Global trends in merger control enforcement – themes for financial institutions
In the context of M&A financing, increased levels of antitrust intervention continue to reinforce the need for financial institutions to pay close attention to merger control considerations. This article summarises the 2017 trends and provides some lessons for merging parties and financing banks. In 2017 the trend of increased intervention by antitrust authorities in M&A deals continued. More deals were frustrated (ie prohibited or abandoned) due to antitrust concerns, representing a much higher value than in 2016, and the number of deals subject to remedies remained consistently high. In addition, the focus on enforcement of procedural merger control rules showed no sign of abating.
Antitrust frustrated significantly more M&A
Over 38 deals with a total value of at least EUR130 billion were frustrated in 2017 as a result of antitrust concerns. This is up 23% by volume and 88% by value when compared to 2016. Of these, 22 transactions were formally prohibited and 16 were abandoned.
The value of deals frustrated represents around 5% of total global M&A – more than double the 2% seen in each of 2015 and 2016. Considering it only covers deals which did not go ahead in the 26 jurisdictions surveyed and only where the deal value was made public, in reality the actual figure is likely to be even higher.
Number of remedies cases remained high
2017 saw significant interference by antitrust authorities in the form of (often far-reaching) remedies. 155 deals were only cleared after the parties and authorities had agreed on conditions designed to address antitrust concerns. This is consistent with 2016 figures (where there were 159 cases), showing that the uptick in cases identified in 2016 appears to have stabilised at this higher level.
Coordination between authorities on remedies was an increasing trend in 2017, particularly on complex global deals. Dow/DuPont is a good example of this – the global divestments accepted by the European Commission were taken into account by a number of other antitrust authorities, including in Brazil, Mexico and India. We have seen similar cases already in 2018, and expect this trend to continue throughout the year.
In terms of type of remedy accepted, for the first time 2017 saw the balance shift in favour of behavioural remedies (commitments entered into by the purchaser in respect of its future market conduct), as opposed to those which are structural in nature (ie a divestment of particular assets, activities or businesses). 53% of remedy cases in 2017 involved behavioural remedies, either on their own or in combination with structural divestments. This is up from 49% in 2016. While it is hard to pinpoint a precise reason for this shift, it may in part be a result of an increase in the number of vertical deals reviewed in 2017. In contrast to this broader picture, however, it is important to note that in the EU and U.S., structural divestments remained the most common form of remedy in 2017.
Who bears the risk?
The increased number of deals being frustrated by antitrust authorities highlights the importance of merger control planning for overall execution risk. Purchasers can mitigate this risk by negotiating appropriate antitrust conditions – in 2017 80% of high value conditional private M&A deals were subject to an antitrust or regulatory approval condition.
However, 2017 was a sellers’ market and as a result sellers pushed back hard on execution risk. In 24% of private M&A subject to an antitrust/regulatory approval condition, the purchaser gave a “hell or high water” commitment to take all actions necessary to get the deal cleared. These conditions have become standard in auction scenarios. A further 6% of deals included conditions which required the purchaser to agree divestments in order to obtain clearance.
Sellers also continued to require reverse break fees (payable by the purchaser to the seller). These fees are now used in around 19% of all conditional deals (a similar level to 2016), with the average fee being USD22 million, or 6% of deal value. In large transactions the fees can stretch into the billions, such as the USD2.1 billion fee agreed between CVS and Aetna in late 2017.
Level of antitrust intervention varies by sector
Consistent with 2015 and 2016 data, the telecoms, transport and life sciences sectors accounted for a higher share of antitrust intervention in 2017 than their proportion of overall M&A deals would suggest. Telecoms deals represented 5% of total deals subject to antitrust intervention, while making up only 1% of all global M&A. For transport and infrastructure the figure was 7% of antitrust intervention, compared to only 3% of overall M&A activity. Life sciences accounted for 13% of antitrust intervention but 7% of global M&A.
2017 also saw a new trend for intervention focused on the industrial and manufacturing sector (29% of antitrust intervention compared to only 19% of overall M&A activity). This suggests that companies in this sector are becoming more willing to try their hand at more complex consolidation, in markets which are already reasonably concentrated.
Looking forward we may see the technology sector feature more heavily in terms of intervention. This is due to both the profile of deals currently being reviewed (eg Qualcomm/NXP) and those in the pipeline. In addition, there has been a push by various antitrust authorities to introduce new merger control thresholds based on deal value. Germany and Austria have already adopted these thresholds, and other authorities, most notably the European Commission, are considering following suit. If they do, it is likely that more deals in the technology/digital sector will fall to be scrutinised under merger control rules, particularly those involving the acquisition of innovative companies which do not yet have significant turnover.
And finally, cutting across sectors, in 2017 antitrust authorities continued to closely consider the impact of a deal on innovation, including pipeline products and R&D. The European Commission has been particularly focused on this issue – in Dow/DuPont, for example, it found that innovation would be significantly reduced post-merger, and the parties were required to divest nearly all of DuPont’s global R&D activities to get clearance. This focus looks set to continue in 2018. Companies looking to acquire innovative companies (or finance such acquisitions) should therefore expect scrutiny.
