Over the past year, the Competition and Markets Authority (‘CMA’) has become increasingly interventionist when it comes to UK merger control. This is expected to continue into 2020, particularly as the CMA gears up for Brexit. After the UK leaves the EU, the CMA will be able to review large mergers that would have otherwise been reviewed only by the European Commission, and will undoubtedly want its position as a national regulator to be taken seriously in the run-up to this.
This growing scrutiny means an increasingly unpredictable and costly UK merger process, which can significantly affect deal timing, value and outcomes. Businesses involved in M&A activity will need to adapt their approach to the following challenges:
1/ The CMA is reviewing mergers that it would not have looked at previously: The CMA is looking at deals even where the parties have limited activities in the UK. This is particularly true when incumbents are buying entrants. The CMA also investigates shareholdings in rivals.
Action: Consider whether the CMA would be interested in your deal, even if possible grounds for competition concerns are not obvious or minimal.
2/ The CMA is exploring more innovative concerns: Novel issues could include looking at the impact of combining the parties’ data sets, or identifying concerns by taking a very narrow view of the relevant market. These concerns are often wide-ranging and can involve a greater degree of speculation about future market developments. Where the CMA previously may have given parties the benefit of the doubt, businesses will now face greater interrogation, particularly in relation to deal valuation and rationale. The extensive information and document requests that go hand in hand with this approach will add to the burden on businesses.
Action: Prepare to respond to resource-intensive requests and focus these efforts to efficiently rebut concerns.
3/ It is becoming more difficult to resolve CMA concerns: If a novel concern is identified, it will be more challenging for businesses to find a solution that is acceptable to the CMA. This added difficulty is reflected in the sharp increase in effective CMA prohibitions 1 (from 0-2 cases per year between 2015 and 2018 to 6 cases in 2019). Even if an issue is eventually resolved, it will likely take longer to do so.
Action: Ensure pre-deal valuations and risk assessments include the broad range of potential concessions that may be required. If concerns are identified, discuss possible solutions with the CMA early to maximise chances of getting them comfortable with the proposals.
4/ The CMA is putting more weight on internal documents: The CMA can often interpret these in a narrow way that supports its concerns with the merger. Certain documents, when taken out of context, could be taken as evidence that the merger will undermine competition.
Action: Proactively provide the context behind internal documents to help avoid these being misconstrued.
5/ The CMA is getting tougher on pre-clearance conduct: The CMA is getting stricter when it comes to keeping businesses separate prior to its approval of the merger. Even minor lapses or mistakes are being pursued and can result in large fines, including in cases where the CMA does not ultimately find any competition concerns.
Action: As part of pre-deal planning, conduct a comprehensive review of how the businesses will need to interact between completion and clearance. Discuss these with the CMA as early as possible to maximise chances of agreeing exceptions.
6/ Exits for successful start-ups are becoming more difficult: Increasing focus on national security rules will limit certain types of purchasers, particularly where assets are considered strategic. This can extend beyond traditional categories such as defence and infrastructure: having a lot of personal data on UK consumers could be sufficient to trigger national security concerns. Combined with the CMA’s increasingly sceptical approach to incumbents buying entrants, start-ups may not have the range of trade or foreign buyers they would have had previously.
Action: Prepare for challenges about the buyer’s identity and alternative exit scenarios, particularly where the deal involves sensitive assets.
As obtaining UK merger clearance becomes more challenging for businesses, it is more important than ever to have the right strategy in place from the outset. Taking account of these key changes when preparing for merger approval will help businesses successfully navigate the UK process.
Fingleton has deep expertise in UK merger control. We advise at all stages of the process. Early advice is generally the most effective as problems identified later in the process are difficult to rectify.
- Cases where the CMA issued a prohibition decision, the deal was cancelled post-Issues Statement, or the remedies effectively amount to prohibition