In March 2021, the UK competition regulator, the Competition and Markets Authority (CMA), published its revised merger assessment guidelines (the "Revised Guidelines"),1 which are the framework the CMA uses to assess mergers. It is the first update in more than a decade. The Revised Guidelines come at a time when the CMA is taking over review of large UK mergers that were examined, until 31 December 2020, by the European Commission under the EU's "one stop shop" principle.

The Revised Guidelines are both forward thinking and indicative of a more interventionist approach. The CMA seeks to address global trending issues, such as (i) the growth of digital markets, (ii) associated non-price competition analysis, (iii) a desire for environmental sustainability as well as (iv) simplifying the exiting firm defence. These are welcome developments. Conversely, the Revised Guidelines will not allay fears that the CMA is becoming more interventionist, and it remains one of the more burdensome filing jurisdictions. The Revised Guidelines (i) replace a "safe harbour" for mergers resulting in less than 40% market share, and five to four mergers with a "red flag" for four to three mergers (where one party is the market leader), (ii) put the burden on the parties to disprove closeness of competition, (iii) downplay the possibility for parties to rely on buyer power as a countervailing argument, (iv) diminish the role of market definition and (v) miss an opportunity to raise the threshold for referral to in-depth investigations.

Context:

The CMA's Revised Guidelines are the first update, in more than ten (10) years, to how the CMA substantively assesses mergers.2 Their adoption follows shortly after Brexit taking full effect; prior to which, the CMA had been playing a secondary role to the European Commission on larger cross-border mergers.3

At the same time, the CMA has been perceived as increasingly interventionist 4 (e.g., resulting from the CMA prohibitions of a vertical merger (ICE/Trayport (2016)) and a US-centric merger with limited obvious UK nexus (Sabre/Farelogix (2019)).5

While the Revised Guidelines do not bring a radical overhaul of general theories of harm or economic principles, there are a number of notable changes -- both forward thinking, on the one hand, and suggestive of a stricter regime on the other hand.

A. Forward thinking and streamlining revisions:

Opportunity to argue green benefits: The Revised Guidelines support the CMA's 2020 Strategic Plan for a "low carbon economy"6 by providing that where a merger might otherwise cause competition concerns, those might be outweighed by certain customer benefits such as "environmental sustainability" and "supporting the transition to a low carbon economy". This is a welcome development that allows parties to argue that, for example, a merger between two car companies that could lead to a short-term price increase could now be compensated by a faster rollout of greener technology. Yet, questions remain, e.g., not only on the relative weight and, therefore, the counterbalancing strength that will be applied to green factors, but also on whether they could become relevant for remedy design, too.

Clear elucidation of non-price competition factors: The Revised Guidelines recognise that firms may also compete on non-price factors. The listed examples of non-price factors primarily focus on features of digital markets, and, indeed, the CMA states that its focus on non-price factors may be more in those markets where "customers do not pay a monetary price for consuming digital services or content, where firms compete mainly by innovating, or where prices are regulated". 7 Despite the digital focus, the inclusion of non-price factors generally now also invites arguments on non-price factors in other markets.

Streamlined exiting firm defence: The Revised Guidelines simplify the so-called exiting firm defence. Under the 2010 Guidelines, the test included three limbs: (i) whether the firm would have exited (through failure or otherwise) and, if so, (ii) whether there would have been an alternative purchaser for the firm or its assets to the acquirer under consideration, and (iii) what would have happened to the sales of the firm in the event of its exit. In practice, demonstrating these criteria proved difficult-- diminishing the importance of this defence. It is, therefore, a welcome development that the CMA abolished the requirement to show what would have happened to the sales.8

Regrettably, the Revised Guidelines no longer contain guidance on how the CMA assesses exiting firm arguments in the context of targets that have been part of a larger group, or subsidiaries, or divisions. Factors referenced under the 2010 Guidelines - including whether any losses were caused by intra-group charges, or whether allocation of costs in a business reflects actual operating cash flow - may still be relied upon given the Revised Guidelines now remaining silent on the issue.

B. A potentially more interventionist regime:

The new Revised Guidelines provide for specific examples that would "more likely" result in a finding of competition concerns (regrettably, the CMA has resisted providing "safe harbours" where it would not find concerns).9 Those examples include: (i) 4-to-3 mergers: a merger involving the market leader and the number of significant competitors is reduced from four to three; (ii) innovation mergers: where innovation is a key aspect of competition and the merger threatens the level/pace of innovation; or (iii) nascent markets: where the merger "prevents competition emerging in other markets or services, even if these markets or services are new or nascent at the time".10

Safe harbour replaced by red flag: While each transaction will be assessed on a case-by-case basis, the CMA's examples indicate: (i) a more interventionist approach and (ii) a focus on the digital space by emphasizing the need to protect innovation and nascent markets. Under the 2010 Guidance competition concerns were considered unlikely for five-to-four mergers, but the five-to-four "safe harbour" has now been replaced by a four-to-three "red flag" (where one party is the market leader).

