Global trends in merger control enforcement – themes for financial institutions
2016 saw the continuously increasing impact of antitrust intervention on M&A deals. Antitrust authorities intervened in significantly more transactions than in 2015. This resulted in a higher number of deals being frustrated (ie prohibited or abandoned) due to antitrust concerns, more deals being subject to interference in the form of remedies, and record fines being imposed on companies that failed to comply with merger control rules. In the context of M&A financing, the increased levels of antitrust intervention reinforce the need for financial institutions to pay close attention to merger control considerations. This article considers some lessons for merging parties and financing banks.
More M&A deals affected by antitrust intervention
More than 31 deals with a total value of over EUR 69 billion were frustrated in 2016 as a result of antitrust concerns – a 30% increase on 2015.
The value of deals frustrated represents around 2% of total global M&A.1 But this figure 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 may be much higher.
The increased number of deals being frustrated by antitrust authorities highlights the importance of merger control planning for the overall execution risk. Purchasers can mitigate this risk by negotiating appropriate antitrust conditions. Deals conditional on antitrust or regulatory approvals are becoming increasingly common – in 2016 76% of high-value conditional deals were subject to antitrust or regulatory approval.2
Reverse break fees more prevalent
Purchasers increasingly face reverse break fees (payable by the purchaser to the seller), such as the USD 3.5 billion fee agreed between Halliburton and Baker Hughes or the USD 2 billion fee announced by Bayer in relation to its USD 66 billion merger with Monsanto. Reverse break fees are now used in about 20% of all conditional deals (up from 14% in 2015), with the average fee having risen to 6.5% of the deal value (up from 5%). We expect this trend to continue in 2017.
There was an interference by antitrust authorities in the form of (often far-reaching) remedies, for example:
159 deals were only cleared after the parties and authorities had agreed on conditions designed to address antitrust concerns.
overall increase in the number of remedy cases from 2015 to 2016 of 14%. The overall increase in the number of remedy cases from 2015 to 2016 of 14%. The increase was mainly caused by a higher number of conditional phase 1 clearances.
While a small majority of all accepted remedies are still structural in nature (ie a divestment of particular assets, activities or businesses), there is a continued willingness of competition authorities to accept behavioural remedies (commitments entered into by the purchaser in respect of its future market conduct).
Level of antitrust intervention varies by sector
For 2016, the telecoms, transport and life sciences sectors accounted for the highest proportion of antitrust intervention.3 Telecoms deals represented 5% of total deals subject to antitrust intervention, while making up only 2% of all global M&A. For transport and infrastructure 8% of deals in 2016 were subject to intervention, while making up only 3% of overall M&A activity. And life sciences accounted for 12% of antitrust intervention but 7% of global M&A deals.
The relatively higher levels of antitrust intervention for these sectors can be explained by the higher degrees of concentration and the higher barriers to entry because of heavy investment requirements (in network, R&D, infrastructure). As a result, transactions in these sectors will generally be more problematic from a competition perspective.
For the technology sector we saw a disproportionately low share of antitrust intervention. This may be due to the generally more dynamic nature of technology markets. However, it may also be the case that certain technological mergers escape merger review because a target does not yet generate any revenue so that jurisdictional thresholds are not met. The European Commission has consulted on the need to potentially introduce a deal value test in addition to the existing turnover thresholds to avoid potentially problematic transactions from escaping its review. This was specifically targeted at acquisitions of innovative companies in the digital economy and pharmaceutical sectors.
Merger review proceedings may take well over a year
For the large majority of cases, namely those that are cleared unconditionally in phase 1, the period between notification and obtaining clearance on average lasts just under one month. In all except five jurisdictions surveyed, unconditional phase 1 clearances were received in less than 30 days on average.
The opening of an in-depth investigation clearly has an impact on the deal timetable, particularly where the merger regime is suspensory. On average, in-depth investigations in 2016 took between five and eight months. 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 further to a year or more. 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). It is important for merging parties and financing banks that the overall timetable, the duration of credit facilities etc adequately takes into account the potentially long duration of merger control proceedings.
Managing the overall merger review timetable becomes more challenging the more filings are required and the more in-depth investigations are initiated. We are now frequently seeing mergers being notified in ten or more jurisdictions. When faced with a patchwork of global filings and potential antitrust issues, it is particularly important for the parties to be well organised, in control of the overall filing process, and prepared for procedural and substantive differences between authorities.
