The ripple effect of Covid-19: what it means for UK merger control

This post looks at the possible impact of the Covid-19 crisis on the UK merger process, and merger outcomes more generally.

In response to the crisis, the UK Competition and Markets Authority (CMA) quickly implemented new measures such as remote working, limiting non-essential travel and ceasing all face-to-face meetings. It is prioritising statutory deadlines¹ but is extending these where possible.

In addition to these publicly announced measures, there are a number of other potential changes to UK merger procedure:

• Increased review times: It is possible merger reviews will be delayed due to both CMA staff capacity, and the difficulty in gathering customer and competitor information from third parties at this time. I understand the CMA is already asking parties to delay filings, and it may extend the pre-notification period or even seek to formally ‘stop the clock’ by asking parties not to respond to RFIs in certain situations.
• More targeted information requests: The CMA may rethink its approach to seeking information from businesses. In order to reduce any delays the CMA might be amenable to more targeted information requests and/or to making more use of technology in its reviews.
• Reduction in submissions: The CMA could ask parties to decrease the volume and length of submissions they make during the merger process.
• Increased intervention on public interest grounds: Public interest intervention notices could be used for mergers involving medical supply companies, food distribution/retail companies, or other sectors/industries that have a heightened national importance during or following the Covid-19 crisis.²

The CMA may be inclined to be suspicious of merger notifications filed during the crisis when information gathering is so difficult, and the CMA is under-capacity. It will be important to articulate why a merger was filed during this time. In ongoing merger determinations, advisors, businesses, and the CMA may need to consider how key market features have changed as a result of the crisis.

Substantive changes

The impact of Covid-19 has already had a significant impact on many sectors including retail, airlines, hotels and flatshares, financial and professional services, private hospitals and pharmaceutical companies. There has also been significant, albeit temporary, changes to consumer demand. Some of these may have lasting implications. All these changes could impact merger analysis:

Changing arguments

• Changes to the target firm’s position: If the target firm is or is likely to come under significant financial pressure — reducing its ability to remain commercially viable and to compete in the market — then this may reduce the likelihood that the merger will raise competition concerns. The CMA recently provisionally cleared Amazon/Deliveroo on this basis. This will be influenced by whether the impact of the crisis on the target firm’s position is likely to be short term.
• Changes to the structure of the market or to available capacity: Where firms go out of business, making markets more concentrated, then merger control could become stricter. Mergers could also be impacted in the short term if future consolidation — via firms going out of business — is considered likely. Alternatively, it is possible that the crisis could reduce capacity constraints in markets where demand has fallen, which could limit the effect of a merger on competition in these markets.³
• Shifts in demand: Many businesses — such as high street fashion — have seen a very significant drop in demand, effectively putting the whole sector on pause. This could increase the time it takes for the impact of the merger to be realised. This could, in turn, reduce the impact of the merger in markets where entry or expansion is likely in the future and potential competition concerns arising from the merger are mainly short-term in nature.
• Importance of out of market constraints/substitutes: If surges in demand for alternative or substitute products as a result of the crisis increases the significance of out-of-market constraints this may have an impact on merger analysis. For example, it is possible that online services may compete more vigorously with standard services if consumers become more used to these services following the crisis. This could reduce the impact of mergers in more traditional segments of these affected markets. However, this will depend on how permanent and significant these changes in demand are likely to be. For mergers currently under review, arguments of this type may be challenging, as forecasting future impacts of an unprecedented change in demand is no easy task. Longer term, the impact of these shifts in demand may change merger precedent in some traditional sectors.
• Increased entry and exit: Changes to the parties’ business models introduced in response to the crisis could increase the likelihood the merger will raise a concern. This might be particularly relevant for mergers where potential competition was being examined by the CMA before the crisis, and where the crisis accelerates the parties activities in each other’s market.

Changing Priorities

• Focus on resilience: It is possible that the CMA may see potential future volatility as a reason to adopt a tighter approach to market structure, especially in markets with high entry barriers. The CMA may place weight on keeping markets less concentrated so that competition is more resilient to future supply and demand shocks.⁴
• Increased uncertainty: Both during and after the crisis, the CMA will have difficulty in gathering information from third parties. In addition, the unprecedented volatility in revenues, market shares, and customer demand may make merger analysis more difficult. This increased uncertainty might lead to more skepticism about deals.
• Merger specific benefits: It is possible that certain mergers will help address issues caused by the pandemic such as shortages in medicine, medical equipment or food supplies. If this is the case, then the CMA is highly likely to take these benefits into account in its assessment, and may even prioritise the speed of the merger review.

Impact on remedies

The current environment could make divestiture remedies difficult to execute as it may not be possible to find a buyer in the current climate. This is particularly likely to be the case for mergers in sectors which are hit hardest by the Covid-19 outbreak such as the retail sector. Even where a sale is possible, businesses may be forced to:

• Sell at extremely low valuations because of uncertainty about the future value/performance of the target, and/or because buyers are cash-strapped, or
• Sell the business to a non-optimal purchaser such as a competitor, or an opportunistic buyer with limited experience operating in the market, which may defeat the purpose of the divestiture in the first place.

The CMA may also be less willing to accept behavioural remedies as part of the package due to problems with monitoring them during this time.

The impact of the crisis on merger control is complex and will need to be carefully considered by companies, advisors as well as the CMA. Changes to how businesses and consumers behave could mean merger precedent is not as good a guide as it once was. This complicates pre-deal risk assessments, and it might also discourage transactions that would be good for business, consumers and society as a whole.

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1/ The CMA working arrangements are set out here.

2/ Sections 422 and 581 of the Enterprise Act 2002 have not been tested for these purposes. The suggested approach might require a broad interpretation of ‘public security’.

3/ This is only likely to apply to mergers in markets where capacity constraints were a significant factor before the crisis.

4/ This is consistent with comments made in a by CMA CEO Andrea Coscelli on 2 March 2020 in which he talked about past events that caused markets, such as audit, to become undesirably concentrated.

Originally published at https://fingleton.com.