The CMA recently announced their concern that a merger between two large toy suppliers may result in a “substantial lessening of competition”. They have threatened a full scale investigation unless the buyer comes up with ways to address the concerns.
VTech Holdings Limited (VTech) and LeapFrog Enterprises Inc (LeapFrog) are two of the three largest suppliers of toddler electronic learning toys and children’s laptops/tablets in the UK. The companies entered into a deal in April (as reported here and here) which saw VTech purchase LeapFrog for a reported $72 million. Crucially, completion of the deal was not conditional on obtaining competition law clearance from the Competition and Markets Authority (“CMA”). The CMA quickly “called in” the merger for investigation. The CMA also imposed an initial enforcement (or “hold separate”) order on the companies. This prevents them from combining their operations until the investigation is complete. (You can see more detail on the CMA’s investigation on their dedicated case page.)
The CMA’s initial inquiries suggest that the companies are close competitors, particularly in the supply of electronic reading systems for children. The CMA is therefore concerned that the merger could lead to increased prices, reduced quality and limited choice for consumers. VTech, as the purchaser, was given until last Friday, 25 August to propose undertakings to settle the CMA’s concerns. Unless these satisfy the CMA, the merger will be subjected to a detailed “Phase 2” investigation.
This case highlights a number of the legal risks arising from M&A activity. However, by following a few key tips, avoiding merger control pitfalls can be as easy as A-B-C:
A is for AWARENESS – KNOW THE THRESHOLDS
The CMA can review a deal if it meets either of two tests:
- The turnover test: This test is met where the target’s turnover is more than £70 million.
- Combined market share: The CMA also has jurisdiction where the combined business’s market share will be at least 25%. In concentrated markets, like the electronic toy market, this can catch deals even if they are well below the turnover threshold.
Bear in mind that deals involving large, international businesses may trigger the EU merger control regime. This is based purely on the turnover of the parties. If the parties (including co-investors and group companies) have a global turnover of more than €2.5 biliion the EU regime may apply.
B is for BE PROACTIVE
Limit the risks by taking a proactive approach. Make your deal conditional on CMA clearance and notify the authorities. It might seem like a good idea to keep quiet and hope that the CMA doesn’t notice your deal. However, the CMA has teams dedicated to monitoring markets for qualifying deals: this is one game of hide and seek you’re not likely to win.
C is for CALCULATE – BUDGET FOR TIME AND EXPENSE
Once a deal is called in, the CMA has 40 working days to decide whether issues arise from the deal. However, their clock doesn’t start to run until they hav all of the information it needs from the parties. “Pre-notification” discussions with the CMA, before the clock starts, may need at least 4 weeks. The CMA is then likely to use the full 40 days to complete its initial investigation.
If the initial investigation raises concerns, like in this case, the CMA can take up to 25 weeks for its detailed “Phase 2” analysis. Should the VTech/LeapFrog merger be submitted to a Phase 2 investigation, the two companies could be “held separate” and operationally distinct for a total of 12 months from completion of the deal.
The hold separate order is likely to result in significant expense for the buyer, who will incur costs in operating the businesses separately without benefiting from its purchase. Mergers examined by the CMA are also subject to a fee of between £40,000 and £160,000, regardless of the outcome.