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The CMA At 10 – Merger Numbers Continue To Fall
Tag Archives: Phase 1
What’s Behind The Major CMA Shift From Phase 1 Remedies To Phase 2 References?
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Christmas Promise For Merging Firms
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It’s not often that the CMA comes bearing Christmas news of great promise to dozens of future merging companies. But this Christmas could be the one.
I’m talking here about the CMA’s ‘de minimis exception’ which has previously allowed the CMA to clear problematic mergers that it deems too small to merit the costs of a Phase 2 investigation (as long as clear-cut Phase 1 remedies are not available to deal with the competition problems identified).
Glad Tidings Of Joy
The CMA‘s proposal to double – to £30 million – the maximum size of market that it may exempt from further investigation or intervention (under its so-called ‘de minimis exception’) heralds glad tidings to many companies contemplating future mergers.
The change looks set to bring the ‘de minimis exception’ within reach of dozens of merging companies over coming years. The CMA doesn’t publically put a number on it but figures compiled for my ‘CMA At 500’ project suggest no mere Christmas bauble when compared to existing case numbers.
Even under the previous thresholds there have been 42 public cases to date in which parties mounted ‘de minimis’ arguments – nearly 10% of all cases to date.
In addition, the figures suggest that a large number have been screened out at briefing paper stage or gone ahead without any CMA scrutiny.
By looking at the market size profile across cases the CMA will know just how big a change the doubling of the market size threshold could make to these numbers.
And this doesn’t allow for the fact that the new proposals also bring hopeful news to many firms in small-to-medium-sized markets who have previously screened out deals because of perceived merger control risk.
For the many of you who have considered ‘de minimis’ policy as part of your risk assessment it may soon be time to have another look at the deals you’ve so far rejected or put on the back burner.
A Heavenly Song
The proposals also sweep away the long-established cost-benefit framework for assessing whether the harm from a ‘small market’ merger exceeds the CMA‘s costs of a Phase 2 in-depth investigation – a key part of previous ‘de minimis’ policy.
This change is connected to the doubling of the threshold to include medium-sized markets, as the threshold will now be at a level where potential cost to consumers of problematic mergers in markets under the threshold will routinely exceed the costs of further CMA investigation or intervention – and by orders of magnitude.
The change also means that merging companies will save time and costs through shorter investigations and more cases able to proceed without public scrutiny.
Ding Dong Merrily On HIgh
And better still…..
In future the ‘de minimis’ exception may be considered even where clear-cut Phase 1 remedies are available that would avoid the costs of a Phase 2 reference – again, consistent with dropping the cost-benefit framework.
Given the proportion of cases that result in Phase 1 remedies that looks like a another significant benefit to merging parties and another bold change to the rules on a narrow cost-benefit view.
Again, analysis of past ‘de minimis’ candidates that have resulted in Phase 1 remedies indicates the potential scale of the change.
Beware Scrooge
Before merging companies get too excited, however, there is one big uncertainty to gauge about how the new ‘de minimis’ system will operate.
In future the CMA will be able to refuse to apply the ‘de minimis exception’, where the markets involved are deemed “priority” and/or “important” for various reasons.
Looking at the 40+ past cases considered for de minimis (in public investigations) there could be good news for many merging parties if the future profile of cases resembles the past.
But much depends on how the CMA applies the ‘important’/’priority’ criteria in practice. For that reason self-assessment of merger control risk may become more difficult for a time – until sufficient case numbers allow us to see how the CMA applies these criteria that are currently rather vague.
There is another criterion too worth bearing in mind. This relates to mergers involving local markets. The CMA will continue to have regard to these in assessing whether to apply the ‘de minimis exception’, in case allowing a problematic deal through opens competition risks in other local markets. The good news for merging firms is that, on past form, only a handful of de minimis candidate cases have involved local markets.
Joy To The World
In the hopeful spirit of the season – and leaving these important uncertainties aside – further Christmas generosity to merging firms at hand.