Vertical mergers in the spotlight
Antitrust intervention in vertical mergers (where parties operate at different levels of the supply chain) or conglomerate mergers (where parties are active in different but related markets) is relatively rare – 12% of deals frustrated or subject to remedies in 2017 raised concerns that were primarily vertical or conglomerate. However, the large-scale nature of many of these types of mergers in recent years, plus the fact that they have often taken place in mature, concentrated markets, have put them firmly on the radar of antitrust authorities.
Where vertical or conglomerate mergers raise antitrust concerns, these are usually addressed with remedies. However, this is not always the case. Currently all eyes are on the U.S. following the Department of Justice’s (DOJ) challenge to AT&T’s acquisition of Time Warner (the first U.S. court challenge against a purely vertical merger in decades). The outcome of the litigation is much anticipated by businesses, financial institutions and practitioners alike. More generally, we expect that going forward this type of deal will continue to remain in the antitrust spotlight.
Merger review periods can be unpredictable
For the vast majority of cases it is good news – they are cleared unconditionally in phase 1, within 30 working days from notification.
By contrast, review periods for indepth investigations can be unpredictable, with large variations between jurisdictions and often significant changes year on year. This can clearly have an impact on the deal timetable, particularly where the merger regime is suspensory. On average, in-depth investigations in 2017 took between 90 and just over 200 working days (with prohibitions and remedies cases generally taking longer than unconditional clearances). When you take into account the often lengthy pre-notification discussions for cases that are expected to go into a second phase, the investigation periods can extend well over a year.
In addition, antitrust authorities may extend the typical time frame, eg by asking the parties to withdraw and re-file a notification (in China) or by “stopping the clock” to wait for further information from the notifying parties while pushing the deadline to take a decision forward (in the EU). Some authorities (such as the DOJ) have recognised that merger review periods have increased, and are looking to take steps to reduce them, eg by streamlining requests for internal documents from the parties. However, it is unclear when, and to what extent, any improvements may be seen.
Record fines for breaches of procedural merger rules
Fines relating to violations of merger control rules amounted to EUR164.4m in 2017, 36% higher than 2016. Of this amount, EUR110.3m relates to fines imposed for the provision of incomplete, incorrect or misleading information by merging parties. The vast majority of this sum comes from the record EUR100m fine imposed by the European Commission on Facebook for failing to provide full information during the review of its acquisition of WhatsApp. EUR51.6m fines were imposed for breaching commitments entered into in remedies cases. And the remaining EUR2.5m relates to fines imposed for failures to file or “gun-jumping” (ie not waiting to receive merger clearance before implementing the deal). We expect this trend of strict enforcement to continue, and for more large fines to be imposed in the coming years (the European Commission in particular is currently investigating two high-profile cases of alleged gun-jumping, as well as two further instances of suspected failure to provide information).
Key lessons for merging parties and financing banks
Have a well thought-out merger control strategy
Managing the merger review timetable becomes more challenging as more filings are required and more in-depth investigations are initiated. We are now frequently seeing mergers being notified in ten or more jurisdictions (Bayer/Monsanto, for example, required around 30 filings).
When faced with a patchwork of global filings and potential antitrust issues, it is particularly important for the parties to be well organised and in control of the overall filing process. They should engage with authorities early, and think carefully about the timing of filings. This should maximise the chances of a smooth merger approval process.
In terms of timing, as part of the overall strategy it is also crucial that both merging parties and financing banks ensure that the deal timetable (including long-stop dates) and key aspects of the financing, such as the duration of credit facilities, adequately take into account the potentially long duration of merger control proceedings.
Take a proactive approach to addressing antitrust concerns
The limited time frame of merger review periods means that parties contemplating complex transactions that lead to market consolidation should carefully prepare for potential antitrust intervention, identifying the likely areas of competition concern and – where necessary – lining up potential remedies well in advance. In global deals in particular, where authorities may look to co-ordinate on remedies, merging parties should think about the remedy package as a whole, rather than by individual jurisdiction. This should help to avoid the potentially burdensome result of “piecemeal” remedies across different geographies.
Be fully aware of, and comply with, procedural merger rules
The strict enforcement of the procedural aspects of merger control has now become standard for antitrust authorities across the globe. In order to avoid additional burdensome investigations and the potential for large fines, it is vital that merging parties:
- Consider carefully where filings are required – more and more authorities are clamping down on instances of failure to file (nine fines were published last year in China alone). A full analysis of potential filings should therefore be made right at the outset of a deal.
- Do not “jump the gun” – parties should put in place adequate safeguards for the period between signing and closing, and should stay clear of any attempt to influence the commercial behaviour of a target company before obtaining merger clearance.
- Provide full and accurate information to antitrust authorities – this applies to information provided both in the initial filing, and also throughout the whole review process (eg in response to further requests for information from an authority).
To identify the global trends in merger control enforcement in 2017, Allen & Overy has collected statistical data and background information on relevant cases from 26 jurisdictions, focusing in particular on the EU, U.S. and China. We made a similar assessment for 2015 and 2016, allowing us to compare figures and identify year-on-year change. The results of our analysis are published in our “Global trends in merger control enforcement” report. This article contains a summary of some of the key insights of the report.
This article is part of the Allen & Overy Legal & Regulatory Risk Note, a quarterly publication. For more information please contact Karen Birch – email@example.com, or tel +44 20 3088 3710.