Better Assessment of UK Merger Control Risk

Mergers and acquisitions involve the potential for the relevant competition authorities to scrutinise a deal and, if they think it may harm competition, impose remedies or prohibit it altogether.

This article focuses on merger control in the UK, by the Competition and Markets Authority (CMA).

The better the assessment of these intervention risks (sometimes known as ‘merger control risks’) the better the judgments companies are able to make on matters such as:

  • whether to go ahead with a putative transaction or to re-shape it to mitigate the potential competition risks
  • whether or not to notify deals to the CMA
    • (it’s worth noting here that non-notified deals called in for examination by the CMA were at record numbers in 2018)
  • what they need to do to manage and mitigate risks, both before and during an investigation – recognising the potential for unwelcome surprises, including:
    • unexpected merger remedies or
    • costly Phase 2 investigations that the company hadn’t anticipated
  • whether or not to offer remedies to head off problems at Phase 1 or risk reference to a full Phase 2 investigation.

In practice companies adopt a wide spectrum of approaches, ranging from no risk analysis at all right up to a full replication of the assessment that the CMA might take.

Most lie somewhere in between but many make limited use of lessons from past cases.

As a result companies are regularly surprised by Phase 1 outcomes.

With just over 300 Phase 1 merger decisions now published there are many insights available that companies can use, and in some cases are using, better to assess and manage their  prospects.

Here are four initial steps companies can take to help utilise learning from those decisions much more effectively:

1.Take into account the full range of risk factors identified in past cases, not just some of them.

Ignoring even one of the main risk factors gives an unrealistic outlook which detracts from effective planning.

Risks unrecognised cannot be mitigated or managed.

Looking across past cases, where three of the top risk factors are present the Phase 1 clearance rate has been less than 20%. (And in 2018 it was 0%).

This is orders of magnitude lower than the average clearance rate (of 67%).

What’s more, the problematic deals in this ‘higher risk’ category have been disproportionately more likely to be referred to Phase 2 investigation, rather than being remedied at Phase 1.

2. Recognise the risk in ‘low risk’ mergers

The key here is that:

Low risk is seldom no risk.

This is where CEOs have most often been taken by surprise because

  1. There is a tendency to underestimate risks in ‘lower risk’ cases (especially from factors that are largely or wholly outside the merging parties’ control) and
  2. Mergers in the ‘lower risk’ category account for a large number of cases.

Even in the 73 cases to date where none of the top competition risk factors materialised the CMA found problems in 15 of these ‘lower risk’ cases, of which 6 went on to a full Phase 2 investigation.

15 cases since the CMA began equates to 2 or 3 cases each year. That’s a lot of scope for surprise.

3. Understand the impact of different types of risk .

There are now enough previous CMA decisions to be able to gauge the influence of different factors on case outcomes and to take this into account in focusing effort on the aspects that really matter to building a stronger case.

For instance:

  • What if a transaction involves more than one type of competition issue?
  • What if customers and/or competitors complain?
  • What if a case involves many local markets?
  • What if there are unhelpful internal business documents?
  • What if these factors combine?

In an earlier blog, I looked specifically at the role that so-called ‘market shares’ have played in merger decisions.

And in this one, I showed how merging companies paid too little attention to how closely they compete with one another.

4. Learn from cases that have a similar risk profile

In preparing for a CMA merger investigation most companies take a look at what happened in previous cases in their own sector.

There’s nothing wrong with that but it does mean that a lot of relevant case-learning often goes untapped.

It can be especially insightful to look at what made the difference between clearance and non-clearance in cases with a similar risk profile to your own, including those outside one’s own sector.

In conclusion…

Understanding and managing merger control risks can help avoid costly mistakes and focus case-making effort.

The CMA’s 300 merger decisions to date provide plenty of insights that can be deployed in a very practical way in order better to manage risk and build a stronger competition case.

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This article has focused on risk management and is based on analysis from my comprehensive database of CMA merger decisions.

In addition the 300 cases to date offer many other lessons as to how best to make a merger case. These feature prominently in my merger briefings.

 

2015/16: A Record Year For UK Merger Control

This post looks at the pattern of merger control decisions during the Competition and Markets Authority’s (CMA’s) second full year, which ended on March 31st. The decisions covered are those for which final decisions were published during the year.

In summary:

2015/16 turns out to have been a record-breaking year in many different respects

  1. A record low number of Phase 1 merger decisions

The 62 published CMA Phase 1 decisions was the lowest number of any year since the Enterprise Act came into force and well down on 2015/16.

A third successive sharp drop in the number of non-notified mergers that the CMA ‘called in’ for investigation contributed to the fall. Only 10 cases were called in, the lowest number I can recall for any year. Another record.

