Tag Archives: Phase 2

Twenty Two Too

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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:

Which of these themes is most relevant to your merger in 2023?

An Unusual Call Of Duty?

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Last week the CMA announced that it has provisionally found so-called ‘vertical’ competition problems with the Microsoft/Activision deal, centring on the popular game ‘Call of Duty’.

A vertical problem is one that results from of the coming together – or greater coming together – of different levels in a supply chain, rather than a combination at the same level.

In the past few days there has been a lot of commentary on last week’s announcement, some of it suggesting that this case is somehow unique or unusual.

So – How unusual is this outcome?

As always, it depends how you measure it. But here are a couple of thoughts………

1……………..

This case is one of 14 where the Phase 1 investigation identified vertical competition problems sufficient to justify reference to an in-depth Phase 2 investigation.

To put this is context, there have been around 90 completed CMA Phase 2 investigations to date.

Five of the previous thirteen survived the CMA process.

This is a very similar survival rate to other Phase 2 cases

2………….

In my assessment, the Microsoft/Activision CMA Phase 2 investigation is one of eight to focus primarily or exclusively on vertical matters.

If the CMA decided to prohibit the current transaction it would mean that three of the eight did not survive the CMA process.

If, instead, the CMA accepted a remedy to the competition problems identified, this would the first among these eight cases.

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There may well be other ways of looking at the question of how distinctive this case is.

Do comment below or drop me a line if you have other perspectives.

This post builds on data from a briefing on this case held in the first week of the year which also looked at the detail of the Phase 2 process and the significance of the extension to the Phase 2 timetable.

The Great Bake … Off

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Cérélia/Jus-Rol

On January 20th the CMA announced its first merger prohibition of the new year by concluding that merger between Cérélia andJus-Rol is likely to reduce competition substantially and that Jus-Rol needs to be sold to an independent buyer.

It is unusual to see a case in the food manufacturing sector referred to a Phase 2 inquiry. In fact it’s only the second time for the CMA, out of 29 cases to date.

And this is the first to be prohibited.

According to the CMA, Jus-Rol is by far the largest supplier of branded ready-to-bake products in the UK, while Cérélia is the largest supplier of own-label ready-to-bake products, making these items on behalf of some of the nation’s largest grocery retailers.

Key to the CMA’s Phase 2 conclusion were the following findings:

  • the merger brings together the 2 leading suppliers in the market by a considerable margin – ready-to-bake items supplied by Cérélia and Jus-Rol account for nearly two-thirds of all such products sold to grocery retailers in the UK.
  • Jus-Rol items compete with supermarkets’ own-label products supplied by Cérélia for the same space on many supermarket shelves.
  • grocery customers regard the companies’ products to be important alternatives to one another – particularly because there are few credible alternative suppliers of either branded or own-label products.
  • the merging businesses face limited competition, with all other suppliers being far smaller and many of them lacking the capabilities held by Cérélia and Jus-Rol.

So is this food sector prohibition as unusual as it might seem?

Not if you look more widely than this particular sector.

According to my analysis there have been 10 previous deals with the same pattern of key evidence, across all sectors. Only two have raised no significant competition problems and none have so far survived the Phase 2 process.

The link to the CMA’s Phase 2 report is here.

More Problematic Than Not

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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.

How The CMA Merger Numbers Are Made Up

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There’s been a big overall decline in the percentage of CMA cases cleared unconditionally (at Phase 1 or Phase 2)* in recent years.

It’s been much commented on and interpreted.

But it’s not quite what it seems when you look behind the headline numbers.There are very different patterns when looked at by case type.

In fact, arithmetically at least, the aggregate change is accounted for by just one type of case.

Here’s the overall pattern for 2019 and 2020 cases, with the size of the different elements proportional to the number of outcomes in each category – where

  • green = unconditional clearance at Phase 1 or 2
  • yellow = remedies at Phase 1 or 2
  • red = prohibited or abandoned …….

Source: Adrian Payne analysis of published CMA decisions

It illustrates how important it can be to look behind the aggregate numbers when considering past or potential case outcomes and when interpreting ‘trends’ in the aggregrate numbers.

In one of my next Merger Insight briefings I’m going to be discussing the reasons behind these patterns and what they mean for companies planning mergers.

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(* Percentage of publically-investigated cases. Takes no account of cases the CMA chooses not to investigate publically, on which no meaningful data are published.)

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CMA Phase 2 Decisions: The Long And Short Of It

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There is a lot of interest at the moment as to what governs extension of the CMA Phase 2 timetable and whether extension has been a ‘good or bad sign’ for merging parties.

In my latest Merger Insight briefing yesterday I therefore looked at the Phase 2 cases to date for which the CMA extended the timetable for review – usually by up to eight weeks.

Below is a key chart that informed the discussion.

From left to right it ranks the Phase 2 final outcomes in ascending order of the duration of the Phase 2 process.

Each case is coloured as follows:

  • Black – merger abandoned
  • Green – unconditional clearance
  • Orange – clearance with remedies
  • Red – prohibition

The chart rather explains itself….

 

About a third of Phase 2 investigations to date have been extended. With one or two exceptions these are concentrated in the right-hand third of the chart.

It’s immediately apparent therefore that the proportion of cases unconditionally cleared has been very low for extended cases – less than half that for cases that ran to the usual timetable.

