Some companies try to argue to the CMA that the company they are acquiring

a) has been earning less than the cost of capital

b) can only invest in desirable future technology by becoming more profitable through merger and

c) will inevitably become less competitive if the merger does not proceed (and maybe even exit altogether).

One of the problems with this general argument is the scale of capital expenditure that takes place in companies that earn below the cost of capital.

For example, around 30% of capital expenditure by companies in the UK’s All Share index over the past five years has been made by companies earning an average 5-year return on equity of less than 5%. (Source: analysis using Sharescope)

The position is very similar if one uses return on capital employed instead of return on equity.

It’s very clear, then, that – in general – a low return is not anywhere near an absolute impediment to investing.

Nor is it clear that companies with low returns invest less. In fact the data suggest they invest a higher proportion of their sales and of their operating cashflows.

Which is no surprise. After all, companies with low returns have a strong incentive to invest in order to increase those returns.

What does this mean for companies wishing to put forward credible arguments along these lines?

The big point is that arguments of this sort can sound impressive but often lack supporting evidence when one looks across companies generally.

Instead the argument only begins to be credible if there are reasons very specific to the case at hand why low returns inevitably and significantly impair the ability to invest in a way that will benefit consumers.

If you want to make this type of argument, therefore, here are three questions that I have found it essential to ask:

a) what makes the argument so compelling in this particular case?

b) what specific evidence is there to support each limb of the argument you are making?

c) how well does each part of the argument stand up to good stress-testing and strong challenge?