3. Global M&A

Challenges for merging parties in 2017 – anticipating the deal-critical issues in your sector

As the shifting political landscape is likely to complicate merger activity globally, it will be important for merging parties to anticipate changes in enforcement standards – including, potentially, a reduction in multijurisdictional convergence and co-operation. At an early stage of planning, parties must consider:

  • a broader range of potentially inconsistent regulatory approaches;
  • presenting defences effectively to regulators who will continue to communicate but may diverge on standards; and, if necessary,
  • developing a workable global remedies strategy.

Anticipating regulatory challenges in global M&A

Increased complexity and diversity

Early indications from the US presidential transition – both policy statements and proposed personnel – suggest both a more lenient approach towards mergers and less interest in international co-ordination. This could lead to the European Commission and US authorities approaching merger reviews with differing levels of scrutiny.

Merging parties will need to anticipate more complex and diverse regulatory reviews. Moreover, some transactions that faced a higher regulatory risk in recent years may be worth re-examining in 2017, particularly regarding transactions with a largely US focus.

Political intervention in deals: focus on strategic and sensitive sectors

As discussed in Theme 1, authorities are likely to remain interventionist in deals involving sensitive sectors, with a growing focus on foreign investments in strategic sectors also raising hurdles for certain cross-border investments:

  • EU and Germany: recent Chinese investments in German technology companies have led to calls for tighter controls over foreign investments in key sectors, in Germany and across the EU. Reviews of mergers involving Chinese state-owned enterprises (SOEs) have also faced greater scrutiny from the European Commission, which has recently taken the approach that SOEs do not have independent decision-making power as they are under the control and direction of a single State body. Practically, this means that Chinese SOEs have been required to aggregate turnover and provide information for all SOEs under the State body’s control active in the same broad industry. This has increased complexity for merging parties by drawing a greater number of companies into the review process and increasing the amount of information required for a merger filing;
  • UK: proposals are expected in early 2017, as part of the prime ministerial review of industrial strategy, which will likely target foreign investment in UK ‘critical infrastructure’; and
  • US: a number of recent foreign investment transactions (particularly involving Chinese investors) either were blocked by the Obama administration on national security grounds or faced extensive CFIUS review before obtaining approval. The Trump administration may see the CFIUS process as a tool for addressing trade-related concerns under the guise of a more broadly applied national security standard (see Theme 1).
The new US antitrust enforcement leadership is likely to be somewhat more lenient toward mergers and somewhat less focused on international cooperation. This may create greater opportunity for clearance of certain transactions, but it requires reconsideration of strategies designed for multijurisdictional convergence and coordination. Merging companies need to prepare and present defences – and to devise remedy strategies – to address the new realities.

Paul Yde, Partner, Washington DC

Stricter enforcement of the rules preventing ‘gun jumping’

In large-scale, complex deals, it can be hugely valuable for merging parties to plan well for their first days post-closing. However, integration planning – and the importance of strict compliance with competition laws prior to completion – is another area that has the potential for divergent approaches between authorities in different countries.

In November 2016, in a notable example of the closer attention that authorities are paying to parties’ conduct pre-completion, the French authority appears to have taken a strict approach in fining a company €80m for a series of steps that were interpreted together as meaning the parties were no longer independent. These steps included the purchaser exercising approval rights over certain strategic and operational decisions by the target during the standstill period.

Although the parties went far beyond pure joint planning, this case is a reminder of the need for strict pre-completion conduct guidelines, safeguards and a monitoring mechanism that enables merging parties to demonstrate full compliance to the authorities if required.

Similar issues are due to be considered by the EU courts, following a reference from a Danish court on whether a pre-clearance announcement by KPMG Denmark that it was terminating a co-operation agreement with KPMG International as part of its merger with Ernst & Young infringed the standstill obligation.

Whilst effective integration planning in mega-deals, where the interim period between signing and closing can be long, has become key to the financial success of the transaction, it has also materially enhanced the risk of serious antitrust violations. ‘Planning the integration planning’ is crucial.

Gian Luca Zampa, Partner, Rome

Presenting your case effectively to regulators

Changes in regulatory attitudes and shifting market dynamics also challenge traditional approaches to merger assessment. A continuing strategic challenge for the substantive assessment of a transaction remains to, first, convince authorities of the relevance of competitive forces that go beyond market share calculations and, second, ensure that authorities interpret those competitive forces correctly.

