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:
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:
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.
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:
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.
Thomas Wessely, Partner, Brussels
Rod Carlton, Partner, London
Looking ahead in 2017
Companies planning complex deals in 2017 are advised to prepare early and well: