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Skyscrapers against a blue sky
Skyscrapers against a blue sky

Tougher merger control enforcement frustrates more M&A

Antitrust authorities frustrated more deals in 2023, adopting an increasingly tough approach to merger control enforcement. They used novel arguments to challenge transactions, continued to reject remedy offers and reached diverging outcomes. This created an extremely challenging environment for dealmaking – something that is set to continue into 2024.

 

Many antitrust authorities have denied adopting a more “interventionist” approach. But the data suggests otherwise. In 2023, 20 deals were prohibited and a further 18 were abandoned due to antitrust concerns. This represents a 54% rise in prohibitions and a 15% increase in overall intervention from 2022. 

In practice, real deal frustration levels are likely to be even higher. According to U.S. Department of Justice Antitrust Division (DOJ) Head Jonathan Kanter: “most anticompetitive deals are no longer getting out of the boardroom”. The potential for antitrust objections and the risk of intervention is causing some parties to drop transactions at a very early stage, or not pursue them at all.

Concerns over ecosystems and innovation block deals

Antitrust authorities focused on novel and evolving theories of harm in 2023, particularly for non-horizontal deals in the digital and life sciences sectors.

For the first time, the European Commission (EC) blocked a deal on the basis of “ecosystem” concerns. It concluded that Booking’s acquisition of eTraveli would allow Booking to expand its travel services ecosystem by adding eTraveli’s flight product, making it more difficult for rivals to contest Booking’s position in the hotel online travel agency market.

Other authorities have used similar concerns to challenge deals. In its suit to block Amgen’s acquisition of Horizon Therapeutics, the U.S. Federal Trade Commission (FTC) relied on a portfolio/entrenchment theory of harm for the first time in decades. It alleged that Amgen had a history of leveraging its broad portfolio of blockbuster drugs to gain advantages over potential rivals.

Ultimately the parties agreed remedies with the agency. But more U.S. complaints on this basis are expected. As noted below, revised U.S. merger guidelines set out how the FTC and DOJ will scrutinise deals that risk entrenching or extending a dominant position.

We also saw an increasing number of deals frustrated (at least in part) due to their impact on innovation, often combined with concerns over the removal of new rivals and/or future competition. EC and UK Competition and Markets Authority (CMA) objections on these grounds caused Adobe and Figma to abandon their tie-up. Sanofi similarly walked away from a licensing deal for a Maze drug after the FTC alleged it would remove a potential competitor.

Companies with entrenched or strong positions in dynamic and rapidly evolving markets should prepare for intense scrutiny when planning acquisitions, even where the target is not (or not yet) a rival.

U.S. win rates high with reforms set to boost intervention 

The U.S. agencies have stepped up merger control enforcement efforts under the Biden Administration. This trend continued in 2023.

Three transactions were formally prohibited. In Illumina/GRAIL the FTC won on appeal, with Illumina then agreeing to sell off GRAIL in light of the court’s ruling and the EC’s order to unwind the deal. Each agency also secured a permanent injunction – Jet Blue/American Airlines (DOJ) and a healthcare technology transaction (FTC).

A further seven deals were abandoned due to U.S. antitrust concerns. These figures are in line with previous years, despite a sharp drop (over 25%) in the number of deals reviewed.

The agencies’ willingness to litigate more cases is clear and has been fuelled by their hardline approach to merger remedies.

And their win rate in court is relatively high. Under the leadership of Lina Khan, the FTC won 71% of contested deals that resulted in a verdict at trial (ten of 14). For the DOJ under Jonathan Kanter, the rate is slightly lower at 57% (four of seven). In total, the U.S. agencies won at trial in two thirds of cases.  

The DOJ is even positive about the cases it has lost. It insists these have produced pro-competitive benefits by deterring anti-competitive deals.

But some merging parties considering whether to fight an agency challenge in court may read the data as giving them a reasonable chance at a favourable outcome. In nearly two thirds of FTC complaints the parties were able to proceed with the deal in some form, either by securing a win at trial or agreeing a settlement. The same was true in half of DOJ complaints.   

Looking ahead, merging parties can expect greater intervention in the U.S.

Revised merger guidelines, adopted in December 2023, have rewritten how the DOJ and FTC will review transactions. The new guidelines contain a lower threshold for presumption of illegality of horizontal mergers (set at 30% market share). They also target serial acquisitions, partial ownership and minority interests, transactions that would further entrench dominant players, and set out how the agencies will assess vertical mergers and the impact of a deal on labour markets. 

The ability of the U.S. agencies to apply the guidelines will be vastly enhanced by planned changes to the HSR filing form, expected to take effect in the second or third quarter of 2024. The new form will require submission of far more extensive information, including current and potential overlaps between the parties, effects on labour markets, minority interests, prior acquisitions dating back ten years and foreign subsidies. It will significantly increase the administrative burden on notifying parties.

UK CMA navigates Microsoft/Activision Blizzard and blocks completed M&A

The number of frustrated deals in the UK last year remained high at six.

