

60  – The smallest share of supply for the parties to those deals found to harm competition

78  – The number of pages in the longest Phase 1 decision

82  –  The number of Phase 1 decisions announced

90  – The highest percentage share of supply of one of the parties to a merger that was cleared at Phase 1

6,500,000  – The size (in pounds) of the largest market deemed too small to justify a Phase 2 investigation (under the de minimis criteria)

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Note: Numbers refer to those OFT, CC and CMA cases for which the decisions were announced during 2014 and for which relevant details were published as at 31/12/14.

© Adrian Payne 2015

 

 

Fit for merger?

The CM140921-gymA’s long-awaited lengthy merger decision on the Pure Gym/The Gym deal has finally been published, nearly two and a half months after the decision was announced to refer it for Phase 2 investigation.

Although the deal was abandoned soon after the reference decision was made, the decision itself is one of the most interesting decisions of the year.

In terms of some of the issues raised, it reminds me very much of the OFT’s Rank/Gala casinos decision almost exactly two years ago.

It should give plenty of food for thought to merging parties in similar types of business on matters such as:

  • how important national parameters of competition can be, even when services are provided through local outlets
  • the importance of realistically assessing which types of outlet compete most strongly and how – not all gyms are created equal, it appears
  • why 80% customer catchment areas are not always the whole story in thinking about the geographic scope of competition
  • how internal documents need to provide sufficient support to the narrative parties put forward
  • why potential competition between parties (i.e. in opening new outlets near the other party) can be every bit as important as existing overlaps, especially where there is only a small number of national players
  • the role of entry analysis and customer switching analysis when competition is as much about fighting for new customers as it is about retaining existing customers and when tariff structures complicate incentives
  • what can happen when the CMA believes it may not have received all the information that is available
  • why website material can become an important source of evidence that needs to be managed well
  • the importance the CMA can attach to being able to replicate or extend results of analysis that the parties present.

Throughout the decision the CMA makes repeated reference to the commentary on retail mergers, published jointly by the former OFT and CC .

It is well worth reading and fully considering the points made in the commentary if you are contemplating a retail merger (even though I would say that having had a close hand in developing the retail commentary!).

The commentary can be found here and the decision itself is here.

 

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.