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The Merger That Was Set Up To Fail
Tag Archives: remedies
Behavioural Merger Remedies: A Tale Of The Unexpected
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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”.
Looking Into Carving Out
It’s been a great pleasure working with my friends at Aldwych Partners and NOCON on a study of merger remedies that the CMA has published today, alongside its own report.
The focus has been on so-called ‘carve out’ merger remedies.
These remedies involve the divestment of a combination of assets, contracts and staff, which were not previously a self-standing business or business unit.
Overall, our case studies show that carve-out remedies carry significant risks to their
effectiveness and that risk mitigations, such as fallback remedies, may only be of limited use.
Where the CMA concludes that a carve-out remedy is likely to be effective in addressing
competition concerns, the case studies indicate that additional safeguards may be warranted to address their risks.
——-
Key learning points from our five case studies, include the following:
- Carve-out remedies that unwind or undermine economies of scale, density or scope can be expected to significantly increase the risk to the remedy’s effectiveness.
- Carve-out remedies can provide merger parties with greater opportunities to influence the content of a divestment package and, through this, limit future competition.
- Carve-out remedies that transfer customers to a new supplier will depend on
customer consent and this can pose a substantial risk to these remedies’
effectiveness. - Carve-out remedies pose additional challenges for purchasers’ ability to carry out
effective due diligence as the divestment package is not based on a pre-existing
business unit. - Merger parties may be able to weaken future competition through their influence over the choice of purchaser for a divestment package. This is a greater risk in carve-out remedies, where fewer prospective purchasers have the ability to become effective
competitors. - Fallback remedies may not significantly mitigate the risks associated with carve-out remedies given the low probability of their use and their limited assistance to
prospective purchasers in negotiating divestment packages.
Full reports here
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 Fall And Rise Of CMA Merger Remedies
I’ve talked in recent posts (here, here and here) about the noticeable rise in CMA merger remedies, both at Phase 1 and Phase 2.
Here’s the overall picture…..
For most of the CMA’s existence the number investigations each year that conclude with competition problems being dealt with by remedies has been between four and ten.
Since last summer, however, there’s been a noticeable increase beyond the normal range – especially noticeable given that the number of public merger investigations has fallen to record low levels.
The rise in remedies seems strong but the chart helps keep things in perspective.
First, the recent number of remedy outcomes, while striking, is not unprecedented.
And, second, the number of remedies has risen and fallen several times. Short-term ‘trends’ have a habit of disappearing.
Even so, an interesting question is whether we have yet to reach ‘peak remedy’ this time around, especially given the changes to the CMA’s remedy processes that I noted in a previous post.
Other interesting ‘remedy’ topics include
- how the pattern compares with that for merger prohibitions
- the extent to which the greater use of remedies deters companies from proceeding with deals that may harm competition or chills transactions that might benefit competition.
Which remedy topics would you, dear reader, like to know more about? Do feel free to leave a comment or to drop me a line.
I’m expecting to say more about merger remedies in future posts. Do feel free to click the ‘follow’ button at the side of the main blog page to subscribe to the blog series.
Notes on the above chart:
For each period of 12 months the graph tracks the number of final merger decisions in that period that have been remedy outcomes. Cases are taken into account in the 12 months in which the final decision for the case is published. A Phase 1 case therefore appears in the series when the full written decision is published, unless it is referred to Phase 2, in which case it appears in the series when the full Phase 2 decision is published or the case is abandoned by the merging parties.
UK Merger Insights: 2023 No.3
Here’s a selection of some of the best articles I have read recently that are relevant to UK merger control………….
1. Overseas Takeovers
In this article Duncan Lamont looks at whether overseas takeovers are a threat to the future of the UK stockmarket.
2. Spirited Mergers
Here’s an important sector to think about……Peter Francombe looks into the outlook for Scotch Whisky mergers in this article.
3. Private Equity Challenges
Rebecca Ward and colleagues look at the increasing challenges facing private equity investors when it comes to merger control. Here’s the link.
4. Faster CMA Merger Remedies?
In this piece Carlo Sushant Chari and Joel Bamford look at the new Phase 2 merger remedy process.
I also talked about it in this post.
5. Roll up, Roll up
Wahida Ahmed says that the CMA is giving more scrutiny to serial acquisitions, in this article.
6. How Harmful Are Killer Acquisitions?
In this paper Mark Ivaldi and colleagues consider the evidence behind theories about so-called ‘killer acquisitions’
Please click here and here for my previous selections this year.
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?
Phase 2 In 2022
In my previous posts reviewing 2022 I have focused on Phase 1 outcomes.
To complete the picture here are the key figures regarding the CMA’s completed Phase 2 merger investigations in 2022…………………..
The Most To Date…
In 2022 there were 14 final decisions, the highest under the CMA and well above the previous years’ average of 10.
But for some of the merging companies involved there was good news……
Good News?…
First, the deal survival rate (8 out of 14) was the highest since 2017, the last time that survivors outnumbered terminated deals.
Second, the number of Phase 2 remedies accepted (5) was the highest number since 2016.
As I noted in my review of Phase 1 outcomes, remedies at that phase were also at their highest since 2017, a theme I’ll return to in a forthcoming post.
And third, the five Phase 2 remedies included two of the new ‘fast-track’ Phase 2 remedies that are now potentially available to merging parties – Sika/MBCC and Carpenter/Recticel.
Quick Fix Questions…
It will be interesting to see how this new policy works in practice.
Here are two questions about it worth keeping in mind….
1.How will this new fast-track process affect the incentives of the parties to offer undertakings at Phase 1 and overall case strategy at Phase 2?
2. And how might it affect the substantive competition assessment at Phase 2 and thereby change the overall enforcement pattern at Phase 2?
If you have thoughts on this, do feel free to comment.
Click here for an interesting piece on Phase 2 fast-track cases by Sofia Platzer and colleagues
Adrian Payne 