Aggressive merger control enforcement causes a rise in frustrated deals

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9 mins
Published Date
Feb 23, 2023
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Antitrust authorities scrutiny of M&A further intensified in 2022. A greater willingness to challenge transactions (including vertical mergers) combined with an increasing scepticism around the effectiveness of merger remedies unsurprisingly resulted in a rise in prohibited and abandoned deals.

Last year, a total of 32 deals were frustrated in the jurisdictions surveyed. 13 transactions were blocked and a further 19 were abandoned due to antitrust concerns. In particular, we saw an increase in the number of deals frustrated in each of the EU, UK, and U.S.

Antitrust authorities continued to coordinate on their overall approach to tackling potentially anti-competitive deals as well as on individual cases. However, they did not always reach the same result, demonstrating the unpredictability of merger review outcomes for international deals.

In a number of jurisdictions, court rulings were crucial in confirming the authorities’ enforcement approach. Looking ahead, these judgments will likely give authorities even greater confidence to adopt an interventionist stance.

EC doubles the number of deals frustrated

Deals frustrated at EU level doubled in 2022, from three to six – the highest since we started this report in 2015.

After two years without a prohibition, the European Commission (EC)  blocked two mergers: Illumina’s completed acquisition of GRAIL and the HHI/DSME shipbuilding deal. Parties walked away from a further four transactions due to the EC’s concerns. No deal was waived through an EC phase 2 probe in 2022 without some form of intervention.

Illumina/GRAIL is a landmark case. It is the first use by the EC of its new policy to encourage referrals by EU Member States of deals falling below EC and national merger control thresholds (see chapter 3 for more on this). It is the first time the EC has blocked a purely vertical deal. It also marks the first imposition by the EC of interim measures in a merger review, in response to Illumina completing the transaction while the EC’s phase 2 investigation was ongoing.

Illumina and GRAIL are challenging many of these decisions. The result of the appeals is likely to set an important precedent for the parameters of the EC’s powers in future cases. In the meantime, the EC has set out provisional steps on how the deal should be unwound.

Separately, the EC scored a duo of important court wins in 2022. The General Court upheld the decisions to prohibit two metal deals (Wieland-Werke/Aurubis and Thyssenkrupp/Tata Steel), confirming the EC’s approach to market definition and assessment. The rulings will no doubt motivate the authority to take future enforcement action.

Looking forward, the European Court of Justice (ECJ) will hand down its ruling in CK Hutchison/Telefónica UK later this year. The EC originally blocked the deal. The General Court overturned this decision in a 2020 judgment, which was criticised last year in an important Advocate General opinion. If the ECJ follows the opinion, consolidation in telecoms (and other concentrated) sectors may become more challenging.

UK sees rise in intervention and divergence from the EU

After a dip in total deals frustrated in the UK in 2021, last year we again saw an increase. The Competition and Markets Authority (CMA) blocked four deals and three more were abandoned due to the authority’s concerns.

Three (75%) of the prohibitions were completed deals, resulting in the acquirer having to unwind the transaction (or, in one case, the UK part of the transaction). In addition, we saw a phase 1 decision that was tantamount to a prohibition – the CMA accepted commitments from the acquirer to sell off the whole target business.

Two cases deserve particular mention.

First, the CMA again blocked Meta’s purchase of Giphy. Following Meta’s appeal against the original prohibition, the UK Competition Appeal Tribunal (CAT) had ordered the CMA to reconsider the transaction.

The CAT found fault with the way the authority treated certain third-party confidential information. However, it upheld the CMA’s finding that the merger substantially reduced “dynamic” competition. This will be important for future deals in digital and other fast-moving markets.

The CMA’s new prohibition decision was based on concerns over Meta “denying or limiting other social media platforms’ access to Giphy GIFs…or changing the terms of access”. The authority also found the merger “would negatively impact the display advertising market”.

Second, the prohibition of Cargotec/Konecranes by the CMA marks the first major post-Brexit merger control divergence between the CMA and the EC.

