The draft revised guidance, and the notably more positive framing of efficiencies arguments, mean that merging parties could have more avenues to successfully argue that their deal generates benefits that offset any anticompetitive effects.
This sounds promising in theory, but much will turn on how the CMA applies the guidance and, in particular, whether it is more willing to engage with efficiencies arguments using the evidence that businesses produce when assessing M&A opportunities. We examine the CMA’s proposals and what they mean for dealmaking in the UK.
Same challenges or new opportunities?
While the CMA is retaining its analytical framework for assessing efficiencies—which has historically set a high bar—it has provided clarity on when efficiencies may arise, and the types of evidence required to demonstrate them.
To be considered alongside the competitive effects of a merger, efficiencies must:
- enhance rivalry in the supply of the products where anticompetitive effects may otherwise arise
- be timely, likely, and sufficient to prevent those anticompetitive effects
- be merger-specific
- benefit customers in the UK.
These hurdles have traditionally been tough to clear. Parties have faced challenges in providing the extensive, verifiable evidence required by the CMA to substantiate their efficiency claims.
Now, the CMA is proposing six important changes that, if adopted, should go some way to improving merging parties’ chances of successfully arguing rivalry-enhancing efficiencies.
1. A greater role for efficiencies in the overall assessment
The CMA has historically considered rivalry-enhancing efficiencies as a “second step” in its assessment of a deal. First, the authority determined whether a merger gives rise to anticompetitive effects, then, if it did, the CMA considered submissions on rivalry-enhancing efficiencies from the merging parties. Current CMA guidance indicates that only in “some cases” would the competitive assessment and efficiencies be considered together.
This resulted in a perceived negative bias regarding the assessment of efficiencies as part of the assessment. It also created a practical hurdle, as merging parties would be wary of making efficiencies submissions to avoid the perception that a deal raises competitive issues that need to be mitigated.
In the draft revised guidance, the CMA states that it will adopt a consistent approach in assessing evidence that supports the finding of competitive harm and evidence that supports the claimed benefits of a merger. It says that rivalry-enhancing efficiencies will form part of the CMA’s overall assessment of the competitive impact of a deal.
Ultimately, this should mean that theories of harm and efficiencies are considered on a more equal footing, with the analysis of benefits more integrated into the assessment process. With that, the CMA is encouraging the parties to engage openly and early on efficiencies (see below).
2. Recognition that a deal may lead to “dynamic” efficiencies
Dynamic efficiencies enhance rivalry if they increase the ability or incentive of the merging parties to innovate and invest. They differ from static efficiencies (such as one-off cost synergies) as they enable the merged firm to improve performance on an ongoing basis. The draft guidance gives examples, such as successfully combining complementary technologies, knowledge, or organizational techniques.
The outcome of innovation and investment efforts is often uncertain, which could make arguments based on dynamic efficiencies more difficult to craft. But this should not put merging parties off. In such cases, the CMA may also assess whether the merger will strengthen the process of dynamic competition, e.g., by increasing the ability or incentive of the parties to innovate.
3. A more flexible approach to timing
The CMA is open to considering efficiencies that are likely to arise over a longer timeframe. It will look at the market-specific context, such as investment and innovation cycles, when assessing timing. This is important, particularly in the context of dynamic efficiencies, which the CMA accepts may not be realized for “several years”.
However, the expected future gains of longer-term efficiencies will be “discounted”, meaning they will carry less weight in the overall assessment. Collecting evidence that shows the benefits will be realized over as short a period as possible will therefore be crucial.
4. Use of remedies to secure efficiency commitments
A common hurdle when arguing that a deal results in material rivalry-enhancing efficiencies is demonstrating with the required degree of evidence that such efficiencies are likely to arise, and in a timely manner.
The CMA is now clearly indicating that where there is good evidence of the potential for efficiencies, but doubts persist around their likelihood and timeliness, remedies may be the answer. Merging parties could commit to realizing those efficiencies within an agreed timeframe.
