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.
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.
How the European Commission looks at the effect of horizontal mergers on innovation will be remembered as one of the important policy changes championed by European Commissioner Margrethe Vestager, who reminded the public that EU merger control rules ‘are there to protect innovation’, and that this objective ‘is important in [our] merger policy’.
The Commissioner’s public interventions have accompanied the rise of a novel theory of harm, which posits that horizontal mergers could ‘lead to a reduction of innovation’ in an industry as a whole. This was its position in relation to a merger between Dow and DuPont, where the Commission found the merger would significantly reduce innovation competition for pesticides. This theory led to the divestiture of DuPont’s global R&D organisation in pesticides as part of the remedies required to clear the merger. In the recent Bayer/Monsanto merger, it seems that the Commission applied a similar approach, and found that the transaction would have ‘significantly reduced competition in a number of markets’ and ‘significantly reduced innovation’. As part of the remedy package, Bayer has committed to divest three important lines of its global R&D organisation.
Although assessing the effects of mergers on innovation is not new—the Commission’s Horizontal Merger Guidelines state that ‘effective competition may be significantly impeded by a merger between two important innovators’—under Vestager’s leadership the Commission’s approach to the impact on innovation has changed dramatically.
Traditionally, the Commission has examined whether a proposed merger creates an overlap between a product actively marketed by one of the parties with a pipeline product developed by the other party (‘market-to-pipeline’) or whether the parties developed separately pipeline products that would eventually compete on the market (‘pipeline-topipeline’). Pipeline products include products at a relatively late stage of their development, with a good chance of launch within two to three years.
In the recent Pfizer/Hospira merger, the Commission found that the proposed transaction raised competition concerns because Pfizer was developing a competing medicine to Hospira’s. Specifically, Hospira was selling Inflectra, an infliximab biosimilar used to treat several chronic inflammatory diseases, notably the inflammation of Crohn’s disease. At the same time, Pfizer was in an advanced stage of developing its own biosimilar for infliximab. The Commission was concerned that Pfizer would likely discontinue its efforts to bring its new medicine to market, reducing competition. As a remedy, Pfizer divested its development programme.
In Johnson & Johnson/Actelion, the merging parties were separately developing new treatments for insomnia, using the same novel mechanism of action. The Commission was concerned that post-merger, J&J would have the ability and incentive to delay or abandon one of these programmes and thus required that Actelion’s insomnia research programme be divested.
In the US, the Federal Trade Commission (FTC) has followed a similar approach. For example, in Thoratec/ HeartWare, Thoratec was marketing a successful ventricular assist device (a heart pump) while HeartWare’s device achieved promising clinical trials. The FTC challenged the merger, alleging harm to innovation and to future price competition. In Nielsen/Arbitron, Nielsen offered a leading TV audience measurement service, while Arbitron offered a leading radio audience measurement service. At the time of the merger, both were developing a cross-platform audience measurement service. The FTC challenged the merger, alleging harm to innovation.
The Commission’s approach in Dow/ DuPont marks a dramatic shift in the way the impact of mergers on innovation is examined. The Commission did not focus on specific product overlap, as it did before, but instead it considered the impact on innovation ‘as a whole’. Putting it simply, the Commission found that Dow and DuPont would likely reduce their R&D budget post-merger, which would inevitably lead to a smaller number of new products brought to the market.
But is it that simple? First, if the Commission found that a ‘merger between important rival innovators is likely to lead to reduction of innovation’, how is innovation measured? Surely by considering the launch of potential new products. But future new products (or products in an advanced-stage of development) were not the focus in Dow/ DuPont. Can innovation be measured by R&D expenditures? Maybe. But R&D expenditures do not automatically translate into a guaranteed number of new products. R&D activities are a risky venture. Billions can be spent, often without immediate, or any, results. In the pharmaceutical industry, a recent study shows that only 9.6 per cent of drugs in Phase I are approved by the US FDA. The chance of success increases to 15.3 per cent in Phase II and 49.6 per cent in Phase III. Second, as the Commission puts it in its March 2017 decision (at 348), ‘innovation should not be understood as a market in its own right, but as an input activity for both the upstream technology markets and the downstream [product] markets’. If that is the case and if the ultimate goal of merger control is to protect competition between ‘downstream products’, would it not be necessary that innovations worth protecting, although inherently uncertain, be at least to some extent identifiable with existing or pipeline products?
Third, merger control is inherently forward-looking and requires making predictions, which become increasingly imprecise the further into the future one looks. In past cases, that the competitive assessment focused on pipeline products seemed justified, in particular when it was expected that these products would hit the market in two to three years. Equally, merger-specific efficiency arguments are typically accepted within such a timeframe, so that they can be verified with at least some degree of predictability. In sharp contrast, between the moment new molecules are discovered and the point that firms can launch a new product, more than 10 to 12 years can pass. It is extremely difficult to make any sound predictions so far into the future.
Fourth, firms undertake R&D investments when they expect sufficiently high returns. Expected returns on such investments depend in part on the number of firms engaged in the same ‘innovation space’. Obviously, the more firms that are involved, the lower the expected returns. Indeed, when a firm is the only one contemplating a research programme, it can expect greater reward than when others are pursuing the same research agenda. This means that a merger, by eliminating a rival, can increase the chance that the merged firm will undertake the necessary investment to pursue an ambitious R&D programme.
Finally, what can be an adequate remedy in such cases? Prohibit the merger as in Thoratec/HeartWare or Nielsen/Arbitron? In Dow/DuPont, in addition to product overlap divestitures, DuPont’s pipeline in herbicides and insecticides, its discovery pipeline in fungicides and its entire R&D organisation had to be divested, including some 400 to 500 employees. Contrary to past cases, where pipeline products were sold to third parties, forcing the sale of an entire R&D organisation appears far more radical. But will such a type of remedy be successful? Will the R&D organisation be equally successful under its new owner? Will the scientists stay or leave for new ventures? Only time will tell. In the 1995 AMP/Wyeth merger, the parties divested one of the two development programmes for Rotavirus vaccines to the Korean Green Cross. More than ten years later, GSK launched a rival vaccine, while the Korean Green Cross never did. In Ciba-Geigy/Sandoz, the FTC was concerned that the merger could impair the development of gene therapy, a market that the FTC forecasted to be worth US$45 billion within 20 years from then. Although the parties divested one of the gene therapy programmes to Aventis, the market for gene therapy is still very small and Aventis has not launched a product in this space. Predicting the future isn’t so easy after all.
Clearly, the Commission’s theory on innovation is here to stay. It seems to have applied it again in Bayer/Monsanto. Therefore, companies should consider carefully any overlap in innovation activities in a broad sense, even if there is no prospect of developing concrete products in the near future. Focusing on pipeline products is no longer enough to assess the regulatory risks posed by a transaction. Further, since the Commission’s assessment relies heavily on internal documents, the parties should describe their R&D activities with care, highlighting the potential efficiencies of merging them. The parties should emphasise the complementarity of their R&D assets, which could lead to an increase in innovation. At the same time, highlighting the benefit of eliminating duplicative activities could backfire, as the Commission might interpret such a plan as a clear intent to reduce innovation competition. Finally, mergers that may be prone to the Commission’s theory on innovation are likely to face an even longer pre-notification period.
Partner Axel Schulz talks about how competition authorities are increasingly concerned about the impact of consolidation on innovation.
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