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Pandemic, economic crisis and the failing firm defense

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Jessica Bowring

Senior Associate

London

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08 October 2020

The profound economic shock caused by the Covid-19 pandemic is likely to cause the failure of a number of firms and possible consolidation in some sectors of the economy. Firms whose business model was faltering pre-crisis will not survive and this may generate M&A activity in relation to distressed assets. This poses a dilemma for competition authorities.

On the one hand, they will need to remain vigilant and be concerned by the medium to long-term effects of possible consolidation. On the other hand, some have argued, competition policy should not get in the way of the exit of “zombie firms that trap industries into low productivity cycle, limited technology diffusion and weak economic dynamism”1 and the Covid-19 crisis provides an opportunity to abandon its focus on rivalry. It is possible that in cases of acquisition of distressed assets competition authorities will come under political pressure if the parties argue persuasively that the acquisition will preserve, at least in the short term, some employment opportunities.

These authors do not believe that this area of merger control policy requires a radical rethinking and, on the contrary, competition authorities need to remain alert to the effects of consolidation that may be caused or accelerated by the crisis. The decisional practice developed at EU level (and in the UK) in relation to failing and flailing firms described in this article provides sufficient flexibility. However, the articulation of a correct counterfactual against a background of the profound changes that will affect a number of sectors will require that competition authorities calibrate correctly their assessment of the competitive strength of each of the parties and the overall degree of competition.

This article was published in the September edition of the Competition Policy International Antitrust Chronicle.

Footnotes

1 Jorge Padilla, Nicolas Petit, Competition policy and the Covid-19 opportunity, May 2020, Concurrences N° 2-2020, Art. N° 94317, pp. 2-6.

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