The new arrangements contain none of the simple and cost-free measures that could have been proposed to restrict the scope for the more concerning deals (from a competition view) to go through unscathed – as well as clearing the way for future increases in the market size threshold.
In the words of the song, for merging firms
“It’s Beginning To Look Like Christmas”.
How Much Tougher On Mergers Has The CMA Become?
As discussed in an earlier post, there is a widespread view that the CMA has taken a much harsher view of mergers over the past few years.
There are many different ways of trying to measure this.
Here’s one based on my ‘CMA At 500’ analysis……
The CMA has just published it 500th merger decision. What is the picture if one compares the first 250 with the second 250?
Three striking aspects to consider
1. Number of mergers not cleared unconditionally at Phase 1 –
- Up 29 ……………(from 67)
2. Number of mergers referred for an in-depth (Phase 2) investigation –
- Up 26…………….(from 33)
3. Number of these Phase 2 mergers not surviving Phase 2 –
- Up 22…………….(from 10)
These rises look dramatic in the context of 250 cases.
On further examination they show:
- A big swing in Phase 1 cases towards those meriting remedy or a reference to Phase 2
- A big swing towards reference, rather than remedy at Phase 1
- A big swing from clearance to termination at Phase 2
But what do these movements actually mean?
To assume that changes such as these are wholly down to a tougher CMA stance would be a very big assumption – and one with the potential to deter more deals than it should or encourage firms to misdirect efforts in making their case.
How much, for example, might instead reflect change in
- the composition of cases coming forward, and/or
- the composition of the cases that the CMA chooses to investigate, and/or
- the behaviour of merging parties, rather than harsher decisions by the CMA?
And to what extent are the changes evenly spread, rather than concentrated in particular parts of the case portfolio or particular periods of time (e.g. the Covid years)?
And maybe the answers vary for each of the three ‘swing’ movements listed above.
Searching For Answers
The only way to approach these questions is to delve below the headline statistics published by the CMA and look at the features of the cases themselves.
In my ‘CMA At 500’ research I have used my assessment of the features of all 500 cases to examine these questions, including through the type of analysis discussed in this blog from 2019.
Click here if you’d like me to say more about this topic in future posts.
Do get in touch if you’d like to know more about my ‘CMA At 500’ project
What’s Wrong With October?
The CMA opened its Phase 1 investigation into the Vodaphone/Hutchinson merger today.
The parties will be hoping to defy the track record of CMA merger cases opened in October:
- Phase 1 clearance rate only just above 50%
- Phase 1 remedy rate = 50% above average
- Phase 1 reference rate = 50% above average
- Phase 2 clearance rate = 50% of average.
Ranking within months of the year – respectively:
- 2nd worst
- Worst (unless one sees remedy as the best possible outcome!)
- 2nd worst
- 3rd worst
What’s wrong with October?
I have my theory. What’s yours?
The CMA At 500 – What’s Trending – And What’s Not
In June the CMA published its 500th merger decision.
There’s little doubt that the profile of UK merger decisions has developed a lot since the CMA began. No surprise there, as a great deal can happen over 9 years.
It seems that many readers (especially advisers) are sympathetic to the first of the somewhat tongue-in-cheek narratives I set out in my previous blog, although with a more measured overarching headline, along the lines that the CMA has become much stricter on mergers.
But what lies below that sort of headline?
What exactly does it mean? And for whom?
And what call to action should it have for merging parties, investors and others?
The reason these questions are important is revealed when one looks below the aggregated statistics that the CMA publishes by using data published in case decisions.
In future blogs I plan to say more on all of this, based on recent research I have been doing looking at the CMA’s first 500 merger cases – ‘The CMA At 500’.
Comparing the first 250 and the second 250 brings out many unexpected similarities and differences.
The ‘stricter enforcement’ narrative, it turns out, is much more nuanced that it might first appear from the headline numbers and applies unevenly across different types of case.
Many companies relying on the simple headline ‘stricter trend’ in thinking about merger control risk will be well wide of the mark. The average is different from the typical.
