The global M&A market remained strong in 2018, with announced transaction volumes exceeding US$4 trillion. This activity is in spite of regulatory and geopolitical headwinds creating uncertainty, in particular for transformational mergers and ‘mega deals’ valued in excess of US$10 billion. The strong M&A market is expected to continue through 2019. At the same time, politicians and businesses worldwide continue to test the role of merger control in the modern economy. Competition regulators face mounting pressure for radical intervention in some concentrated sectors and questions about whether they have the right tools for the job, and even more fundamental questions about what the goal of merger control should be. These questions create uncertainty for businesses looking to engage in mergers and acquisitions by making the time frame and outcome for merger review harder to predict, making transaction planning more important than ever. We set out below just a few of the areas where there has been a meaningful press for change.
Political considerations in merger control
In 2019, competition regulators globally are facing a growing number of questions from politicians, academics, and in some cases the regulators themselves as to whether existing merger control rules are ‘fit for purpose’ and whether merger review processes should be expanded to look at a wider range of issues than the traditional consumer welfare standard that is used in the overwhelming majority of jurisdictions today. In other jurisdictions, competition regulators have been criticised for taking geopolitical considerations into account. The specific concerns raised vary by jurisdiction and by the source of the complaint, but, when taken together, the calls to dramatically change existing merger control rules create risk and uncertainty for businesses with plans for acquisitions, combinations or disposals.
In some cases, these questions have focused on whether the merger review process should move beyond its traditional focus on competition and consumer welfare to consider other social or economic issues. These may include, for example, the impact of a proposed transaction on employment, national security, the environment, the exportation of jobs and industry abroad, or data privacy. In the United States, these proposals have come from both democrats and republicans, and have in many cases fallen alongside ‘hipster antitrust’ proposals that the US agencies should revert to the historic concept of ‘big is bad’ that predated the modern consumer welfare standard. For example, in reaction to concerns voiced in the halls of Congress and among consumer advocacy groups that the US economy has become less competitive in recent decades as a result of lax antitrust enforcement and a string of judicial decisions favoring defendants, the US Federal Trade Commission (FTC) has convened a series of hearings to take stock of US antitrust laws and to assess whether the now more than 100-year-old statutes are working in the context of the modern economy or if instead they are ripe for revision. Detractors point out that the US Department of Justice (DOJ) and FTC lack the expertise and framework to consider these factors, and that they are better dealt with outside of the merger control process.
Some of the advocacy for change has come from within the merger control authorities themselves. For example, the French competition authority has advocated for legislation that would give it the power to assess transactions that do not meet the French merger control thresholds but may nevertheless have a competitive impact in France. Other regulators in Europe, including in the UK, have suggested that merger control thresholds should be modified to capture ‘killer acquisitions’ that often involve the purchase of a target with limited turnover or resources for a very high transaction value.
In the European Union (EU), the European Commission has come under intense pressure from politicians in some member states asking whether existing merger control rules have a stifling impact on EU industrial policy. In February 2019, the French and German governments issued a joint manifesto suggesting a number of changes to the existing merger control rules, including the possible introduction of a right of appeal of the Council (which is composed of ministers from each EU member state), which could override a prohibition in certain circumstances where a transaction is desirable for industrial policy reasons. Subsequently, in July, the German, French and Polish governments published a detailed set of proposals on merger reviews suggesting that the merger control guidelines be amended to allow the Commission to take into account the distortive effect on competition of companies that are controlled or heavily subsidised by foreign states, including state-owned enterprises. The proposals follow the Commission’s prohibition of the proposed combination of the mobility businesses of Siemens and Alstom, which had significant backing from the French and German governments, who saw the transaction as necessary to create a European mobility company capable of competing with China’s state-owned equivalent, CRRC. In response, Commissioner Vestager has been steadfast in arguing that DG Competition should continue to make decisions independently, arguing that Siemens and Alstom already are each global champions even absent the proposed transaction. It will be interesting to see whether any of these proposals will be picked up by the new European Commission, which is expected to take office in November 2019.
Still other jurisdictions are in the process of expanding existing merger control regimes to cover new sectors or new types of transactions, while others are introducing merger control for the first time. For example, the merger control regime in Malaysia, which historically was limited to the aviation sector, has been expanded to cover telecommunications. This move came shortly after the announced combination of the first- and second-largest mobile service providers in Malaysia, Axiata and Telenor, which otherwise would have fallen outside of the existing merger control regimes.