However it’s not all bad news for parties involved in extended cases. Extension can lead the CMA to become comfortable with a relaxation of remedies proposed at the provisional findings stage and enable late-emerging evidence to be explored in full.

Even so – the fact remains that only just over one in five extended cases have ended up being cleared.

Or – to put it another way – over two-thirds of mergers that have been prohibited or remedied at Phase 2 have involved extended investigations.

The other talking point yesterday was the proportion mergers that parties have decided to abandon. But that’s a story for another day….

For details of my free Merger Insight briefings please click here.

 

 

More Mergers Going Nowhere?

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There’s been a lot of attention recently on a flurry of merger transactions that have been abandoned at Phase 2 of the Competition and Market Authority (CMA) merger control process.

Some say that this is because the CMA has got tougher on mergers, especially under the leadership of Andrew Tyrie.

Overall, however, the proportion of investigated transactions that do not proceed – either because they are abandoned by the parties or prohibited by the CMA – has been almost identical under the CMA to the proportion under its predecessor body, the Competition Commission (CC).

However, the CMA allows certain deals to proceed without formal investigation that would once have been reviewed under its predecessor agencies.

If the figures were adjusted to allow like-for-like comparison it is arguable that a lower proportion of deals are abandoned or prohibited following CMA scrutiny than was previously the case.

Nevertheless, it is also the case that the percentage of investigated deals abandoned or prohibited has been at record high levels over the past couple of years, contrasting with very low levels in the CMA’s first four years.

The key question is the extent to which recent figures represent normal annual variation, a sign of tougher CMA policy or a sign that companies have attempted riskier transactions.

My own analysis suggests that the profile of cases has played an important part.

In particular, compared to previous years, there have been notable increases in the percentage of cases involving:

  • high shares of supply – and/or
  • few remaining competitors – and/or
  • close competition between the merging parties.

In 2019, for example, nearly 10% of cases involved all three features – much higher than previously.

At the same time a sharp fall in the proportion of cases involving assets with potential for divestment to solve competition problems fed directly through to:

  • more reference cases
  • more Phase 2 prohibitions
  • more companies deciding to abandon their merger.

Looking ahead, a big question is whether the fall out from the Covid-19 crisis will further embolden firms to undertake deals with significant levels of merger control risk.

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What proportion of deals investigated by the CMA has been prohibited or abandoned?Click below on the figure you think is closest to the answer:

 

More Merger Remedies Than Ever

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The Competition and Markets Authority has just completed its fourth year.

One particular development stands out, looking at the pattern of outcomes among the 250+ CMA merger decisions since 2014….

More Phase 1 remedies: Fewer Phase 2 investigations

On average, the Competition and Markets Authority (CMA) has accepted between 3 and 4 more remedy outcomes each year at Phase 1 than the Office of Fair Trading (OFT) which had responsibility for Phase 1 mergers until 2014.

At first glance that increase doesn’t look significant…. until one considers that:

  • the average number of Phase 1 remedies under the OFT was only 5 in the first place and that
  • the CMA has been formally considering 30% fewer cases than did the OFT.

The number of references to Phase 2 is on average just over 3 lower each year than it was before the CMA took over responsibility for Phase 2 mergers from the Competition Commission.

Pre-CMA the average annual number of references was 11.

While there is not be a direct one-for-one relationship between the increased average number of remedies and the lower average number of references, a  link would not be too surprising given the CMA’s stated policy of resolving more cases at Phase 1.

Overall, the percentage of problematic Phase 1 cases resolved through Phase 1 remedies, rather than reference to Phase 2, has been more that a third higher in the CMA’s first four years than for any four-year period under the OFT.

What has been the change in the pattern of outcomes at Phase 2?

The reduction in the average number of Phase 2 cases under the CMA reflects, in order of scale of change:

  • fewer mergers being abandoned on reference to Phase 2
  • fewer Phase 2 clearances
  • the near elimination of Phase 2 prohibitions and
  • a lower number of Phase 2 remedy outcomes.

This is consistent with the notion that, if there is some link between more Phase 1 remedies and fewer references to Phase 2, it is the more ‘marginal’ and more ‘fragile’ that may have been most affected.

If so it means that some cases that might have been cleared at Phase 2 are undergoing merger remedies at Phase 1.

This may be one reason why the proportion of cases being unconditionally cleared at Phase 1 or at Phase 2 is sharply lower under the CMA than it was under the OFT. (Another is the CMA’s greater selectivity in which cases formally to investigate.)

How Are Companies Responding?

Judging from conversations during some of my recent merger briefing sessions ,some companies considering or implementing mergers are already paying much closer attention to the potential for a Phase 1 remedy outcome than used to be the case.

This includes thinking harder about the more expansive types of Phase 1 remedy that the CMA has shown itself prepared to consider and accept.

For some it also means attending more to how they shape and scope their transactions and how they measure the degree of merger control risk they are taking on.

There are plenty of lessons merging companies can learn from the CMA’s 34 Phase 1 remedy cases so far – the subject of one of my recent briefings.

In recent months the rate of remedied cases has come back somewhat from its peak. Looking ahead, it will be interesting to see, therefore, whether we have already reached ‘peak Phase 1 remedy’.

 

 

 

 

2015/16: A Record Year For UK Merger Control

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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

2014 in Numbers : An Overview of UK Merger Control

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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

6   –  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