In March 2020, Compass Lexecon held its 14th annual UK Competition Policy Forum, which gathered a distinguished group of senior competition law practitioners, economists, academics and regulators to discuss topical matters at the intersection of competition law and economics. As usual, discussions were held under the Chatham House Rule, so we do not identify our guest speakers.

Our first panel discussion was a 10-year retrospective review of merger control in the UK, focused on what might be causing the UK’s Competition and Markets Authority to intervene more frequently. We are pleased to share an overview of the roundtable discussion, following a panel composed of two law firm Partners and economist Rameet Sangha (Compass Lexecon), chaired by Kirsten Edwards-Warren (Compass Lexecon).

The CMA has increasingly prohibited mergers (and parties have abandoned more mergers at Phase 2) over the last 10 years, as the chart above demonstrates. Why is this and is it warranted?

So far, no one has carried out a systematic review of mergers that were blocked or abandoned to consider whether the reasons for blocking the mergers were borne out in practice. Ex-post studies have been carried out but these have focused on clearances and whether they were justified; finding that, in general, they were.

Jurisdiction: The CMA now establishes jurisdiction in a greater number of cases. In the past, jurisdiction was established by a simple share of supply test in the relevant market. However recently it has gone beyond this in a number of ways: the market definition has been flexed in order to meet the share of supply test; conducting R&D in a market has been equated to supplying within that market; and it has found an overlap in the distribution of a product as opposed to within the product market itself.

In general, it appears that if the CMA is interested in the substance of a case, they find a way to establish jurisdiction. In one extreme case, one party to a merger had pre-registered for a contract tender in the UK, but subsequently withdrew and the CMA still managed to assert jurisdiction over it.

The CMA also appears to be willing to re-investigate old cases. for example, it initially indicated that Takeaway.com/ Just Eat would not be investigated, but it subsequently decided to launch a Phase 1 investigation. It was then cleared at Phase 1.

Substance: Discussants felt that there is no longer a role for advocacy in CMA cases, particularly at Phase 1 and that it is increasingly hard for parties to make themselves heard. Instead, the emphasis has been on applying rules-based methodology at Phase 1. There has also been a heavy emphasis on internal pre-existing documents.

In particular, the CMA has been focusing on internal documents and potential competition. This requires extensive IT forensic work with a short timeline; this approach seems to lack proportionality and is a huge expense to the parties involved. The CMA does not seem to have any regard for the impact of these processes on businesses. This narrow focus also risks overlooking legitimate objectives of the businesses, for example, innovation benefits of mergers.

The CMA is also getting tougher in the process it follows during investigations.  For example, it has conducted more witness interviews suggesting a move towards a more adversarial approach. There have been five fines for breach of Initial Enforcement Orders, two unwinding orders and four fines for failures to produce documents.

It appears the CMA is more willing to accept that a party will remain as a credible competitor in the counterfactual, but less willing to accept any arguments of potential competition, making it harder to get a case cleared.

There is also some indication of further scepticism from the CMA in relation to potential competition, particularly in the case of digital markets with large incumbents.

At Phase 1 this is more understandable, especially with the degree of future uncertainty in innovation-intensive industries. However, possible entrants and potential competitors remain relevant, even in these industries. With such a stringent approach, the CMA is in danger of prohibiting potentially beneficial mergers and deterring others before they are even notified.

One example of the CMA’s cautious approach is the Amazon/Deliveroo (2020) case. Here there was no evidence that Amazon had plans for entry, so it was unlikely to be timely. There was also no evidence to suggest that Amazon would be an important competitor had it entered. The deal did not result in control: it did not give the ability to block special resolutions or enable vetos and yet the CMA still had concerns regarding sharing special knowledge and expertise and referred the case to Phase 2. The case was subsequently cleared at Phase 2.

Similarly, in Liberty Living/Unite (2019), a merger in student accommodation, CPPIB, which owned Liberty Living, was taking a minority stake in Unite. No real control was afforded, but it was still deemed to have material influence. The deal was ultimately cleared.

When the discussion turned to previously cleared mergers, participants noted that the KPMG and Lear studies commission by the CMA concluded that the clearance decisions were justified.

For example, in Facebook/Instagram (2012), at the time of the merger Instagram was small and had no revenue and there were other social networking sites with similar profiles, so the deal was cleared. Instagram has since become stronger, but discussants felt that is not a reason to claim it was a mistake to clear it.

In Hungry House/Deliveroo (2017), the facts supporting clearance were borne out, but had it taken place in the current climate it might have been blocked. Similarly, in Hostelbooker/Web Reservations International (2013), the expansion predicted occurred and the market became more fragmented, confirming the reasons for clearance.

However, there is currently no similar retrospective look at deals that were blocked or abandoned to see if these decisions were justified. For example, Clearscore/Experian (2019) was abandoned at Phase 2. Clearscore provided credit scores and connected people with credit providers. It was seen as an innovative player entering the market, but it was not a particularly innovative credit checking tool.  New entry was expected and likely: from Money Supermarket and Credit Karma. The CMA agreed barriers to entry were low, but it was not sure this would be sufficient, and it appeared to be heading towards blocking the merger when the deal was abandoned.

Since then, both anticipated entrants have successfully entered, putting into question the CMA’s stance.

How have online constraints been viewed in UK merger decisions?

As the presence of online constraints has increased in importance, the CMA’s treatment has evolved, but it remains sceptical and requires strong evidence to be persuaded to take online constraints into account in a merger involving predominantly offline parties.

Newspapers - News Corp/BskyB (2011) was abandoned and several titles closed; however, in Trinity Mirror/Northern & Shell Media Group (2018) a few years later there was some recognition of the influence and constraint of online.

Radio advertising – In the Phase 2 Bauer Media mergers (2019), the CMA provisionally found an SLC in one region, but in the final decision it concluded that the radio stations were not close rivals. It also recognised some constraint from online.

Retail mergers – In JD Sports/Go Outdoors (2019), for the first time, the CMA accepted that online retailers could be considered a constraint when looking at local overlaps. There was good data showing in store price matching against online competitors. In JD Sports/ Foot Asylum, online was also accepted as a constraint.

Parties need to provide cogent evidence in order for the CMA to accept online competition as a constraint.  This could include pre-existing documents showing response to online constraints or third-party tracking of where advertisers are putting their money. However, it can be hard to track online advertising, so surveys provide the only option in some cases.

Conclusion

In general, discussants felt that the CMA has clearly taken a stricter approach to merger control in recent years. They were concerned that this approach may lead to the prohibition of mergers that would have been beneficial to consumers and could even put firms off contemplating potentially beneficial mergers all together. However, enforcement is costly. Perhaps greater leniency will come naturally because of resource constraints, post-Brexit? Alternatively, more vigorous use of judicial review by merger parties could lead to reform and clarification of some of these issues. However, this is also costly, but perhaps should be encouraged, to bring about change.

Either way it will be interesting to see what lies in store for the next 10 years of merger control.