The potential effect of a merger or other M&A transaction on innovation is not a new issue. However, it is highly topical and must form part of the analysis of deals in relevant industries (life sciences, agrochemicals, high technology and others).

In particular, in the EU, recent cases and discussion go beyond the traditional analysis of whether a transaction will impact potential competition (looking at innovation in terms of pipeline products) to considering a non-product-specific analysis of “innovation competition.”

A recent example of this came in the European Commission’s (EC) decision to clear, under the EU merger control rules but subject to conditions to deal with particular concerns, the merger between Dow and DuPont. One of the EC’s concerns was that the merger would have reduced future innovation in the agro-chemical industry. This was due to the fact that there are only five companies (including Dow and DuPont) that can carry out the necessary research and development from start to finish to bring new products to market on a global scale.

Also, according to the EC, both companies have a number of similar projects under way to develop new products which could ultimately compete head-to-head. The EC took the view that, after the merger, the companies would have wanted to pull the plug on some of these projects. More broadly, they would have incentives to reduce their effort to develop new products.

The parties therefore agreed to sell to a third party, as a condition of clearance, a number of new products that DuPont is developing, and its worldwide research and development organisation for pesticides.