At the other end of the spectrum, in at least one case questions were raised about whether the competition regulator took geopolitical considerations into account in a merger control decision. In July 2018, Qualcomm abandoned its planned US$44 billion acquisition of NXP. Qualcomm had obtained eight of nine merger control approvals identified as conditions precedent for the transaction, including agreeing to remedies in the EU and South Korea to address competition concerns. However, the parties were unable to secure merger control clearance in China in advance of the long stop date set out in the transaction agreement. While the State Administration for Market Regulation (SAMR) has taken the position that it was unable to approve the transaction because the remedies offered by the parties were not sufficient, press reports suggested that the US–China trade war played a meaningful role in the process.
Of course, regardless of the outcome of the political negotiations, Brexit will have a significant impact on transactions involving the UK, whether as a result of ongoing uncertainty for parties to transactions being reviewed by the European Commission that would be notifiable to the UK if a hard Brexit occurs, or for transactions that will require a parallel UK and EU review in a post-Brexit world.
Focus on digitisation
Concerns about whether existing merger control regimes are equipped to handle the modern economy have been most pronounced in the technology sector, where concerns about use of data, e-privacy, digital taxation and platforms are central to a wider debate around the potential need to strengthen oversight by competition and other regulators. Technology is transforming the way businesses work and the products and services they offer. Many companies see M&A as the best – or at least the fastest – way to build their digital capabilities, with digital investment rising to a new high of US$258 billion in 2017 and the average digital deal value higher today than its non-digital counterpart.
So far, much of the hand wringing in this area has been theoretical, consigned to sector inquiries and market studies. For example, the UK created a Digital Competition Expert Panel to assess whether the Competition and Markets Authority (CMA) and other UK regulators have the tools to assess transactions in the digital economy. The US FTC has created a technology task force to monitor competition in technology markets, investigate any potential anticompetitive conduct in those markets, and take enforcement actions when warranted. To date, no competition authority has prohibited a transaction or required remedies solely on the basis of concerns around ‘big data’ or platform access. However, merging parties should expect more attention to this area in any transaction involving technology.
The past year has also seen a number of merger reviews where regulators have focused on the issues raised by these various studies and sector inquiries. In February 2018, Apple’s proposed acquisition of UK-based music company Shazam was referred to the European Commission following notification in Austria. The Commission opened a Phase II investigation, focused on a number of issues around whether combining Apple’s and Shazam’s data could result in vertical input foreclosure, allowing the merged company to restrict competitors’ access to Shazam’s data. Ultimately, the Commission cleared the transaction unconditionally, concluding that Apple would not be able to use Shazam’s data to foreclose competitors of Apple Music, largely based on a finding that Shazam’s data was not unique. Although the transaction was ultimately cleared without conditions, Apple/Shazam is indicative of the way in which merger control authorities may look at deals involving big data in the future.
Transactions involving the digital economy continue to raise questions around whether existing analytical frameworks have led to under-enforcement in rapidly changing industries. Competition regulators across Europe have raised concerns about killer acquisitions, which involve acquisition by a large company of a smaller target that is an important potential competitor, but has yet to fully realise or monetise its business concept. Chief Competition Economist for the European Commission, Tommaso Valletti, has suggested a radical change in approach that would reverse burden of proof for killer acquisitions, requiring ‘super large’ acquiring companies to affirmatively justify the efficiencies arising from their transaction. Valetti argued that allowing a company like Google, which already has ‘a zillion applications’, to acquire yet another application has limited social benefit, particularly where the business offering that smaller application could go on to become a major competitor to Google.
In 2019, the UK CMA is expected to publish ex-post evaluations of a number of completed mergers involving potential competitors. Similarly, the Korea Fair Trade Commission is expected to publish new guidance on its assessment of future competition. While merger control analysis is inherently prospective, an assessment of how fast-moving digital markets would have operated absent the merger is especially difficult – and especially so in these markets, many of which did not even exist 10–15 years ago.
Often, transactions that might be considered killer acquisitions fall below existing merger control thresholds because the target has limited turnover. In light of this, Germany and Austria have introduced additional merger control jurisdictional thresholds based on transaction value – and not turnover – to catch these transactions, consistent with the long-standing approach in the US. The European Commission, CMA, Japan Fair Trade Commission and Australian Competition and Consumer Commission are considering similar changes.
