Global economic growth is back on the agenda and companies are once again looking to position themselves for success by pursuing mergers and acquisitions. But what are the prerequisites for success in an increasingly disrupted world?
Welcome to the second White & Case merger control publication, the first edition of which was warmly received. Earlier this year, it became apparent that an update was required, not so much driven by regulatory change, but rather to take into account policy shifts.
For example, we have seen the US catch up with Europe in relation to vertical mergers, the AT&T/Time Warner review being the most prominent recent example. At the same time, the European Commission has forged ahead again with a focus on conglomerate mergers and innovation markets. Perhaps the Dow/DuPont merger has attracted the most attention, as authorities now get out their telescopes and look far into the horizon to identify anti-competitive harm. There is a sense among the Commission’s hard-liners that in the past too many mergers wriggled through without proper analysis. Our own view is that it may be legitimate to look ahead to try and identify harm (after all, that is what merger control is all about), but this long lens should not be forgotten when it comes to reviewing the synergies that a merger may create. However, Europe has set the tone, and we expect other authorities to follow.
Europe also seems to be taking the lead (and others will follow due to the prospect of publicity-garnering fines) in relation to procedural infringements. The argument for pursuing companies for inaccurate filings, for example, is that such violations call into question the very system of merger control. Be that as it may, due process needs to be followed in such cases, and this may divert valuable resources to past cases as opposed to dealing with the current case load. In other words, pursuing a few flagrant cases may be necessary to set a precedent, but they should not become regular items on the authorities’ agendas (bringing with them attendant increases in filing times, and costs). Our view is that the authorities should confine their focus to statements that would have yielded a very different outcome, not mere technical infringements.
This leads us to the subject of gun-jumping. Again, viewed from afar, this should not be a problem in no-issues filings, and authorities typically have the tools to unwind a completed merger. The maxim ‘no harm, no foul’ ought to be applied to these cases to ensure that valuable resources are not frittered away on them.
In sum, our assessment is that the global system of merger control continues to limp along. However, the costs associated with a system containing myriad controls are increasingly high. Looking ahead, we wonder whether a fundamental overhaul is needed to ensure that transactions that pose no problems are not saddled with the costs imposed by the global system. (Yes, this will mean some authorities will have to relinquish jurisdiction in certain instances, safe in the knowledge that a transaction will be reviewed elsewhere.)
But more importantly, we continue to believe that the system of mandatory pre-merger review is fundamentally flawed and that instead we should shift to a system of voluntary merger control in which only mergers that present genuine issues need to be notified. Ironically, when commentators question whether the UK system of merger control needs to change in light of Brexit, one of the things that we would not change is the voluntary nature of the system.
Axel Schulz and Matteo Giangaspero
The European Commission is increasingly concerned that market consolidation will harm innovation and has changed dramatically the way it examines the impact of mergers on innovation. Merging parties should be prepared for it.
Has the disclosure standard for companies been raised in the EU?
When it comes to mergers within the digital landscape, the greatest challenge for regulation is to strike the right balance as regards enforcement. How are EU authorities taking action and what does this mean for the innovation economy?
Strati Sakellariou-Witt and Jan Jeram
An increase in cases has been seen as a warning that the EU is ramping up its response to potential conglomerate effects. What can merging companies do to prepare for a challenge?
Rebecca Farrington, Noah A. Brumfield, Jérémie Jourdan, Veronica Pinotti, Martino Sforza, and Julio Felipe Pantazis
Regulators in key global markets are increasingly demanding remedial action to allay competitive concerns.
The European Commission is paying greater attention to investors who hold stakes in multiple companies in the same industry and considering how this concentration of influence might have an anti-competitive effect.
Patrick Sarch and Sophie Sahlin
Effective handling of antitrust issues can help businesses bolster their negotiating position—whichever side of the deal they're on.
Pontus Lindfelt and Matteo Giangaspero
The evolution in private equity means that forward-thinking firms are adding early-stage review to their merger strategy.
