By Alberto Prandini, a Principal at Fingleton.
The Competition and Markets Authority (CMA) is currently considering changes to its Merger Assessment Guidelines (MAGs) around how it assesses mergers in digital markets.
The MAGs set out the CMA substantive approach to merger inquiries and allow prospective parties and their advisers to anticipate and understand the regulatory risk the deal may face. Having a set of guidelines that both sides can refer to helps the CMA to stay focused on the merits rather than the politics of a case.
The MAGs were last revised in 2010 and in general have aged well. They have remained a relevant reference tool while allowing for the CMA approach to be refined and evolve over time — at times via additional ad hoc guidance such as the Retail Mergers Commentary (for example, around the assessment of competition in local catchment areas).
Many argue that digital markets are different. These differences led the Furman Review to recommend that “the CMA should conduct a full review and update of its MAGs, as soon as time and resources allow […] to provide greater clarity about how it will deal with the particular issues arising in digital markets” (§3.74).
There is much to be welcomed in the CMA’s review of the MAGs. For starters, it paves the way for the CMA to restore the level of regulatory certainty that investors and practitioners have become accustomed to with UK merger control. As we discuss further below, the CMA’s recent merger decisions in technology markets (PayPal/iZettle, Thermo Fisher Scientific /Roper Technologies, Experian/Clearscore, JustEat/Hungryhouse) have already begun to incorporate several elements the Furman review identified as relevant to digital mergers (in some cases very much at the surprise of the parties and their advisors).
There are, however, some aspects that merit closer scrutiny.
What actually is a digital merger?
The demarcation between ‘digital’ and ‘non-digital’ mergers is somewhat artificial and a clear-cut dividing line risks being arbitrarily drawn. There is likely to be a continuum in the nature of mergers cases and recent inquiries in highly innovative sectors which fall short of multi-sided platform ‘digital mergers’ still raised many of the key issues the CMA is exploring. For example, the role of innovation and potential competition, the evidentiary weight of internal documents and deal evaluation are equally relevant to deals outside the digital (or technology) space.
Pending a fuller revision of the MAGs, the CMA should be wary of creating two parallel decisional practices, as this would generate legal uncertainty and potentially discourage beneficial deals.
Dynamic counterfactuals do not happen in a vacuum
As the prospect of being acquired is a motivating factor for many startups, the analysis of dynamic counterfactuals should include the possibility that an alternative acquisition of the target by another player, with the combined entity expanding its range of services and/or its user base. Third parties should expect the CMA to scrutinise in greater detail their future plans, for example by requesting a wide set of internal documents and probing them extensively at oral hearings.
Internal documents, or lack thereof
Internal documents often provide a wealth of evidence relevant to a merger inquiry such as the deal rationale and how closely merger parties consider they compete with one another. However, the CMA might misunderstand internal documents it reviews if it does not understand how the companies that have produced them operate. This is especially true in technology and digital mergers for several reasons:
- Innovative firms in dynamic markets, especially fast-growing start ups, may have less formal decision making processes and do not consistently produce internal documents. The CMA should provide guidance about the evidential weight it is prepared to afford to verbal submissions at the oral hearing (as substitute for non-existing written documents), in so far as consistent with the other evidence it has gathered.
- Innovative business units (or local branches within multinational companies) compete for allocation of staff, R&D and other capital resources from the parent company, so the authors may be petitioning an internal stakeholder rather than expressing objective views on the firm’s strategy.
- When companies have multi-layered decision making, drafts versions and junior documents can only attract low evidential weight, especially if they were not submitted to or agreed by the board.
High transaction value, low evidentiary weight
Unusually high multiples in the valuation of the target over its market price may be an indicator of competitive concerns, but that is a far cry from arguing that a high valuation is on its own evidence that the merger will be anti-competitive. In digital markets especially, there may be significant synergies from combining two services, from adding superior technology to a company with a strong brand and established user base, or from combining the resources of a larger firm with the disruptive technology of a smaller one.
If the CMA assumes that high multiples are strong evidence that a deal is anti-competitive, deals that are in fact good for competition and consumers may be discouraged.
In PayPal/iZettle the CMA accepted the parties’ argument that a valuation almost twice as high as iZettle’s abortive IPO value was justified by commercial valuation and synergies rather than prospects of anti-competitive or “killer” behaviour after the merger.
Conclusions
In reviewing aspects of the MAGs, the CMA is moving forward with the reset of merger reviews in digital markets called for by the Furman Review. This is a step in the right direction.
But this reset will only be complete when the CMA carries out a fuller review of the MAGs, and if the government enacts changes to legislation also recommended by the Furman Review.
The MAGs will play an important role in setting out how the CMA will operationalise this new framework, while a body of case precedent is established over time. It is hard to understate how valuable the guidance they provide to businesses contemplating often speculative deals.
The sooner this process is complete, the better for UK businesses and investors.