Role of market definition reduced: The CMA has curtailed its market definition guidance -- scrapping the reference to established economic tools used in its assessment,11 and signalling a departure from the current EU methodology.12 Going forward, the CMA will place more emphasis on the competitive assessments and dynamics between the parties. This shift is likely to result in vague market definitions and, consequently, risks creating further uncertainty for merging parties.

Closeness of competition dependent on overall market: Closeness of competition is an important concept in assessing markets where competitors sell slightly different products (termed "differentiated markets"). The CMA takes a more expansive approach now by assessing the parties not just against each other but relative to the remaining players in the market. It notes that in a market with few players ("few" is not specified) "any two would normally be sufficiently close competitors to raise concerns". It is then on the parties to disprove that assumption -- and the smaller the number of players remaining, then the higher the burden of proof.13

Missed opportunity to raise threshold to open Phase 2 investigations: The CMA's assessment involves comparing the merger to the situation that would have occurred but for the merger, which is known as the "counterfactual". The CMA clarifies that where there are multiple possible realistic counterfactuals, the CMA will chose the worst case scenario, i.e., the one where the parties are strongest and their competitors weakest, at Phase 1, and only at Phase 2 will the CMA select the counterfactual that is most likely to occur. Such an approach potentially alleviates the CMA's onus at Phase 1. If so, further significant economic burden is put on merging parties for transactions that would have otherwise not been referred to an in-depth investigation. Such burden is often evidenced by parties outright abandoning a deal after the opening of a Phase 2.14 Given that the CMA's Phase 1 review period (around 8 weeks, plus an unspecified pre-notification period duration that in some cases runs several months) is already one of the longest worldwide, an increased referral rate is concerning.15

Less significance of buyer power arguments: Regrettably, the Revised Guidelines no longer discuss buyer power as a countervailing factor. Such an approach ignores market realities, especially in sectors characterized with a highly concentrated customer base (e.g., in the OEM automobile sector). Instead, the CMA position appears to be that buyer power is unlikely to outweigh competition concerns that would otherwise arise (unless it results in sponsoring a new entrant to enter the market). Such an approach suggests a departure not only from the 2010 Guidelines, but also from how other antitrust agencies currently consider countervailing buyer power. It remains to be seen how an alignment can be achieved across different regulators in cross-border mergers.

Focus on digital mergers: Where the 2010 Guidelines touched on analysis of "two-sided markets"16 only in a cursory manner, the Revised Guidelines have significantly expanded their discussion of this issue in view of the rise of digital platforms. 17 Furthermore, the CMA notes potential competition (i.e. with a prospective entrant) is a particular feature of digital markets and it suggests a broader approach to the general notion of potential competition. In fact, the CMA will examine (i) the loss of future competition that the potential entrant would have provided had it remained independent and (ii) the loss of dynamic competition: where firms compete with each other in a continual dynamic process (e.g., making ongoing efforts to enter new spaces / innovation investments). The CMA now considers that it is sufficient for it to find that a potential entrant would have entered the space -- without needing to conclude on the precise products it would launch. Similarly, on dynamic competition, the CMA states that the loss of a dynamic competitor can result in competition concerns even if the CMA considers that actual entry is unlikely or will be unsuccessful or, even if in the short term there remain constraints.

Conclusion

In this area, the Revised Guidelines contribute to the CMA's reputation as an innovative regulator. The Revised Guidelines aim to address a number of global trending issues, such as (i) the growth of digital markets, (ii) associated non-price competition, (iii) a desire for environmental sustainability as well as (iv) simplifying the exiting firm defence. These are welcome developments.

Conversely, the Revised Guidelines regrettably (i) replace a "safe harbour" for mergers resulting in less than 40% market share, and five to four mergers with a "red flag" for four to three mergers (where one party is the market leader), (ii) put the burden on the parties to disprove closeness of competition, (iii) downplay the possibility for parties to rely on buyer power as a countervailing argument, (iv) diminish the role of market definition, and (v) miss an opportunity to raise the threshold for referral to in-depth investigations. The UK regime already has amongst the longest review periods, and the Revised Guidelines will not put at ease those concerned that the CMA has become increasingly interventionist.