Phase 1 Merger Decisions – 2015/16 compared to previous years

160406-phase 1 figures 15-16

2. A record low number of decisions was found not to meet the jurisdiction criteria

The number and proportion of published cases found not to meet the qualifying tests for jurisdiction was in 2015/16 a fraction of its historic average – and by far the lowest in any year so far under the Enterprise Act.

3. Phase 1 competition problems at a record high

The proportion of Phase 1 cases meeting the jurisdiction tests (so-called ‘qualified cases’) that was found to threaten a ‘substantial lessening of competition’ (SLC) doubled compared to the CMA’s first year and reached a record high of 38%.

There are two elements to this that are worth noting:

  • Cases that are candidates for a Phase 1 SLC decision are examined in detail at a so-called ‘Case Review Meeting’, late in the Phase 1 process. The proportion of cases taken to a Case Review Meeting was well above average in 2015/16.
  • And of those cases, over 80% resulted in an SLC finding – again well above average.
  1. The lowest ever proportion of cases decided at Phase 1

The proportion of qualified cases decided at Phase 1 was the lowest to date under the Enterprise Act.

This result stems from the fact that, even though the proportion of problematic cases referred to Phase 2 for further investigation was well below average, the percentage of problematic cases in the overall caseload was at a record high, as described above.

  1. The proportion of problematic Phase 1 cases deemed too small to merit a Phase 2 investigation was at a record low

This statistic relates to so-called ‘de minimis’ cases. It is a great example of how one needs to look at individual cases (both notified and un-notified) in order to interpret the result.

Might it indicate that the CMA is taking a harder line on arguments put to it that a case is too small to warrant further investigation? Or does it show that the CMA is calling in fewer potential ‘de minimis’ cases? Cases strongly favour the latter.

6. A record high for Phase 1 remedies

The proportion of problematic cases dealt with by remedies at Phase 1 rose to a record high of nearly 40% in 2015/16.

It is striking that, at one point during the year, seven out of ten consecutive SLC decisions (excluding de minimis cases and automatic references) were dealt with through Phase 1 remedy rather than reference to Phase 2, another record under the Enterprise Act as far as I recall.

It is interesting that this is in the context of there being….

7. No Phase 2 prohibitions for the second consecutive year.

This means that the CMA Phase 2 decision-makers have yet to prohibit a merger.

There have, however, been two previous occasions in which there have been no prohibited mergers for two consecutive years. So this one isn’t a record !

2015/16 – CMA Final Phase 2 Merger Decisions

160406-phase 2 decisions 15-16

Looking ahead

Where does this cascade of new merger records leave the CMA, merging firms, competitors and customers?

There is little doubt that the CMA has become increasingly selective in the cases it has chosen to call in for investigation, to a degree that requires highly reliable information being available from merging parties in order to enable the CMA to avoid missing too many problematic deals of reasonable size.

The particular challenge here for the CMA is to make these ‘call in’ decisions accurately and quickly outside of the formal review process, without the range and quality of cross-checks that comes from interaction with competitors and customers when a case is called in for review.

As some have already recognised, for merging parties greater CMA selectivity is clearly relevant to decisions regarding notification. A key question, therefore, is whether the CMA will decide to be as selective in the year ahead. It is worth remembering here that there has already been more than one occasion under the Enterprise Act when tighter case selection has been followed by a move back to a more expansive approach to calling in cases for review.

For customers and competitors greater CMA case selectivity clearly puts a premium on making representations more quickly, rather than waiting for a formal investigation to begin. The much-expanded role for pre-notification also points in this direction, as does the earlier involvement of the Phase 1 decision-maker than used to be the case.

Turning to substantive decisions made during 2015/16 , as the National Audit Office recently put it, “the CMA is expanding the practice of clearing cases with remedies in phase 1 without the need to go for a more detailed and resource-intensive phase 2 review.”

It would be easy, however, to overstate the extent to which the 2015/16 remedies record is due to the CMA’s expanded Phase 1 remedy ambitions. In particular, the increasing level of challenge in many deal valuations (a factor in the low number of deals) seems to me to have had a notable effect on the appetite for regulatory risk and therefore the pattern of deals being brought to fruition (including their suitability for Phase 1 remedies).

Two other questions are also relevant here:

  • To what extent has the way in which CMA plans and manages its casework (now that Phase 1 and Phase 2 are under one roof) affected the pattern of Phase 1 decisions being made?
  • And what has been the impact of certain ‘bold’ Phase 2 clearance decisions on the attitude to remedies at Phase 1, both by parties and by the CMA?