If interested, do watch out for my blogs on ‘The CMA At 500’ or contact me to find out more about my presentation on the research.
Twenty Two Too
Fully understanding the prospects for a UK merger control investigation – whether as an investor, a merging firm, or a merging firm’s rival – depends on how well you interpret the CMA’s stance towards mergers and over what period.
I find that the best-prepared look at the CMA’s track record in merger assessments over both the short- and the longer-term, in order to help evaluate what has changed and what is changing.
And they also recognise that developments in the UK can differ from the more global narratives that tend to dominate a lot of merger control commentary.
This is especially important for investors and companies from outside the UK.
With all that in mind, here’s a quick synopsis of key UK themes from my series of posts looking back at 2022 and putting it in the context of what came before:
- UK merger investigation numbers were near historic low levels
- Hardly any investigations involved competition problems in small markets – a big change from the CMA’s early years
- The number of Phase 1 clearances fell for the fourth successive calendar year
- Phase 1 interventions outnumbered clearances for the first time
- Remedy interventions made a big comeback – at Phase 1 and at Phase 2
- More deals survived Phase 2 than ended there – the first time this has happened since 2017.
Which of these themes is most relevant to your merger in 2023?
According To Our ForFarmers
The CMA’s write-up of its Phase 1 decision regarding the joint venture between Forfarmers and Boparan raises several important points relevant to parties assessing merger control prospects, including :
- It cannot be assumed that the CMA will use the same travel distances for catchment areas as in previous cases that the parties think are similar
- Local share of supply thresholds can form the SLC decision rule (rather than a trigger for further analysis) – even in cases where the number of local areas for consideration is small
- The level of the share of supply thresholds used to determine SLC (in this case 35% + 5%) depends on the facts of the case – for example, whether rivals have spare capacity.
The CMA identified horizontal and vertical competition concerns.
The deal has been abandoned shortly after reference to a Phase 2 investigation.
Late Exit Pass
The CMA’s recently-published Phase 1 decision on the Korean Air Lines/Asiana Airlines merger includes interesting discussion on the way in which arguments unfolded as to whether that the target would exit if the merger did not proceed.
The merging parties’ initial submission was that, in the absence of the merger, Asiana would be a substantially weaker competitor.
According to the decision write-up the parties only later argued that the criteria for the ‘exiting firm’ test are met, an argument that the CMA rejected.
In the parties’ response to the CMA’s issues letter, they indicated that they had not made this argument earlier because the CMA had indicated that it would be highly unlikely to accept such a counterfactual in Phase 1.
The CMA said that the fact that the Parties only submitted that the exiting firm test is met at a very advanced stage of the CMA’s investigation (ie in response to the issues letter) limited the CMA’s ability to conduct the evidence-gathering that would typically be required to assess whether this test is met.
This is all rather circular!
But it isn’t new.
Late and unsuccessful deployment of an exiting firm case at Phase 1 has been seen many times before.
In fact I talked about it in my very first blog – nearly ten years ago!
In a later post I’ll aim to look at some of the reasons why this scenario recurs.
In the meantime, here’s the key question that firms contemplating merger in the UK might want to ask very early on:
What can be learnt from the 48 previous CMA cases in which ‘exiting firm’ arguments have been deployed about :
prospects for success and
how best to make the argument?
More Problematic Than Not
Number Four in my look back at 2022…..
This was the year in which there were more Phase 1 merger interventions than unconditional clearances (among Phase1 decisions published during the year) – for the first time.
Despite the very low number of published Phase 1 decisions, the number of remedy decisions was well above the CMA average (10 versus 6) and the highest since 2017.
The number of reference-to-Phase-2 decisions was just above the average for previous years (11 versus 10).
Also:
Between 2017 and 2021 the number of references had been more than twice the number of remedies.
In 2022 they were roughly even.
2022 is also, therefore, the year in which Phase 1 remedies came into their own again.
Adrian Payne 