The Benefits of Using Data at an Early Stage in Merger Control
Company mergers are complex and costly exercises, with parties required to deal with many competing demands for their attention and time. One aspect easily overlooked, or considered of lower priority, is the compliance with UK merger controls, governed primarily by the Enterprise Act 2002 (the Act), and enforced by the Competition and Markets Authority (CMA). However, this may prove to be a false economy and lead to greater resources being required down the line or transactions being abandoned.
What analysis will the CMA undertake and using what information?
In undertaking a merger inquiry, the CMA is interested in answering two primary questions:
- whether the merger is likely to result in a Substantial Lessening of Competition (SLC) in the UK, and;
- whether there are factors that may significantly or fully offset any harmful impact of the SLC, e.g. synergies.
The CMA will require parties to provide documents such as:
- business cases of merging parties;
- statutory accounts;
- forecasts;
- board papers setting out the rationale for the merger;
- analyses of the expected impacts of the merger on competitive conditions or sales growth;
- market reports;
- customer research; and
- pricing studies, to name but a few.
In addition, it will also seek information that will assist it in determining whether a merger will likely result in an SLC. In doing so, it will first look to define the relevant market(s), and then consider three types of effects.
Merger effect:
Horizontal mergers – unilateral effects | Horizontal mergers - coordinated effects | Vertical or conglomerate effects | |
| Description | Firms competing in the same relevant market merge and reduce competition allowing them to profitably increase prices, reduce quality, etc. | The merger may provide for conditions that would make it easier for a number of firms in a market to coordinate (tacitly or explicitly) and jointly increase prices post-merger | Merger firms leverage market power in at least one of the markets they are active in to reduce competition in another market. |
| Data utilised by CMA: | Data on merging parties and their competitors such as:
Information on consumers such as:
| Information on:
| Information on the vertical supply chain and the importance of the merging parties as both an upstream supplier and downstream customer. Market information, including:
|
What information might be used to demonstrate positive impacts of a merger?
Even where the CMA finds an SLC, these potential negative effects can sometimes be negated or offset, and providing information to demonstrate this is important. Examples of these, include:
Offsetting effects
| Low barriers to entry | Countervailing buyer power | Efficiencies | |
| Description | It can be shown that an SLC may be unlikely to occur if barriers to entry (and exit) are low | Dependence on a particular customer or group of customers which places a constraint on the merging entities | Efficiencies may result from the merger due to economies of scale and scope. These must be timely, likely and sufficient |
| Data utilised by company to demonstrate impact | Internal data on:
Data on consumer switching costs and practices including price elasticity of demand | Data which demonstrates dependence on a single customer, a small group of key customers, or pooled customers through:
| Information that demonstrates efficiency gains e.g.
Data that demonstrates how and why some of these benefits would be passed onto consumers, for example:
|
How should data be used to maximise the probability of an early CMA clearance?
There are benefits to the merger parties engaging with the CMA early in the transaction and providing information of sufficient quality and quantity to allow the CMA to clear the merger. Doing so during the pre-notification “informal advice” stage, and as part of submitting the merger notice for the subsequent 40-day Phase 1 merger inquiry, might dissuade the CMA from moving to a Phase 2 inquiry. These detailed Phase 2 inquiries are more lengthy (lasting up to 24 weeks), resource intensive and costly, and can often lead to companies abandoning proposed mergers or result in CMA ordering commenced or completed mergers to be unwound.
The analysis submitted by the merging entities, and their advisors, is key in reducing the likelihood of potentially protracted CMA investigation - care should be taken in its collection and preparation. This may not happen when firm’s resources are stretched due to merger preparations. Further, it is also important to understand how the data will be used by the CMA’s economists to define the relevant market(s), assess levels of competition, and consider impacts of a merger. It can therefore be beneficial to make use of experts in both data collection and competition assessments.
The role of Data Experts
With the ever-increasing data volumes companies are creating each day and the range of systems and software in place, without the use of specialist technology, it has become a challenge to efficiently collect, analyse, review and disclose the relevant information required by the CMA. The combination of external data experts, competition experts and legal can significantly assist with what may be already stretched key business stakeholders with the response required. Here are the 4 key ways Data Experts can assist:
- The key documents the CMA require may be stored in a variety of systems such as email systems, laptop/desktops, document management systems, file servers, cloud-based applications and mobile phones. Data experts can facilitate the collection and processing of data from all of these sources with minimal input from the business.
- The processing and the hosting of this data in an eDiscovery platform allows multiple groups of people, such as key business stakeholders and legal advisors to analyse and review the data collaboratively.
- The use of eDiscovery workflows including de-duplication techniques, advanced searching functionality and Technology Assisted Review (TAR) can ensure that the review process is as streamlined as possible with the potentially important documents to the response being prioritized for review.
- Regulators such as the CMA have also had to adapt to the increasing data challenges and, as a result, have had to rely on eDiscovery platforms themselves to effectively analyse documents provided to them by the businesses they are investigating. This has led to regulators wanting to take receipt of document sets in specific eDiscovery formats that allows for an efficient upload of the data to their system. The most efficient way to facilitate this exchange of information in the format required by a regulator is an eDiscovery platform to eDiscovery platform exchange.
How can A&M help?
A&M can support companies to prepare for mergers and during interactions with competition authorities. We assist in identifying relevant arguments, the evidence required to support these and extracting information from client systems. Considering the relevant data and information during the initial phases of merging plan may lead to the merger being cleared being more quickly.