Dr. Tobias Heinrich, Marc Israel, Farhad Jalinous, Igor Ostapets, Veronica Pinotti, John Tivey, Jun Usami, Z. Alex Zhang, Orion Berg, and Ksenia Tyunik
A clampdown by governments across the world on potential security threats has increased the scrutiny of participants seeking clearance for cross-border mergers and acquisitions.
Whether it is 'hard' or 'soft', a UK exit from the EU will mean a very different dynamic in terms of merger control.
Toshio Dokei, Hideo Nakajima, Seiji Niwa, and Takako Onoki
In the past 18 months, Japan’s regulator has tackled Big Data, introduced greater disclosure and conducted a high-profile, parallel merger review.
Gun-jumping has been in the crosshairs of competition-law enforcers for the past decade, and recent developments show authorities across the world are taking an even tougher line.
Jérémie Jourdan and Martin Möllmann
When European Union Courts overrule European Commission decisions on transactions, finding a solution to the situation can be challenging for parties to the deal.
Partner Mark Powell discusses how the global merger control systems have evolved in the past and what lies ahead.
Partners Axel Schulz and Marc Israel talk about how merger control authorities across the world are taking a greater interest in deals that may potentially raise national security concerns.
Partners Marc Israel, Mark Powell and Axel Schulz discuss how competition regulators investigate issues relating to common ownership.
Partners Axel Schulz and Mark Powell and counsel Sophie Sahlin discuss issues relating to gun-jumping.
Partners Marc Israel and Mark Powell discuss how Brexit may impact the deal approval process, both in the UK and in the EU.
Partner Axel Schulz talks about how competition authorities are increasingly concerned about the impact of consolidation on innovation.
An increase in cases has been seen as a warning that the EU is ramping up its response to potential conglomerate effects. What can merging companies do to prepare for a challenge?
In the aftermath of the attempted merger of General Electric and Honeywell in 2001—the first time that a proposed tie-up between two US companies had been blocked solely by European regulators—merger agencies in the EU and the US have adopted a consistent approach for global mergers and cooperate closely based on best practice guidelines. However, the approach on the two sides of the Atlantic remains inconsistent when it comes to assessing mergers that could have ‘conglomerate effects'. These are transactions in which the parties are not competitors in the same product markets (there are no horizontal overlaps) and do not have a supplier-customer relationship (there are no vertical overlaps), but are active in two closely related (or neighbouring) markets. In such cases, the question is whether the merged company could leverage its power in one market over a neighbouring one, and exclude competitors in that second market.
After prohibiting the GE/Honeywell and Tetra Laval/Sidel mergers in the early 2000s, mainly due to conglomerate issues and after being overruled by the European courts, the European Commission went quiet on conglomerate effects for more than ten years. In 2008, in its guidelines on the assessment of non-horizontal mergers, it stated that: ‘Conglomerate mergers in the majority of circumstances will not lead to any competition problems’ (at 92). However, recent decisions and pending cases reveal an increased pursuit of conglomerate cases. In 2016, the Commission examined four deals in close succession for potential conglomerate effects: Dentsply/Sirona (dental equipment and consumables); Worldline/ Equens/Paysquare (payment software and relevant machines); Microsoft/ LinkedIn (computer operating systems and social networking services/app) and Broadcom/Brocade (computer processors and interface cards). While in the US most transactions received unconditional clearances, the EU requested remedies from the parties in each one of these deals.
This trend continued in 2017 with the review of Qualcomm/NXP (baseband chips and near-field communication and secure elements chips), Essilor/Luxottica (eyewear and ophthalmic lenses) and Bayer/Monsanto (pesticides and seeds), all of which were subject to an in-depth investigation in the EU (varying from six to nine months), in addition to a (presumably) long pre-notification phase. By contrast, the Qualcomm/NXP deal was cleared in one month by the US authorities, and although the review of the Essilor/Luxottica transaction took longer, it primarily focused on raising rivals’ costs and not bundling concerns.
The main concern in conglomerates cases is whether the merged company will have the ability and incentive to foreclose rivals either by: a) tying products technically and degrading interoperability between the merged entity's products and competing products in favour of the merged entity's own downstream product; or b) bundling products commercially.
