In a period of economic, political and regulatory change, how can companies plot the right course for M&A success?
Merger control in a changing world
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.
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.
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?
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.
The pervasive influence of data has prompted the regulator in Japan to rethink its approach to merger control regimes. In June 2017, the Japan Fair Trade Commission (JFTC) and the Competition Policy Research Center (CPRC) jointly published their Report of Study Group on Data and Competition Policy. The study group began in January that year and the report discussed how Japan’s Anti-Monopoly Act (AMA) can address issues created by today’s data-driven society.
The JFTC is the sole regulatory authority that enforces merger control under the AMA, and when analysing a business combination, it starts by defining what constitutes a market in terms of size and geographic scope.
The JFTC looks at this from the perspective of a consumer’s ability to purchase a substitute product or service, and may also analyse the issues from the vantage point of supplier substitutability.
Traditionally, substitutability is determined using the SSNIP test (small but significant and nontransitory increase in price). But the proliferation of data requires a different approach. The report highlights that a digital platform comprises several layers of markets with different types of consumers or users (also referred to as a ‘multilevel market’), where ‘free’ services might be provided in one market (for example, the social media service market) but compensation is paid in another (for instance, the online advertisement market). The report argues that the SSNIP test does not necessarily apply to this type of ‘free’ market, and suggests considering the substitutability of consumers and/or suppliers using another method, such as the SSNDQ (small but significant and non-transitory decrease in quality) test, which focuses on functionality and quality rather than price.
When determining whether or not a specific business combination should be reported, the JFTC currently looks only at the parties’ Japanese turnover for the previous business year. If their turnover does not meet the thresholds, JFTC pre-notification is not required, even if their turnover may dramatically increase after the business combination is consummated (that is, if the following year’s turnovers greatly exceed the thresholds for pre-notification), and even if such a business combination then exerts a substantial influence on the relevant market(s).
The report recognises that it may take some time for data resources to be converted into increased turnover from innovation and/or sales of new products or services. In addition, the aggregated accumulated data may result in the parties being able to obtain or strengthen market power. The report therefore suggests considering a revision of the current pre-notification requirements to allow the JFTC to review certain important transactions that may be missed under the current system. It refers to a 31 March 2017 amendment to the German business combination regulations, which adds the value of an acquired company as a factor in determining whether or not pre-notification will be required. Under such a system, pre-notification could be required even in a situation where the turnover of the interested parties does not meet the thresholds.
In November 2017, the JFTC introduced quarterly disclosure for proposed business combinations including the following information: filing date; the names of the parties involved; major business category; type of business combination (for example, merger or share acquisition); clearance date; and whether the waiting period was shortened.
The cases cover both Phase I and Phase II combination reviews, subject to the exclusion of some confidential cases. The new level and frequency of disclosure by the JFTC is a welcome and positive development. We are hoping to get more information from the JFTC about this issue in the future, for example regarding analyses of market definition in real-life cases.
In June 2017, the JFTC published its annual business combination report looking at the biggest transactions in the fiscal year 2016. That year, two deals in Japan’s petroleum refining and wholesale industry were noteworthy—the acquisition of TonenGeneral Sekiyu K.K. by JX Holdings to create Japan’s biggest oil refiner and the purchase of Showa Shell Sekiyu K.K. by domestic rival Idemitsu Kosan Co.
The JFTC reviewed approximately 45 relevant markets, including those with high combined shares, such as the LP wholesale gas market of approximately 80–90 per cent.
The JFTC conducted reviews of both transactions in parallel. On 19 December 2016, the JFTC published a press release announcing its decision to grant clearance to both transactions, subject to the remedies proposed by the relevant parties.
These cases are significant because although the notification for the Idemitsu transaction was submitted several months before that of the JX transaction, the JFTC reviewed both transactions together, rather than applying the European Commission’s ‘first- come, firstserved’ approach.