Innovative theories of harm
Working within the bounds of existing merger control regimes, regulators have brought aggressive enforcement actions and focused on novel theories of harm, creating uncertainty for merging parties.
For example, while competition authorities have long recognised that innovation – in addition to price and product quality – is a relevant component of competition, they have traditionally limited the analysis of the likely impact of a merger on innovation to the overlaps between the merging parties’ marketed and (late-stage) pipeline products. That is changing. Following the European Commission’s decision in Dow/Dupont, competition regulators are also considering whether a transaction might result in an overall reduction in R&D where the parties to a transaction are important competitors in the development of new and innovative products. In other cases, regulators are expanding focus to early-stage pipeline overlaps, as seen in the European Commission’s imposed remedy in J&J/Actelion. Officials at the US FTC have indicated that, where a remedy is required in a pharmaceutical merger that will result in a loss of competition between a marketed and a pipeline product, the FTC will in most cases require divestiture of the marketed product.
Competition regulators are also increasingly considering the potential impact on competition of common ownership by institutional investors in multiple players in the same industry. Critics have argued that large minority investors benefit if these companies do not compete aggressively with one another, such that these prolific ownership interests can have a stifling effect on competition. Commissioner Vestager has indicated that the EU is studying this issue, and the European Commission has considered common ownership issues as part of the analysis in a number of recent transactions, including Dow/Dupont.
Regulators are also resurrecting theories of harm that were previously considered to have fallen out of fashion. A series of recent cases in a diverse range of industries indicates that the Commission is looking at issues around conglomerate effects with renewed interest, despite having not focused on conglomerate effects since the GE/Honeywell decision in 2001. For example, the Commission articulated serious concerns and required remedies in the Microsoft/LinkedIn and Broadcom/Brocade transactions relating to conglomerate effects that could arise from combination of complementary product lines.
In China, SAMR has been consistently paying close attention to conglomerate effects of transactions. In 2018, SAMR was the only competition authority that attached conditions to its approval of Essilor/Luxottica, a transaction that was largely conglomerate in nature. UTC/Rockwell Collins is another example, where SAMR was concerned about the conglomerate effects of the transaction and imposed conduct remedies on UTC, including commitments not to engage in tying, bundling or lowering the interoperability and compatibility of certain of its products with third party products.
In the US, the DOJ unsuccessfully sought to block AT&T’s proposed acquisition of Time Warner, alleging that the transaction would result in vertical foreclosure. That case was litigated reportedly because DOJ leadership demanded – and the parties were unwilling to offer – a ‘structural’ settlement involving a divestiture of assets, despite the fact that the DOJ historically has been willing to accept behavioural commitments in vertical cases.
Procedural reforms: streamlining on the horizon?
From a more practical perspective, in the past year a number of competition regulators have acknowledged that review periods are becoming too long and the process unduly burdensome. In many cases, regulators have committed to or are considering tangible steps to streamline the process.
In the US, the DOJ and FTC have introduced a number of reforms to expedite merger reviews, including by reducing data and document requests and providing soft commitments to published time frames. The decision came in response to concerns that ‘significant’ mergers were taking 65 per cent longer to clear than they were just a few years ago. Expanding review timelines are in large part because of the increase of available documents and data, and the corresponding struggles to produce that information to the agencies. The DOJ and FTC have each released a new Model Timing Agreement and the DOJ has released a Model Voluntary Request Letter, all intended to facilitate more narrowly focused Second Request investigations and to commit the agencies to faster reviews, provided that parties are willing to provide information early and meet intermediate deadlines. The DOJ’s Model Timing Agreement limits a review to 20 custodians and 12 depositions per party in most cases, and endorses the use of technology assisted document review.
In China, SAMR has continued MOFCOM’s practice of using a simplified procedure that allows for an expedited review for cases where the combined market share of the parties to the transaction is below 15 per cent, among other criteria. Cases filed under the simplified procedure now account for approximately 80 per cent of filings in China, and more than 98 per cent of these filings are cleared within Phase I (ie, within a month from acceptance).
Notable exceptions to this trend are the European Commission and UK CMA, where review time frames for Phase II and remedies cases continue to extend, with no plans proposed to shorten the process. In the EU, in complex Phase II cases it is now routine for parties to provide a Form CO that is hundreds of pages long and includes thousands of pages of annexes, as well as hundreds of thousands of ordinary course documents. In addition, stop-the-clocks are now a matter of course in Phase II reviews, which regularly extend well beyond the 125 working day maximum review period provided for under the EU merger rules.