With the exception of Essilor/Luxottica and Bayer/Monsanto, in all cases examined and cleared by the EU, remedies were requested to address the conglomerate concerns (see panel opposite). These were mostly behavioural remedies—in the form of assurances that the parties will not eliminate competition—as opposed to structural remedies, which are preferred in cases of horizontal effects.
While Commissioner Vestager maintains that the conglomerate cases just happened to appear at the same time, many observers believe that the increased pursuit of such cases reveals a trend that merging parties should take into account when contemplating a transaction that could raise conglomerate effects in the EU. The parties should consider whether customers in the relevant markets might complain during the merger review process. They should also review internal documents to see whether statements were made by the sales and marketing teams about leveraging the merged company's increased strength in one market into other markets. In in-depth antitrust reviews, regulators both in the US and the EU ask companies to produce tremendous amounts of internal documents, which could be relevant to the competition landscape affected by the merger, on very short deadlines. It is important to ensure that the internal documents are not misinterpreted in a way that could jeopardise the antitrust review. Finally, if it is likely that conglomerate concerns are serious, and time is of the essence, the parties could explore whether to raise the issue in pre-notification talks with the authorities, and think of a suitable remedy early in the process in order to be prepared.
|
Merging entities |
Concerns |
Remedies undertaken |
|---|---|---|
|
Bayer/Monsanto |
Bayer and Monsanto could decide to bundle or tie sales of pesticide products and seeds, potentially making competitors' access to distributors and farmers more difficult in the advent of digital agriculture, which requires collection of information about farms with the aim of providing tailored advice or aggregate data to farmers. |
The bundling concerns were not proven during the in-depth investigation and remedies were offered only in relation to the horizontal concerns of the transaction. |
|
Broadcom/Brocade |
Potential degradation of interoperability between the merged entity's switch chip and interface cards, which could lead to possible leakage and misuse by the merged entity of confidential information related to competing interface card suppliers. |
Broadcom committed to cooperating closely and in a timely manner with competing interface card suppliers to achieve for them the same level of interoperability enjoyed by its own interface cards. |
|
Dentsply/Sirona |
Dentsply rivals that offered dental consumables would be excluded from accessing Sirona's dental equipment due to denial of commercial and technical information. The fact that Dentsply's offer of consumables was very limited in comparison to its competitors' and that Sirona had entered into long-term licensing agreements with Dentsply's competitors that would prevent it from changing its practices for a significant period, did not change the assessment. |
Sirona extended existing licensing agreements with Dentsply competitors for ten years and undertook to continue the supply of all necessary know-how, commercial and technical information to them. |
|
Essilor/Luxottica |
The merged entity would use Luxottica's powerful brands to force opticians to buy Essilor's lenses by means of bundling or tying, and thus exclude other suppliers. |
None. The Commission engaged in extensive market testing, reaching out to 10,000 opticians and receiving feedback from 4,000 third parties, which helped it to understand the market and ultimately clear the transaction with no remedies. |
|
Intel/McAfee |
Rival security solutions would not have access to the necessary information to use the functionalities of Intel's CPUs in the same way as McAfee. |
Intel committed to, among other things, ensuring that vendors of rival security solutions will have access to all necessary information required to use functionalities of Intel's CPUs and chipsets. |
|
Microsoft/LinkedIn |
Microsoft would pre-install LinkedIn on all Windows PCs, integrate LinkedIn into Office by combining the user databases, and shut out LinkedIn's competitors by not providing them with the technical information that they need to interoperate with Microsoft's products. |
Microsoft undertook, inter alia, not to force PC manufacturers and distributors to pre-install LinkedIn on Windows PCs and to allow users to remove it should the manufacturer or distributor decide to pre-install it. |
|
Qualcomm/NXP |
Interoperability concerns; concerns that Qualcomm would bundle NXP's IP to its patent portfolio, increasing its bargaining power and allowing it to charge significantly higher royalties. |
Qualcomm committed to: providing the same level of interoperability between its own products and NXP products with the corresponding products of other companies for an eight-year period; offering certain licences; and not acquiring or enforcing certain patents. |
This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2018 White & Case LLP
