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.
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?
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Online markets constitute a special focus of competition law. To be appropriately applied, regulation requires a thorough analysis beyond market shares and demand-side substitutability.
Rapid growth and change in the global technology sector and the evolution of digital economies have created new challenges for competition authorities. To keep pace with developments, the European Commission conducted a so-called sector inquiry in the field of e-commerce and published its findings in 2017. Currently, the EU is holding far-reaching discussions that could lead to the possible regulation of internet platforms and form part of a broader EU strategy for a digital single market.
National authorities are also starting to take action. Over the past five years, the German Federal Cartel Office (FCO —Bundeskartellamt), the main body responsible for German merger control rules, has made various interventions against agreements and practices in the online distribution field. In particular, the question of how to treat bans on sales via third-party internet platforms in selective distribution systems has been on the FCO's agenda for some time. In 2015, the FCO concluded that ASICS Deutschland had restricted online sales of running shoes in an anti-competitive manner.
The FCO has also launched an investigation into discrimination by retailers against online sales compared with offline sales. In June 2017, the FCO was handed additional investigative powers covering consumer protection, under which it has already launched a sector inquiry into online price comparison websites.
Another important aspect of competition law in the technology sector is merger control. Probably one of the most frequently discussed cases has been the US$19 billion acquisition of WhatsApp by Facebook in 2014. Despite the deal's large value and the fact that WhatsApp was already widely used in Europe, the transaction did not meet the turnover thresholds of any merger control regime in the EU. Politicians and competition authorities in Europe therefore discussed additional instruments in order to review and control these market developments. As early movers, Austria and Germany amended their competition laws in order to react to such new developments in the digital economy.
Among the changes, it has been clarified that services that are rendered free of charge to consumers may nevertheless constitute a market in terms of competition law. This is particularly relevant for multilateral online platforms such as search engines, comparison websites, hotel booking portals or social networks, which offer their services for no fee.
€400m
Under new laws, merger control will be required if the value of the consideration for a transaction exceeds €400 million in Germany (€200 million in Austria) even if the companies involved do not meet the domestic revenue thresholds
US$19bn
The acquisition of WhatsApp by Facebook in 2014, fell below EU merger control thresholds despite its hefty price tag.
Another interesting aspect is the criteria for the assessment of the market power of companies on platform markets. The new law in Germany introduces specific criteria to be taken into account, such as: direct and indirect network effects; parallel use of multiple services and switching costs for users; economies of scale in the context of network effects; access to competitively sensitive data; and innovation-driven competitive pressure. These criteria or some of them have been applied before by other competition authorities. These legislative developments also prove that online markets constitute a special focus of competition law. To be appropriately applied, regulation in this field requires a thorough analysis beyond market shares and demand-side substitutability.
The new laws on merger control take into account that many companies in the digital economy, especially when they are new, may offer their services without generating significant revenues but become relevant when other considerations such as personal data are taken into account. However, investors are ready to pay high prices for successful or promising digital companies. Thus, amendments include an additional merger-filing threshold based on the transaction value.
Under the new laws, merger control will also be required if the value of the consideration for the transaction exceeds €400 million in Germany and €200 million in Austria, even if the companies involved do not meet the domestic revenue thresholds. The consideration includes all assets and other monetary values or services the seller receives from the acquirer in the context of the transaction (purchase price) as well as the value of any obligations to be taken domestic operations. More jurisdictions are likely to follow in implementing these kinds of merger tests.
Given the dynamics of the technology and internet markets, one of the key challenges for competition regulation is to properly control M&A transactions without distorting incentives for competition for potential startups. From a company's perspective, merger control means additional bureaucratic hurdles, increased costs and time-consuming legal tasks. Hence, during the legislative discussions in Germany, startup companies raised concerns that an extensive merger control that included a standstill obligation until clearance may create a competitive disadvantage compared with other jurisdictions in the EU. As a result, investors might be deterred from investing in Germany. Against this background, the German national association of startups called for a European solution instead—this initiative could, however, not avoid the legislative changes.
The challenge is to strike the right balance between potential overenforcement and laxity. Predictions and projections on market development are particularly hard to make in this field. Even if a transaction falls under a broader value-based filing test, competition authorities must be careful in determining potential threats to competitors. A premature conclusion might, in fact, preclude a competitive offer to the market.
Instead of regulatory intervention, competition itself might sometimes be the solution. The next challenge for current incumbents might be waiting in the 'incubator', ready to be released for the next innovative, if not disruptive, service that will quickly change the current market shape—and welcoming competition as a discovery process.
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