A new approach to mergers in 2021
Last year, the Competition and Markets Authority (CMA) broke the UK record for the most deals prohibited in a single year. There was also a sharp increase in the number of appeals to the Competition Appeal Tribunal. This reflects the CMA’s tougher approach to mergers: there is now a higher likelihood that the CMA opens an in-depth (Phase 2) review and a greater chance it remedies or prohibits the deal when it does than in previous years. This tougher approach also increases costs for businesses involved in M&A activity. In-depth reviews can take up to 12 months and distract management from other priorities. If the deal gets prohibited, it can significantly set back future plans.
Businesses involved in M&A activity will need to adapt their approach.
1/ The CMA is prohibiting more deals:
The CMA did not clear any mergers that were referred for a Phase 2 investigation in 2020 - demonstrating the low probability of success at this stage. 10 deals were prohibited or abandoned in 2020 compared to 6 in 2019, and 1 in 2018. (1)
Businesses can minimise the risk of prohibition by working with their advisors to identify all possible CMA concerns as early as possible in the process and proactively addressing these with the CMA.
For deals where there is uncertainty over whether the CMA would open an investigation, there might be merit in engaging with the CMA’s mergers intelligence committee.(2) This can reduce the likelihood of borderline cases being reviewed in more detail by the CMA.
2/ The CMA is relying on internal documents and third-party statements:
Merging parties’ internal documentation (such as emails, internal presentations, marketing material, minutes of board meetings etc.) about the merger or market dynamics can carry more weight than arguments and other evidence submitted during the merger process. In other words, what you say to the CMA may not be believed if your documentation tells a different story. This is particularly relevant for mergers in dynamic markets, where the CMA is increasingly focusing on future or potential competition. In doing so, the CMA is likely to rely more heavily on forward-looking strategy documents and on statements from third-parties than it does in other mergers in more traditional markets.
Businesses that proactively provide the context behind internal documentation can help avoid them being misconstrued by the CMA. This applies to both documentation required to accompany the initial merger notification, as well as those likely to be requested during the course of the CMA’s investigation.
3/ The CMA is becoming the policeman of the world:
The UK is fast becoming the stumbling block for international deals. This can even happen when the merging businesses have limited activity in the UK, and the deal is cleared in their core market.
This is likely to be magnified by Brexit as the UK will be reviewing large mergers that would have otherwise been solely reviewed - in Europe - by the European Commission. The CMA has estimated that this will result in a 40-50% increase in the number of deals it reviews. (3)
Businesses should pay particular attention to UK aspects in their deals, and factor these into pre-deal risk assessments.
4/ Covid-19 will make merger reviews more challenging:
In the short term, businesses should expect the CMA to be sceptical about any claims regarding the future impact of Covid-19 on competition. Longer-term, previous merger decisions will be a less useful guide if Covid-19 permanently changes how businesses and consumers behave.
Businesses should factor the potential impact of Covid-19 into pre-deal risk assessments and prepare for information requests on internal Covid-19 business forecasts.
5/ Exits for successful start-up investors are becoming more challenging:
Increasing focus on national security rules will create an additional barrier for getting deals done in the UK. This will mainly apply where assets are considered strategically important to the UK government. In a maximalist approach to the proposed National Security and Investments Bill, national security may be defined broadly—or even interpreted as a “national interest” test. Combined with the CMA’s increasingly sceptical approach both to established firms buying entrants and to smaller disruptive players combining to increase their ability to grow, start-ups may not have the range of trade or foreign buyers they would have had previously.
Businesses should prepare for challenges about buyer identity and alternative exit scenarios, particularly where the deal involves sensitive assets.
Given the CMA’s tougher approach to mergers, investments, combinations, and founder exits are now more difficult to achieve - even if they have clear benefits. Businesses that think strategically about regulatory obstacles early on will fare better in this more challenging environment.
(1) Cases where the CMA issued a prohibition decision, the deal was cancelled post-opening of a Phase 2 investigation, or the remedies effectively amount to prohibition.
(2) The CMA’s mergers intelligence committee monitors unnotified mergers that the CMA might be interested in reviewing.
(3) See Andrea Coscelli’s speech on the CMA’s role as the UK exits the European Union, February 4, 2017.