In traditional industries, we have seen that even the first of these hurdles can be difficult for merging parties to clear. Waves of consolidation are often the result of tough market conditions and competitive forces such as overcapacity, limited growth, constraints from cheap imports, and emerging new technology and disruptive innovation. However, our experience is that authorities have still demonstrated a reluctance to accept the relevance of those competitive forces as a defence raised by merging parties to high combined market shares.

As a consequence, a disconnect may result between the competitive forces that drive the business rationale for a transaction and the way in which authorities review that transaction. This is particularly true after a first wave of consolidation that established a set framework of analysis the authorities would be inclined to follow, even in the face of evidence that market dynamics have changed.

Landing on the appropriate market definition has proved particularly challenging in markets where technology is rapidly changing such as telecoms, where questions emerge as to how to treat emerging technologies, and the extent to which these can be considered distinct from earlier generation technologies.

Authorities have been more willing to consider innovation and non-price competitive forces in assessing mergers in technology-driven industries – the challenge is to ensure that the authorities interpret those competitive forces correctly. Two examples are illustrative:

  • first, in relation to investment in innovation, authorities have demonstrated a scepticism that consolidation in low-growth industries is necessary for innovation even where the parties sincerely believe it is a key commercial driver for the transaction; and
  • second, in relation to anticipating innovation, authorities have shown inconsistencies in the importance attributable to pipeline products. In some sectors, such as telecoms, authorities have largely dismissed the significance of pipeline products even where first-mover advantages were strong. In other sectors, particularly pharmaceuticals, a significant emphasis was placed on pipeline products and this has then been used to extract remedies from merging parties.

The challenge for 2017 will be to put forward evidence to convince authorities to view familiar markets in traditional industries with ‘fresh eyes’, and in rapidly developing, technology-driven industries to ensure that competitive forces such as innovation are interpreted correctly by authorities. This will require early and careful planning to ensure the parties make an effective case that objective evidence and internal documents would consistently support. Additionally, given likely changes in US enforcement, and the accompanying potential for divergence in international merger review, presenting an effective multijurisdictional defence may be more complex. Companies considering mergers should take account of the potential impact on deal viability in the US if, as we anticipate, the new Trump administration takes a less interventionist approach to antitrust enforcement generally and innovation in particular than the previous administration.

Managing global remedies

Engaging early on a co-ordinated global remedies strategy continues to pay real dividends in managing a complicated transaction successfully. Co-ordination of global remedies remains high in the agencies’ agenda, as demonstrated by the continued focus of the International Competition Network on this area.

Over the last few years, the major shift in remedies cases at the European Commission has been away from the traditional post-closing remedy in favour of upfront buyer cases. Now, however, we are seeing a preference emerging for ‘fix-it-first’ remedies.

In our experience from advising on several ‘fix-it-first’ cases in 2016, merging parties can obtain a simultaneous triple approval (of the main transaction, the remedy deal and the identity of the remedy purchaser) if deal strategy and implementation are well prepared and carefully managed. Where timing of the main transaction is critical, parties should consider whether such a ‘fix-it-first’ remedy would be viable: although challenging, authorities have generally proven themselves flexible in their approach to remedies. Indeed, parties who must complete a transaction under timing pressure could consider local carve-outs, allowing the rest of the global deal to close around isolated divestment arrangements.

New political headwinds leading to potentially diverging approaches between authorities and particularly increasing scrutiny of foreign investments may, however, present challenges in managing such a global remedies strategy, and indeed the predictability of a transaction as a whole.

As authorities around the world become increasingly sophisticated in their approach to merger remedies, a co-ordinated global remedy design that avoids potentially conflicting demands from authorities will become even more pivotal to the success or failure of cross-border deals that raise competition concerns.

Thomas Wessely, Partner, Brussels

Over the last year or so, we have helped clients make use of innovative, ‘fix-it-first’ remedies processes to achieve greater deal certainty and a speedy closing. 2017 looks set to bring new challenges: international divergence in standards of merger review and greater political intervention in M&A. Managing these challenges successfully will be crucial for businesses engaged in complex global mergers in the year ahead.

Rod Carlton, Partner, London

Looking ahead in 2017

Companies planning complex deals in 2017 are advised to prepare early and well:

  • stay close to the authorities as regulatory attitudes become more difficult to predict;
  • invest time in presenting your case effectively to authorities and support this with internal documents;
  • put in place and police strict pre-completion conduct guidelines, safeguards and a monitoring mechanism that enables you to demonstrate full compliance to the authorities if required; and
  • develop and test global remedy strategies throughout the merger review process.