Competition authorities take tougher stance on merger control

The joint statement by the UK Competition and Markets Authority (CMA), the Australian Competition and Consumer Commission (ACCC) and Germany’s Bundeskartellamt was prompted by a “marked increase” in the number of merger reviews in each country which involve “dynamic and fast-paced” markets, such as technology, the authorities said.

The three authorities emphasise the importance of effective, rigorous merger control to ensure good outcomes for consumers and the economy. Their statement focuses on three core areas: economic impact of the Covid-19 pandemic; difficulty in predicting future competitive effects of mergers; and a strong preference for structural remedies to preserve competition in problematic transactions.

While acknowledging that weakened economic conditions following the Covid-19 pandemic could conceivably "lead to an increase in valid failing firm claims", the agencies stress the need to focus on the “long-term consequences” of potential mergers, and that the pandemic “is not a reason to lower the standard for accepting" such failing firm claims. The agencies will not base their assessments "on speculation or unfounded claims as to the impact of the pandemic".

The agencies also note that forward-looking assessment of merger control is inherently uncertain, particularly in complex, dynamic and fast-changing markets, such as the digital economy. Such assessment is rendered more challenging because merging parties are incentivised to overstate efficiency-enhancing benefits of mergers and downplay negative competitive effects, while third parties may be reluctant or less able to articulate or evidence potentially adverse consequences of a transaction. Yet the structural changes effected by mergers, if not identified and sufficiently addressed during the merger review process, can result in long-lasting erosion of competition.

The agencies are particularly concerned that digital mergers, such as 'killer acquisitions' that eliminate technology start-ups which could otherwise grow to become formidable competitors, may tip the market in favour of an established big tech firm and entrench its market position over the long-term. This in turn may reduce competition, adversely impact innovation and service quality, increase prices, and lead to consumer harm.

Consequently, the authorities warn that they are much more likely to block problematic mergers, or impose structural remedies – such as requiring merging companies to make divestments – as a condition for clearance, than to impose more complex behavioural remedies. Behavioural remedies are less likely to preserve competition, particularly in dynamic and fast-paced markets, and can often be circumvented. To be most effective, behavioural remedies must be carefully crafted to address the specific characteristics of the merging businesses and markets impacted by the transaction, and often require ongoing compliance monitoring which can place a burden on competition authorities' resources.

CMA chief executive Andrea Coscelli said: “The economic evidence consistently shows that competition is vital for innovation, productivity and sustainable long-term growth and jobs”.

“It’s important that we continue to thoroughly examine mergers on behalf of business and consumers – especially in dynamic markets like digital – and take strong action where needed,” he said.

Bundeskartellamt president Andreas Mundt said that the authority was currently seeing “particularly strong market concentration” among digital businesses.

“Stringent merger control is therefore indispensable,” he said.

“Structural remedies are clearly preferable since they permanently safeguard the competitive framework. There are good reasons why under German merger control it is not possible to impose conditions that subject the behaviour of the undertakings involved to continuous control. Abuse proceedings are difficult, lengthy, involve many economic and legal issues when it comes to Big Tech, and are merely aimed at a company’s specific conduct. If we do not rigorously apply merger control and prohibit anti-competitive mergers, the post-merger road that we subsequently have to take is a very difficult one,” he said.

The joint statement is aimed at businesses and their advisers, courts and governments, and is designed to highlight the competition authorities’ “common understanding” on the need for rigorous and effective merger controls.

Competition law expert Hans Jürgen Meyer-Lindemann of Pinsent Masons, the law firm behind Out-Law, said: “It is not surprising to see the Bundeskartellamt participate in the joint statement, given its track record of rigorous merger control and strong focus on the digital sector. Indeed, Germany was the first EU member state to amend its merger control regime in 2017 by factoring deal value into merger notification thresholds, enabling the FCO to better target ‘killer acquisitions’.”

“Further, the Bundeskartellamt takes a more hard-line approach in problematic mergers because, as noted by the Bundeskartellamt’s president, it is not possible in Germany to clear mergers with behavioural remedies – only structural remedies may be accepted,” he said.

Competition law expert Alan Davis of Pinsent Masons said: "The joint statement is consistent with the CMA's recent decisional practice and an increasingly robust approach to merger enforcement, particularly in dynamic and fast-paced markets such as the technology sector. The CMA has been largely sceptical of 'failing firm' arguments relating to economic impact of the Covid-19 pandemic, and has long held a strong preference for structural over behavioural remedies in conditional merger clearances."

Davis said the joint statement "sends a clear signal that the competition authorities, faced with uncertainty about potential competitive effects of a merger, are not predisposed toward merger clearance, but instead are prepared to err on the side of caution, either by imposing structural remedies or prohibiting a transaction altogether”.

“Businesses contemplating M&A deals involving digital or other dynamic and fast-paced markets in the UK, Germany, or Australia, or seeking to mount 'failing firm' arguments in those jurisdictions, need to be mindful of the authorities' scepticism and tailor their approach accordingly," he said.

The statement adds to a growing number of public pronouncements on the potential for anti-competitive behaviour in the digital sphere. In January, a new competition law entered into force in Germany which gives the Federal Cartel Office extra powers to conduct investigations into digital platforms. It also increased domestic turnover merger notification thresholds; following which German merger notifications in Q1 declined by 12% compared to Q1 in 2020, enabling the Bundeskartellamt to focus on more substantively important cases.

In the UK, the CMA has established a dedicated digital markets unit, and sits on a cross-agency digital regulation cooperation forum with regulators including the Information Commissioner’s Office and Financial Conduct Authority.

While the European Commission did not join the statement, it is separately focussing on digital mergers through its proposed Digital Markets Act. The Commission has also recently published guidance on how EU member states can refer mergers for Commission review (8-page / 283KB PDF) under Article 22 of the EU Merger Regulation, even when their own national merger control laws are not triggered by the transaction. The new EU guidance is intended to screen transactions that may involve 'killer acquisitions' particularly in dynamic and innovation-focused markets such as digital, pharmaceutical, life sciences, and certain industrial sectors. 

The new EU guidance has raised some concerns that it erodes legal certainty for merging parties.

Davis said: “Following an Article 22 referral, a transaction could be called in for review by the Commission even if the referring member states have no jurisdiction themselves to investigate the transaction.” The Commission is also prepared to accept a referral six months after a transaction has been implemented, or even later in certain circumstances.

“The first case in which the Commission has applied the new approach under the guidance is already the subject of a legal challenge before the EU General Court. Illumina is seeking to annul the Commission's review of its proposed acquisition of Grail, following an Article 22 referral by six EEA countries. The outcome of the appeal could impact on the Commission's new approach and how it tackles a perceived enforcement gap: where acquisitions of nascent but potentially significant competitors are not otherwise caught by EU or national merger control regimes,” Davis said.