Competition authorities are showing a growing interest in the use of remedies as a tool to clear complex deals. It is our expectation that this trend will continue, if not intensify in 2015.
Authorities are recognising that consolidation in certain sectors, such as telecoms, can produce significant synergies and therefore may be beneficial to customers, in terms of product innovation, service delivery and pricing. They are demonstrating a clear willingness to avoid prohibiting such transactions if workable solutions can be found.
However, authorities are increasingly demanding more extensive and complex remedy packages. Moreover, when testing whether these remedy packages will deliver the desired outcomes, authorities are being more thorough than ever before, and we expect this intensive scrutiny to continue.
Lengthy and complex remedy negotiations are becoming increasingly common. Advance preparation of remedy proposals, together with evidence that demonstrates long-term viability, is essential to facilitating this process and achieving the desired outcome
In-depth scrutiny over the effectiveness of divestment remedies
Negotiations over scope and implementation of divestment remedies can be lengthy and complex, with in-depth scrutiny and market testing often taking several months.
Firstly, a simple divestment of assets, such as key personnel, knowhow and facilities is often no longer sufficient. Obligations may be imposed to transfer contractual relationships, to provide the acquirer with sufficient financial means or to maintain commercial relations with the divested business for several years. In the Syniverse/Mach merger, for example, the European Commission requested a divestment of infrastructure which could allow a purchaser to offer a comprehensive set of services.
Long-term viability and an increased use of 'upfront buyers’
Secondly, merging parties are often required to provide satisfactory evidence as to the long-term viability of the proposed acquirer. If, for example, a new entrant is proposed as a buyer of assets, it should be undisputable that this entrant is here to stay. A remedy package will only be approved if the authorities are comfortable that the acquirer will be, and/or will continue to be, able sufficiently to constrain the market behaviour of the merged entity.
’Upfront buyers’ are used to manage risks about the long-term viability of the divestment package or the availability of suitable buyers. Whereas this additional obligation on parties was previously considered exceptional, we now see authorities using this tool more frequently.
A requirement to identify an upfront buyer will have significant consequences for the timing of a transaction, since divestment of the business (or at least the signing of legally binding agreements) will usually be a prerequisite for clearance and/or for the closing of the transaction. Agreeing such a sale upfront inevitably requires access to the business and, therefore, co-operation with the target to ensure proper due diligence and valuations can be carried out.
Authorities are also showing more creativity and a growing acceptance of less orthodox remedies. In Liberty Global/Ziggo, for instance, extensive behavioural commitments not to hinder so-called ’over-the-top’ distribution of television content and to maintain interconnection capacity were accepted. In Hutchison 3G/Telefonica Ireland the Commission demanded the merging mobile network operator (MNO) to divest 30 per cent of its network capacity in terms of bandwidth to enable the short-term entry or expansion of one or several mobile virtual network operators (MVNOs), which could compete with the merged entity. On top of that, to ensure the viability of the market entrants, the MNO was also obliged to provide a dedicated ‘pipe’ to the MVNO entrants from the merged entity's network for voice and data traffic.
MOFCOM, the Chinese merger control authority, has exercised its powers in even more unusual ways. They have continued to experiment with unique ‘hold separate’ remedies on buyers, which although allowing a transaction to proceed, require the management and operation of the target (or parts of it) to be kept completely separate from the acquiring company for an uncertain period of time (Samsung/Seagate, Western Digital/HGST, Gavilon/Marubeni and MediaTek/MStar).
In China, MOFCOM’s technical expertise has become significantly more sophisticated. The agency is increasingly confident in tackling complex competition issues raised by global transactions, and in particular is willing to respond to those situations with unorthodox and innovative remedies
Some of these remedies have global implications for merging parties, and have been imposed over and above divestment remedies already ordered by other national authorities. They can have profound effects on deal rationale and synergies and must be carefully considered.
In another high-profile case (Microsoft/Nokia) MOFCOM has taken the unusual step of imposing remedies on a seller’s post-transaction behaviour, where it was concerned that retention by the seller of certain intellectual property rights following the sale of the operating business might create scope for patent abuse. Both types of remedies demonstrate a desire by MOFCOM to find a way for international transactions to proceed, while nevertheless addressing China-specific concerns about such deals.
A lengthy negotiation
In the negotiation process on remedy packages, authorities are demonstrating an appetite to dive into the details of the remedies offered with an unprecedented degree of granularity. Parties should expect several rounds of negotiations on the exact wording of the remedy package and, before approval, remedy packages are extensively tested in the market.
Once the remedy package has been approved, parties will then have to closely co-operate with authorities on the actual drafting of agreements that are concluded pursuant to remedies offered. An ‘off-the-shelf’ SPA will often not suffice.
A combination of all of these factors significantly impacts the duration of remedy negotiations, putting pressure on timeframes to which authorities are bound. Attempts to ‘stop-the-clock’, often by mutual agreement with the parties, should therefore be anticipated in deal timetables.
Authorities around the world put much more emphasis than in the past on the long-term viability and efficacy of merger remedies to ensure benefits are delivered to customers in consolidating markets. However, this focus is coupled with a growing acceptance of more novel remedy designs, which demands more creative thinking but should be welcomed by merging parties
Looking ahead to 2015
This intensified scrutiny of remedy packages may appear as an increased burden on notifying parties, since much more upfront planning is required:
- if a divestment remedy is anticipated, parties must consider the availability of acceptable potential buyers very early on in the process;
- if more unusual remedies (such as behavioural commitments) are anticipated, parties should consider involving experts at an early stage to ensure the evidence is available to demonstrate the viability of the remedies. Such advance planning could significantly speed up discussions with authorities;
- since there is less certainty on the timing of the merger approval process, committing to a contractual long-stop-date should be carefully considered.
The increased focus of sophisticated remedy design may, however, also have a significant upside. If parties:
- take the time to engage with authorities, and co-operate with them to remove any doubts as regards potential competition concerns; and
- are willing to offer sufficient and detailed remedies,
the prospects of getting the green light for mergers in concentrated markets that still bring significant cost synergies may have increased.