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.

 

More Merger Remedies Than Ever

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’.