A record backlog of merger and acquisition deals is likely to flood the market by the time a new Commission is in place following the European elections later this year.
Dealmaking has been held up by high borrowing costs, Covid-induced market uncertainty and the spectre of military conflict on the edges of Europe. If, as expected, interest rates start falling and a pro-business majority remains at the helm of the European institutions, economic activity should resume across the bloc. However, this renewed corporate enthusiasm could be tempered by antitrust regulators who have expanded their regulatory toolboxes in a bid to rein in what they judge to be potentially anticompetitive deals. Getting these through is going to require more regulatory planning and preparation than ever before.
Over the past 20-plus years, regulators have become increasingly frustrated by their inability to prevent the formation of anticompetitive monopolies and oligopolies, as well as by their inability to do anything about them once they have been formed.
The existing toolkit failed to deal with those smaller killer acquisitions where large companies went on acquisition sprees, sweeping up start-ups who posed any real or potential challenge to their business models. The failure, generally due to the notification thresholds that required companies to notify regulators of their acquisitions, is particularly problematic for larger regulators such as the European Commission, but also for the Department of Justice and the Federal Trade Commission (FTC) in the United States.
The second major challenge regulators faced is the dynamic changes in markets and business models brought about by information technology, data and the proliferation of algorithms driving pricing and market insight. Traditional and not-so-traditional theories of harm around subjects such as increased market share, leveraging market power, abuse of dominance and self-preferencing haven’t proven sufficient to assuage regulators’ concerns.
Going After Smaller Deals
Regulators on both sides of the Atlantic are addressing their ability to go after smaller deals that previously may have escaped attention but have ultimately led to accretive or creeping market dominance. Ricardo Woolery, an attorney advisor to U.S. FTC Commissioner Rebecca Slaughter, recently argued new U.S. merger guidelines provide “a more robust analytical framework” to interpret a part of antitrust law that has received relatively little analytical attention — the ban on mergers that “tend to create a monopoly.” Woolery pointed to enforcement against serial acquisitions in the healthcare market as an example of the new analytical thinking. It’s no longer necessary for a merger to create a monopoly, they could just “tend to” create one.
The U.S. Department of Justice has also set out its intent. Jonathan Kanter, Assistant Attorney General of the Antitrust Division, said his team is “laser focused” on breaking up monopoly chokepoints across the economy and preventing new ones before they arise.
Kanter assured businesses thinking of mergers that the regulator “must unwind and prevent these threats across the physical and digital economy” and use every available lever to combat concentrated power and prevent future occurrences.
The EU is on the Same Path
Across the Atlantic, the European Commission has been just as busy – possibly more so. Two major changes have taken place in the past couple of years that will have a profound impact on the ability of companies to complete deals.
The first concerns a hitherto little noticed Article 22 in the European Union Merger Regulation. Originally designed to assist smaller Member States who didn’t have the ability – or sometimes for internal political reasons the desire – to vet a transaction, by allowing them to refer the review to a higher authority, namely Brussels.
EU officials, under the leadership of DG COMP Director General Olivier Guersent, saw the opportunity to repurpose the regulation through updating guidance on its implementation. The effect of this was to allow any deal that was notified to a Member State that could have an impact on cross-border commerce in the EU to be taken up by the pan-European regulator. Deals that were too small and slipped under the thresholds for DG COMP review could now be effectively pushed (or pulled) upwards.
The result was immediate and the consequences profound. Deals that previously were invisible to regulators suddenly came under detailed antitrust review. Illumina, a U.S. gene sequencing company, was forced to divest cancer diagnostic test maker Grail after it fell afoul of both European and U.S. regulators. EU officials used the novel interpretation of Article 22 to get authority over the deal.
While the legal challenges to various aspects of the regulators’ actions continue, the underlying fact remains that now, no deal – no matter how small or how little impact it might have on relevant markets – is beyond the reach of regulators.
European regulators have also sharpened another tool to allow them to block or impose conditions on deals that were previously unlikely to fall foul of the rules by redefining what exactly is a market.
The idea of an “ecosystem” was until recently confined to nature, but has quickly been adopted by regulators struggling with dynamic markets, particularly in high tech industries where the concept of increased market share isn’t relevant. One case in particular, Booking.com’s purchase of Etraveli, was blocked on the basis of this theory and is currently being appealed. Since the veto last September, the theory has been picked by regulators around the world.
Application of the theory itself has raised whole new levels of risk for acquirers, a fact recognised by practitioners. Marcus Smith, president of the UK Competition Appeal Tribunal, warned that ecosystem theories of harm have unleashed a “whole world of problems” for regulators as they grapple with higher levels of uncertainty in their merger decisions, raising questions over levels of predictability and are akin to looking into a “crystal ball.”
When merger and acquisition activity returns, as it surely will, new and unprecedented levels of regulatory risk will accompany it. Companies and their advisors who may previously have been comfortable with getting a deal through will now have to start planning and preparing for all possible outcomes.
EU regulators are intent on stopping problems before they arise and that means significantly more deal risk. With renewed institutions likely to focus on EU competitiveness and the efficiency of the European Single Market in the months to come, dealmaking activity will be a key indicator.