The willingness of competition authorities to intervene in proposed mergers across the world remained undiminished in 2018, and there is every reason to expect that antitrust risks will stay high on the agenda of dealmakers this year.
Enforcement activity by antitrust regulators around the world remained intense in 2018, according to our latest survey of trends in merger control in 26 jurisdictions around the world.
Although the boom in M&A activity we saw last year, particularly in the first six months, has shown signs of peaking, there is no indication that merger control enforcement will slacken in 2019.
That's all the more true given that the debate over the future of merger control shows signs of becoming increasingly political, at a time of considerable turbulence in world affairs.
It is significant that our latest survey coincides with the European Commission's recent decision to block the Siemens/Alstom railway merger, a move that has provoked a furious reaction from politicians in both France and Germany. They have called for the EU's merger control regime to be reformed to better take into account industrial policy considerations and allow for the creation of "EU champions", European companies with the muscle to compete with industrial giants emerging in other markets, notably China.
It also comes at a time when a growing number of jurisdictions, particularly in Europe, are strengthening their scrutiny of inbound investment on national interest grounds, as we discuss in more detail in our article on foreign direct investment screening.
The bigger uncertainty is Brexit and the impact it will have both on M&A activity and on antitrust and enforcement policy.
Against that background, it seems fair to conclude that antitrust and other regulatory risks are likely to remain very high on the agenda of dealmakers in the months ahead.
"Over 29 deals with a value of at least EUR46.3bn were prohibited or abandoned as a result of antitrust intervention."
Record levels of activity
2018 saw a record number of merger notifications as global M&A activity continued its record-breaking run.
Our survey, focusing particularly on the U.S., EU and China, found that more than 29 deals worth at least EUR46.3bn were frustrated during the year by antitrust interventions. Seven deals were formally blocked, while a further 22 were abandoned after the merging parties learned that authorities had grounds for concern.
While the overall numbers are lower than in 2017 when 38 deals worth EUR130bn were frustrated they are on a par with the two preceding years, perhaps suggesting that the enforcement landscape is stabilising after an intense period of deal activity.
However, the figures hide some interesting nuances. For example, although the number of deals formally blocked fell from 22 to seven, abandoned transactions rose by 38% to 22 in 2018.
That might indicate that companies have become less willing to fight for clearance. But our analysis suggests another factor may also be at play timing. Indeed, we saw parties walk away from transactions in Australia, China and the EU specifically because the merger review process was taking longer than expected. It's an issue that regulators do seem increasingly aware of, with a number acknowledging that they need to streamline their processes.
The pattern of enforcement activity varied from region to region. Enforcement action declined in the U.S., despite transaction volumes remaining at a similar level. In the EU there were no prohibitions in 2018, but that has changed dramatically in the first three months of this year, with two deals being blocked the Wieland/Aurubis copper merger and, far more controversially, the proposed Siemens/Alstom merger.
In a rare prohibition, the UK's Competition and Markets Authority (CMA) called in the merger between Vanilla Group and Washstation five months after it had completed, underlining the risks, in a voluntary merger regime, of not notifying deals that may raise antitrust concerns. Post-Brexit, the CMA is likely to become more active as it gains the ability to review complex international deals in parallel with the European Commission.
Remedial action remains high
Deals where antitrust authorities accepted remedies to address antitrust concerns declined slightly in 2018, with some 139 deals given conditional clearance, compared with 155 the year before. The figure, however, remains high.
Remedies remain a key issue, with many regulators reviewing whether, once implemented, they have achieved the `right' result. In addition, we are seeing increased collaboration between regulators to agree effective joint approaches on large cross-border transactions.
High overall levels of antitrust intervention, coupled with a willingness of companies to engage in more strategic deals, are likely to have contributed to rising execution risk for dealmakers. Separate analysis we have conducted of the private M&A market in 2018 shows an increase in the number of deals subject to antitrust or regulatory conditions. This is discussed in more detail in our global trends in private M&A article.
Concerns raised over tech deals
Antitrust intervention focused on three main sectors in particular in 2018, according to our survey industrial and manufacturing, energy and natural resources, and transport and infrastructure. In all three, the level of intervention was higher than would be suggested by their share of total global M&A.
In strict contrast, digital and other TMT deals saw a much lower rate of intervention compared with their share of global transactions.
This fits with a number of concerns raised about the effectiveness of merger enforcement in this very active part of the market. Are deals going undetected? Also, do regulators have the right tools to take appropriate action, particularly in so-called "killer acquisitions", where a large player quickly swallows up smaller companies that might have the potential, one day, to emerge as competitors?
Elsewhere, academic studies continued to raise other questions about antitrust enforcement in 2018, not least whether under-enforcement is contributing to growing levels of concentration in certain sectors and in certain markets, with such concentration increasingly being linked with inequality and market power.
Common ownership where investors have holdings in a number of companies in the same sector has also come under the spotlight, with commentators asking whether this is hampering competition and, if so, how antitrust authorities should respond.
Fines and information requests continue to rise
Authorities continue to strictly enforce procedural merger control rules on such issues as "gun-jumping" and filing incorrect information, often backed up by significant fines.
We saw a record number of fines in 2018, with authorities imposing some EUR148.4m of fines in 46 cases. Although that represents a slight decrease in the value of penalties compared with 2017, the volume of fines was a sharp 30% higher. We are already seeing this trend continue in 2019.
Authorities are increasingly using the review of internal documents to try to gauge the strategic intentions of merging parties and the likely impact of the transaction on competition.
In recent years requests for such information have rocketed, with parties being asked to submit tens, and even hundreds, of thousands of documents. For example, the European Commission reviewed some 2.7m documents relating to the Bayer/Monsanto merger. Clearly requests of this type have the potential to increase the length and complexity of merger reviews.
These documents can also have a real impact on the outcome of investigations. In the Dow/DuPont case, for example, document review led the Commission to conclude that innovation would be stifled by the tie-up and merging companies were forced to divest DuPont's entire global R&D business.
New faces, new challenges
Who runs regulatory bodies, and how they are structured, remains a key factor behind merger control trends.
Appointments made by the Trump administration to the Federal Trade Commission, following earlier changes in personnel at the Department of Justice, may have contributed to a decrease in U.S. merger enforcement activity. Will we see more evidence of this going forward?
China, meanwhile, has combined three regulatory bodies into one to create the new State Administration for Market Regulation (SAMR). While there has been no tangible impact from this restructuring so far, it is definitely something to watch in 2019.
Changes are also afoot in the European Commission, with Margrethe Vestager soon to step down as Competition Commissioner. It remains to be seen if she will choose to cement her legacy by introducing key policy changes before her term ends.
Add the uncertainties likely to arise as the post-Brexit world takes shape, and it is clear the merger control landscape will continue to evolve in 2019, and that dealmakers could face a series of significant new challenges.
"The landscape will evolve in 2019 and dealmakers could face significant new challenges."