A Closer Call – UK Merger Control Decisions in 2017

As 2017 draws to a close here are some of the distinctive features of this year’s merger decisions by the UK’s Competition and Markets Authority.

The picture I present is a bird’s-eye view, rather than a commentary on individual cases (which I will cover separately in my Merger 2017 A-Z briefings).

In particular, I focus on noticeable differences between this year’s cases (taken as a whole) and the overall pattern of CMA decisions across previous years, since the agency took over from its predecessor bodies in April 2014.

I focus on the 60 Phase 1 decisions in 2017 to date as there are too few Phase 2 cases to enable a meaningful comparison.

In what follows reference to ‘SLC’ cases means those Phase 1 decisions that found that the merger brings a reasonable prospect of a ‘substantial lessening of competition’.

Below I look at:

  • The pattern of cases
  • Decision outcomes
  • Theories of harm
  • Evidence
  • Key reasoning behind the decisions
  • Analysis
  • Implications for companies

Pattern of cases

  • Across the 60 Phase 1 published decisions in 2017 to date there has been a similar profile to the overall profile for previous years in terms of market concentration, though with more cases with 90%+ shares of supply
  • A much higher proportion of cases qualified for investigation under the ‘turnover test’ for jurisdiction, as opposed to the ‘share of supply’ test.

Decision outcomes

  • A much greater proportion of SLC decisions, almost wholly accounted for by….
  • A much higher proportion of cases dealt with by Phase 1 remedies – so-called ‘undertakings in lieu of reference’ to a Phase 2 investigation
  • A noticeably larger proportion of remedy findings among cases in which the parties had middle ranking shares of supply and/or modest increments to the share of supply

Theories of Harm

  • A much smaller proportion of cases in which a ‘potential competition’ theory was examined (i.e. the notion that the parties may compete in the future even if they have not to date). Previously such cases have proved untypically problematic for competition.

Evidence

  • Customer surveys and diversion evidence featured much more regularly
  • Clearance decisions relied noticeably more on third party evidence
  • Cases in which bidding analysis was key were much more frequently problematic than on average across previous years
  • A noticeably lower proportion of cases attracted complaints from rival firms

Key reasoning behind the decisions

  • ‘Closeness of competition’ between the merging parties featured prominently in a much higher proportion of cases than on average previously – to the extent that, in 2017, it was the most important of the three main reasons behind clearance decisions when taken as a whole. This was also the case for SLC decisions when taken as a whole
  • The number of rival firms remaining after the merger (another of the CMA’s three main decision reasons) was much less important in the reasoning behind SLC cases taken as a whole compared to previously, when it was the most prominent factor overall.

Analysis

  • The following topics all had a much higher profile in 2017 cases than on average previously:
    • Customer benefits through merger
    • Customer switching between rivals
    • Bidding analysis
    • Customer catchment areas
    • Customer surveys

Implications

What are the implications of the above for companies contemplating or planning a merger?

Click here for my summary assessment.

I shall be talking more about the above, as well as about the many other lessons to be learnt from individual cases within this year’s portfolio, at my customary January ‘Merger A-Z’ briefing events.

Fit for merger?

The CM140921-gymA’s long-awaited lengthy merger decision on the Pure Gym/The Gym deal has finally been published, nearly two and a half months after the decision was announced to refer it for Phase 2 investigation.

Although the deal was abandoned soon after the reference decision was made, the decision itself is one of the most interesting decisions of the year.

In terms of some of the issues raised, it reminds me very much of the OFT’s Rank/Gala casinos decision almost exactly two years ago.

It should give plenty of food for thought to merging parties in similar types of business on matters such as:

  • how important national parameters of competition can be, even when services are provided through local outlets
  • the importance of realistically assessing which types of outlet compete most strongly and how – not all gyms are created equal, it appears
  • why 80% customer catchment areas are not always the whole story in thinking about the geographic scope of competition
  • how internal documents need to provide sufficient support to the narrative parties put forward
  • why potential competition between parties (i.e. in opening new outlets near the other party) can be every bit as important as existing overlaps, especially where there is only a small number of national players
  • the role of entry analysis and customer switching analysis when competition is as much about fighting for new customers as it is about retaining existing customers and when tariff structures complicate incentives
  • what can happen when the CMA believes it may not have received all the information that is available
  • why website material can become an important source of evidence that needs to be managed well
  • the importance the CMA can attach to being able to replicate or extend results of analysis that the parties present.

Throughout the decision the CMA makes repeated reference to the commentary on retail mergers, published jointly by the former OFT and CC .

It is well worth reading and fully considering the points made in the commentary if you are contemplating a retail merger (even though I would say that having had a close hand in developing the retail commentary!).

The commentary can be found here and the decision itself is here.