Microsoft/Activision Blizzard was the headline case. The CMA prohibited the deal, rejecting the behavioural (licensing) remedies offered by the parties. Then, in an unprecedented move, the CMA conditionally cleared a restructured version of the transaction following a fast-tracked phase 1 review.

Some have speculated whether the case opens the door for parties to future blocked deals in the UK to have a second “bite at the cherry”. The CMA has firmly rejected this “phase 3” option and will likely be wary of merging parties trying to tread a similar path.

Unwinding completed deals was a key trend for 2023. One of the three prohibited mergers (Cérélia/Jus-Rol) was already completed and so required a full divestment of the target. At phase 1, the CMA accepted remedies in over 20 completed transactions that required the sale of the whole acquired business.

EU court ruling makes some dealmaking harder

Booking/eTraveli was the only deal blocked by the EC last year. Compared to 2022, fewer cases were abandoned due to the EC’s concerns.

But merging parties should not expect an easy ride. Companies looking to merge in concentrated sectors should take note of the European Court of Justice (ECJ)’s ruling in Three/O2, which restores the EC’s wide scope to block transactions that risk harming competition without creating a dominant position. Careful risk assessment will be vital.

Divergence continues to create unpredictability 

We continued to see divergence in merger control outcomes, particularly between the EC and CMA on high-profile transactions. Half of the 12 cases decided in 2023 that were reviewed by both the EC and CMA resulted in divergence of some kind.

In some instances, the authorities reached different conclusions as to whether the deal raised concerns. This could be due to differing market conditions across jurisdictions. Booking/eTraveli was blocked by the EC but cleared at phase 1 in the UK after the CMA concluded eTraveli has a modest market position in the UK.

In other cases, authorities did not agree on whether remedies offered by the parties were sufficient to address the concerns found. The EC accepted licensing commitments to clear Microsoft/Activision Blizzard that were rejected by the CMA (and the FTC).

In a third category, the EC and CMA reached the same conclusion, but one did so after phase 1 and the other after an in-depth review (eg Sika/MBCC’s conditional clearance). In these types of cases, parties must work hard to coordinate investigation timetables.

Both EC and CMA officials stress that divergence is the exception, not the rule. They can point to cases where they are on the same page, eg Adobe/Figma, as mentioned above. But the potential for diverging outcomes poses an increasing challenge for parties to multinational transactions. When assessing antitrust risk, parties should take time to understand any differences in local market conditions as well as the likely approaches of the authorities.

Australian prohibitions rise against backdrop of regime overhaul

Four deals were prohibited by the Australian Competition and Consumer Commission (ACCC) in 2023 – the most we have seen blocked in Australia in a single year since we started the report.

Two transactions were in the transport sector. In one, the ACCC rejected the parties’ offer of divestments in favour of prohibition. The authority also prohibited an additional deal (ANZ/Suncorp) under the merger authorisation process, although this was overturned on appeal in early 2024. Overall, the ACCC completed seven phase 2 reviews – the highest total since 2019.

This rise in enforcement activity sits against a backdrop of proposed reforms to the Australian merger control regime, which aim to give the rules more teeth.

Options are being considered by the government. These include, most radically, a shift from the current voluntary system to a mandatory and suspensory regime, potentially coupled with a power to call in deals falling below notification thresholds. Amendments to the substantive test, including prohibiting deals that entrench, materially increase or extend market power, have also been put forward.

We should know more about the likely direction of travel in the coming year.

New tougher and tighter merger control regimes

Australia is just one of the jurisdictions considering major amendments to merger control rules. Across the globe, regimes are being tightened, clarified or introduced.

These include proposals designed to capture so-called “killer acquisitions”, ie purchases by large players of start-ups or small innovative firms with little or no turnover. A new notification threshold is proposed in the UK and deal value thresholds are planned in India (to apply generally) and COMESA (to apply to mergers involving digital platforms).

By contrast, a planned new Chinese threshold based on market value was dropped, while other filing thresholds were increased. However, the State Administration for Market Reform (SAMR) retains the discretion to review below-threshold transactions which in practice can catch killer acquisitions.

Amendments to the South Korean regime will take effect later this year, expanding the scope of exemptions from the filing requirement and enabling parties to offer remedies (currently, only the authority can design and impose remedy packages). In Canada, the long-standing efficiencies defence has recently been abolished.

Beyond the jurisdictions surveyed in the report, important reforms have been adopted in the Middle East, including revised filing thresholds in Saudi Arabia and a new merger control regime in the UAE. In Africa, we saw updated thresholds and procedural rules in Morocco and await details of a new Egyptian pre-closing regime. In APAC, Cambodia established its first comprehensive merger control framework and the Malaysian antitrust authority continues to push for long-awaited merger control powers.

In many cases, these amendments give antitrust authorities greater powers of enforcement against M&A, adding additional complexity to the regulatory landscape for merging parties.

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