Fines imposed for violations of merger control rules
Fines relating to violations of merger control rules increased significantly, with the total fine amount reaching EUR 105 million (compared to EUR 2.2 million in 2015). Of this amount, EUR 18 million relates to fines imposed for failures to file. The remaining EUR 87 million relates to fines imposed on parties who notified their transaction but who did not await merger clearance before implementing it in violation of a standstill obligation (so-called “gun jumping”).
Key lessons for merging parties and financing banks
Take a proactive approach to address 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. We are seeing our clients more and more taking a proactive approach in entering into remedy discussions with antitrust authorities at an early stage in their review timetable. This is all the more important at a time when antitrust authorities seem to be taking a far more rigorous and time-consuming approach to assessing the viability of remedy proposals.
Consider upfront buyer and fix-it-first solutions
The use of so-called upfront buyer and fix-it-first remedy solutions increased in 2016. This is where the notifying parties negotiate and conclude the agreements giving effect to a divestment remedy before the authority conditionally clears the main transaction (fix-it-first) or after obtaining conditional clearance but before being allowed to complete the main transaction (upfront buyer). The advantages of this are:
for antitrust authorities, it minimises the risk of harm to competition prior to implementation of the remedy, and – more importantly – of a failed remedy; and
for merging parties, it mitigates the potentially costly risk of having to divest part of the merged business at a severely discounted price in a fire sale conducted by a divestment trustee.
The use of upfront buyer and especially fix-it-first remedies can have significant timing implications, as there may only be a short time frame for concluding an agreement with a divestment remedy-taker and obtaining approval for that divestment from the authority.
Therefore notifying parties may want to start discussions with potential buyers for the part of the business that is expected to give rise to antitrust concerns early on in the process, perhaps even during pre-notification discussions. In some situations it may even make sense to consider entering into a break-up bid, where it is agreed in advance that immediately following the acquisition of a target business (or at least very shortly thereafter), part of that business will be sold on to a second acquirer.
The benefit of proactively addressing potential antitrust concerns, either through a fix-it-first solution or a break-up bid, depends on whether the parties are able to predict correctly the scope of the divestment remedy that is likely required to address the authority’s concerns. It is possible that such an approach actually reduces or even eliminates any prospect of avoiding any remedies altogether.
No “jumping the gun” – do not attempt to influence target before merger clearance
Last year, a record-breaking EUR 80 million fine was imposed on telecoms company Altice in France. The French competition authority found that Altice had implemented two transactions before obtaining clearance by exercising decisive influence over the targets and by exchanging commercially sensitive information. The very heavy fine highlights the importance for parties to put in place adequate safeguards for the period between signing and closing, and to stay clear of any attempt to influence the commercial behaviour of a target company before obtaining merger clearance. Other gun jumping fines imposed last year included:
the USD 11 million fine imposed in the U.S. on activist investor ValueAct for acquiring shares in both Halliburton and Baker Hughes with a view to influencing the strategy of both companies in the context of their intended merger, without notifying the acquisition of shares to the antitrust authorities;
the EUR 6.7 million fine imposed in Brazil on Technicolor for completing the acquisition of the connected devices business of Cisco Systems before obtaining antitrust clearance. The parties had argued that the deal had to be closed urgently and had put in place an agreement carving out the Brazilian assets from full completion. Nonetheless the authority considered it to be a very serious gun jumping violation and set the fine at ten times the amount of the previous largest gun jumping fine; and
the EUR 667,000 fine imposed in India on General Electric for failing to notify its acquisition of Alstom within the required time frame of 30 days from announcement.
The record fines imposed last year confirm the need for parties to carefully consider where a transaction needs to be filed, to notify the transaction in time, to respect the standstill obligation and to provide complete and accurate information to the authorities assessing the transaction.
To identify the global trends in merger control enforcement in 2016, 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, allowing us to compare figures and draw conclusions on year-on-year changes. 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.
1. Source: Thomson Reuters, “Mergers and Acquisitions Review”, Full Year 2016, which reports value of worldwide completed M&A as USD 3,235,364.
2. “Global trends in private M&A”, research based on almost 800 private M&A deals on which A&O has acted. Please contact your usual A&O contact if you would like to learn more about the results.
3. Based on a comparison of the percentage of M&A deals by sector (number of deals) to the percentage of deals subject to antitrust intervention (prohibited, abandoned or subject to remedies) by sector.
This case summary is part of the Allen & Overy Legal & Regulatory Risk Note, a quarterly publication. For more information please contact Karen Birch – firstname.lastname@example.org, or tel +44 20 3088 3710.