This is not a new revelation. In last year’s revised merger remedies guidance, the CMA describes how remedies can be used to secure the merging parties’ efficiency commitments where there is uncertainty about whether those efficiencies will be delivered in full. This crystallized the authority’s approach in Vodafone/Three, where it accepted novel behavioral remedies obliging the parties to implement pre-agreed network investment plans. The draft guidelines now formally embed this approach.
In practice, it means that efficiency arguments should not automatically fail if the CMA raises concerns about timeliness or likelihood.
5. More clarity on how to substantiate claims
The draft revised guidance gives examples of the types of evidence that will be relevant in an assessment of merger efficiencies.
The CMA will give more weight to documents created in the ordinary course of business, such as operational/financial data, strategy and merger rationale documents, and transaction materials. However, it recognizes that internal documents may not address all aspects of the efficiencies framework and accepts there may be scope for parties to supplement their evidence with bespoke analysis, e.g., economic modeling (although to carry weight, this will need to be supported by other evidence).
The CMA also notes that precise quantification is not necessary and, in many cases, is not likely to be possible. This is helpful, and a recognition that the practical reality of dealmaking does not always result in data and processes which neatly fit into the CMA’s methodological frameworks. But parties should still provide quantitative evidence where they can—the CMA says this can be useful in understanding the likely magnitude of efficiencies (as well as possible harms).
6. Early engagement is encouraged
The CMA urges merging parties to approach it early with efficiencies claims, including during pre-notification, and to include efficiencies arguments in the merger notice rather than developing them part way through the investigation. This fits with the authority’s general push to improve interaction with merging parties throughout the merger review process.
The benefits are clear. It enables the CMA to provide feedback on parties’ submissions, including suggesting further analysis or evidence that could be probative. It also gives the authority time to fully assess the arguments alongside an assessment of competitive effects and as a core part of the rationale for a merger rather than as a mitigation exercise. Late evidence should be avoided where possible, as it may carry only limited weight.
Helpfully, the draft guidance contains a clear statement that making efficiency submissions in no way implies that the parties accept the existence of antitrust issues. This addresses stakeholder concerns over the possible downsides of early engagement.
Does some of this sound familiar?
Those who have been following the overhaul of the European Commission (EC)’s merger remedies guidelines may recognize some of these evolutions.
The EC’s draft guidelines similarly provide greater detail on how the authority will assess efficiency arguments. A new “theory of benefit” framework is designed to embed the efficiencies analysis into the overall assessment of a transaction. Dynamic efficiencies are explicitly recognized, and the EC may accept benefits that are realized over a longer term. Early engagement with the EC is encouraged.
For merging parties navigating parallel EU and UK merger control reviews, these similarities are helpful. It should enable a consistent “efficiencies strategy” to be deployed across both processes.
But there are nuances between the two positions. For example, the draft EU guidelines do not envisage the use of merger remedies to secure the delivery of efficiencies. The CMA also retains the second limb of its efficiencies framework—the possibility for merging parties to claim, “relevant customer benefits,” which could give rise to pro-consumer benefits more widely, for example in the form of environmental sustainability or in markets not related to the finding of competitive harm. While there may be overlap here with factors considered in the EC’s theory of benefit analysis, in the UK, relevant customer benefits will remain firmly an issue to be considered once it has been established that a merger raises competition issues.
The extent of any meaningful differences between the EC and UK’s efficiencies approach will start to become clear once both sets of guidelines are finalized and are being applied in practice.
Three takeways for dealmakers
- The CMA’s proposed new approach suggests greater scope for efficiencies to become a core part of the rationale of a transaction, to be formulated and evidenced alongside arguments that the deal does not result in any anticompetitive effects. This is a mindset shift for UK merger control, where such arguments have traditionally been seen as a secondary line of defense.
- It will be important for dealmakers and advisers to build a convincing efficiencies narrative (and in some cases a remedy offer), supported by robust and verifiable evidence, early in the process and not only to be used if the CMA raises concerns. An information request template currently being developed by the CMA should go some way to ensuring the right information is gathered.
- There is increased scope to consider arguments based on dynamic efficiencies and other benefits that might arise over a longer timeframe, as well as efficiencies that might not be fully realized on their own but could be supported by appropriate remedies.