On the whole, my own 2015/16 casework leads me strongly to suspect that the CMA’s record-breaking year for mergers hides patterns that are more complicated than they first appear from the aggregate statistics.

As always, many of the main lessons for interested parties to future mergers come from understanding what has worked well or badly in individual cases during 2015/16, as well as from understanding what the aggregate figures do and do not show.

In both respects 2015/16 should leave plenty of pause for thought for all concerned.

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© Adrian Payne, 2016

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 .

 

CMA merger decisions : another bunch of fives

150119-bunch of fivesJust when some companies thought it was becoming safer to merge the Competition and Markets Authority has found competition problems with five mergers …..

..  in just six weeks

(These relate to Phase 1 merger cases requiring further Phase 2 investigation, or undertakings to resolve the problems, for which decisions were announced between December 1st 2014 and January 15th 2015)

This after the CMA identified just four problematic deals at Phase 1 during the whole of 2014 up to the beginning of December (excluding cases deemed too small to justify a Phase 2 investigation).

What should companies currently contemplating difficult deals make of this recent bunch of five?

As always with short sequences of merger decisions it is vital to take a long view and to avoid the temptation to read too much into too few decisions.

So what does the long view look like?

The history of Phase 1 decisions under the 10+ years of the Enterprise Act helps put things in perspective.

In actual fact the UK merger authorities have delivered several speedy bunches of five over the years….2006, 2011 and 2012 each contained six-week periods in which five mergers were found to raise competition concerns at Phase 1.

And those episodes are by no means the record.

In early 2005 there was a similar period when seven deals fell foul of the then-OFT’s decision-makers. And later that same year eight deals were found to be problems in just over a month.

What is more, this number of five-plus/six-week bunches over the years is more or less exactly what one would expect given the average number of cases each year and the average probability of a case giving rise to an adverse competition finding.

And, not to forget that the latest Christmas/New Year decision-making flurry followed an influx of new cases in October that numbered well above average. Perfect timing for a bumper seasonal delivery of merger decisions.

So while it is true that a bunch of fives from the UK’s merger authorities hasn’t happened that often, it is also the case that it has not been that unusual either.

No need for companies to worry unduly yet about the latest bunch of fives.

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© Adrian Payne 2015

 

 

 

Mergers at the CMA: What’s Up?

The Competition and Markets Authority completed its first six months of cases at the end of September.

Since mid-August it has been in the unusual position (as compared with its predecessor, the Competition Commission) of having no Phase 2 merger cases to consider.

As one FD put it to me last week: “What’s up at the CMA? –  I thought there has been a merger boom going on”

Well, actually, in the UK there hasn’t !…………. (as the latest official statistics show).

There are in fact several different elements to the answer, as the following picture shows.

Figure 1: UK Mergers: April 1st to September 30th 2014

141006-merger-funnel

On the face of it some of these figures appear very striking.

No wonder some competition practitioners are already talking of a significant change of approach by the CMA, compared to its predecessor agencies.

Indeed change would not be at all surprising because:

  1. New timetables and procedures are revising what is possible at Phase 1 (including pre-notification) in some cases.
  2. Putting Phase 1 and Phase 2 into a single organisation gives incentives to optimise resources across the two phases that did not exist when the OFT and Competition Commission were separate agencies.

But, not so fast….

….whatever changes do eventually emerge, there is a real danger of drawing premature conclusions.

Six months of case data is far too short a period from which to infer changes in underlying trends. And bear in mind that the number of cases involved at the lower end of the funnel is small.

Looking at the individual cases involved and comparing them with previous years, it is just as likely that the six month figures reflect the mix of cases in terms of sector, size and the pattern of competition issues raised.

With this in mind it is worth remembering that many of the parameters in the ‘funnel’ shown above can and do vary widely from year to year.

To take just one example: the following chart shows how the proportion of qualified cases (i.e. those that have met the jurisdictional criteria) found to raise competition problems at Phase 1 has varied since the Enterprise Act came into force. The latest year’s figure is in fact not much lower than for six of the previous ten years.

Figure 2: Phase 1 ‘Substantial Lessening of Competition’ findings as a proportion of qualified merger cases

141003-SLC per cent

I’ll be returning to this subject in a future article so do drop me a line if you have thoughts.

In the meantime, with eleven Phase 1 decisions due for announcement over the next six weeks, the picture could change rapidly.

Then again…..

 

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Click here for the latest UK merger control statistics.

My article on the one CMA merger reference so far is here.

My ‘A-Z of 2014 UK Merger Analysis’ presentations are taking place in January. Please get in touch if you are interested in arranging one for your firm.

 

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.

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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