Merger litigation trends
Anticipating heightened litigation risk early is key in any regulatory strategy. Strategic deals are facing not only ever-closer regulatory scrutiny, but also more challenges in court.
For example, in recent years parties have become much more likely to challenge a decision to prohibit a proposed transaction. Following in the footsteps of UPS’s successful challenge in Europe of its prohibited acquisition of TNT, an appeal is pending relating to CK Hutchison’s attempted acquisition of O2 UK. Increased willingness to appeal a European Commission prohibition decision will undoubtedly impact the Commission’s merger control processes as it focuses on ensuring that any prohibition decision is unassailable.
Merger litigation is also increasing from sources other than the usual regulators. Third-party suppliers, customers and competitors are also taking an increasingly activist role towards transactions that may impact their businesses, including through litigation. For example, KPN has successfully filed suit in Europe alleging that the Commission had failed to justify its decision to clear the UPC/Ziggo transaction. In the United States, state attorneys general filed a lawsuit seeking to block the pending combination of Sprint and T-Mobile, even before the DOJ had completed its investigation of the transaction (which is pending as at the time of writing).
Expansion of foreign investment review
The impetus for change has not been limited to competition merger control regimes. While foreign investment screening is nothing new, the last year has seen rapid growth and expansion of public interest and foreign investment review processes. By the end of 2018, all of the G7 and 60 per cent of the G20 members had recently introduced, strengthened, or considered introducing or strengthening their national security regimes. In the US, the Committee on Foreign Investment in the United States (CFIUS) introduced new mandatory notification requirements for certain transactions.
While transactions linked to the defence sectors have traditionally been closely monitored and have always been likely to be subject to government review or intervention on national security grounds, the concept of national security risk is increasingly being interpreted more broadly and the types of investments that are considered to be high risk have markedly expanded in scope. Many of these changes have expanded the scope of products considered to be important to national security and focused in particular on advanced technologies. In Germany, recent foreign investment reforms identified several areas – critical infrastructure, cloud computing software and the media, to name only a few – as being especially sensitive, and in France the foreign investment regime has been expanded to cover artificial intelligence, cybersecurity, robotics, semiconductors and hosting of data. These, along with reforms in the UK (which seek to capture deals involving computing hardware or quantum technology) and Italy (which seek to cover data-related industries) will apply alongside the new EU Regulation, which provides for cooperation between member states and the Commission in screening investments involving critical infrastructure and critical technologies.
Consistent with this, the number of cases subject to foreign investment review is increasing. Whereas just under 100 deals were reviewed under the US national security regime in 2013, this number exceeded 250 cases in 2018. A similar picture emerges in Europe, where the number of reviewed filings has been increasing in Germany, France and Italy. While the vast majority of foreign investment deals are still completing, more deals are being reviewed and this is having an impact on deal timelines.
With an expansion of enforcement powers comes an expansion in enforcement activity. In August 2018, the German government was prepared to take its first ever decision to block a transaction on foreign investment grounds, prohibiting Chinese investor Yantai Taihai’s proposed purchase of a German mechanical engineering firm. The transaction was ultimately aborted just moments before the prohibition would have been issued. In the US, CFIUS blocked Broadcom’s proposed acquisition of Qualcomm in March 2018, reportedly based on concerns that the transaction would disadvantage the US in the race to create 5G technology. These actions underscore how outcomes are becoming less predictable than they were in the past.
A number of policy makers and authorities are looking hard at their regimes and practices to consider whether they remain fit for purpose in the modern economy, creating uncertainty for businesses in the merger review process. At the same time, competition authorities are scrutinising deals with increased intensity and sophistication, using their extensive investigative powers to gather vast amounts of documentary and other evidence.
Factoring these developments into early deal planning (in addition to or as part of the broader regulatory strategy planning) is essential to identifying antitrust risks and assessing and minimising their impact on timing, potential remedies, deal certainty, costs and the potential for negative publicity. This need is amplified in cross-border transactions, where multiple competition authorities may assess the transaction, many of which will seek to be equally thorough in their investigations. Parties must ensure that they are well advised, and allocated sufficient resources and personnel to allow the process to run as smoothly as possible.