While the EC was (together with some other jurisdictions) willing to accept a remedies package that included assets from both the acquirer and the target (a “mix and match” remedy), the CMA was not. The CMA said that this approach was complex and risky, and that only divestment of the entire relevant divisions of one of the parties would be enough. The U.S. Department of Justice (DOJ) and Australian Competition and Consumer Commission (ACCC) raised similar concerns to the CMA, but the parties abandoned the transaction before they could reach their final decisions.

CMA officials have stressed that the authority is not on a mission to block deals and its intervention record is a product of the complex deals that are coming across its desk.

However, with nearly 60% of decisions taken by the CMA in 2022 resulting in a prohibition, abandonment or remedies (compared to 43% in 2020 and 25% in 2021), it is hard not to conclude that the CMA is taking a tough stance.

U.S. agencies continue to prioritise litigation

In 2022, we saw eleven deals frustrated by the U.S. antitrust agencies.

Nine deals were abandoned, the majority after the DOJ or Federal Trade Commission (FTC) filed its complaint about the transaction. This is in line with 2021 data. In addition, there were two prohibitions (ie permanent injunctions granted by the courts), one for each agency.

In total, the DOJ and FTC sued to block ­ten deals, up from seven in 2021. This aligns with DOJ Antitrust Division head Jonathan Kanter’s announcement in January 2022 that the agency would litigate more deals.

However, losses suffered by both agencies at trial have led some to question the strategy in pursuing these cases, particularly those involving novel theories of harm. The DOJ suffered three separate merger defeats before managing a court victory in its challenge to Penguin Random House’s acquisition of Simon & Schuster.

The agencies remain undeterred. The DOJ argues that the trial losses in fact produce pro-competitive benefits by delaying transactions or forcing additional concessions from the parties. Both agencies continue to challenge M&A aggressively and we expect litigation rates to increase even further in 2023.

Non-horizontal deals remain in the spotlight

In last year’s report, we noted that a number of the deals prohibited and/or abandoned in 2021 raised non-horizontal – in particular vertical – antitrust concerns. This trend continued in 2022 with several high-profile frustrated cases.

Nvidia/ARM kicked off the tally, abandoned in January 2022 due to vertical concerns in the EU, UK and U.S. Illumina/GRAIL and Meta/Giphy, both discussed above, were blocked. Vertical concerns also caused the parties to walk away in Lockheed Martin/Aerojet Rocketdyne (U.S.) and may have contributed to the abandonment of Kronospan/Pfleiderer (EU-level).

Increased scrutiny of non-horizontal transactions continues in 2023. The tech sector remains a key focus, with in-depth investigations/challenges ongoing in cases such as Microsoft/Activision Blizzard. Deals involving important players at different levels of global supply chains are also likely to face headwinds.

Merging parties can expect welcome clarity on the likely approach to these cases in certain jurisdictions. New U.S. merger guidelines are expected imminently. In Brazil, new guidance on vertical mergers is due to be published in the summer.

Failing firm arguments succeed

Merging parties face a high bar when trying to convince an antitrust authority to waive through an anti-competitive deal on the basis that one of the parties is failing. We had thought we would see more instances of this failing firm defence in 2020 and 2021 as a result of the economic turbulence caused by the Covid-19 pandemic. This was not the case in practice.

In 2022, however, parties achieved greater levels of success:

  • In France, the French Competition Authority (FCA) accepted failing firm arguments for the first time, clearing Mobilux (BUT)’s purchase of struggling rival furniture business Conforama.
  • In Australia, the failing firm defence was accepted by the ACCC when approving a merger between two book printers.
  • In the UK, the CMA approved a milk supplier deal on the basis that the target would have otherwise exited the markets due to financial failure.

As we move into a further period of economic disruption, these victories may encourage more merging parties to run a failing firm defence. They should anticipate that authorities will pore over financial statements and rigorously interrogate the submissions put forward, including on whether there are no less anti-competitive alternatives to the transaction (a condition for the defence in many jurisdictions). Having robust evidence will be crucial.

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This content was originally published by Allen & Overy before the A&O Shearman merger