It’s all too easy to overlook merger control when dealing with smaller value M&A deals, particularly in the digital media sector where a target may well be operating in a niche sub-sector.
Many acquirers and their financial sponsors assume that with smaller targets the competition authorities will either not have jurisdiction to review the deal or would not be interested in them. Unfortunately that can be a dangerous assumption, especially where there may be issues of increased market concentration through overlapping business activities.
Below we explore why it’s important to consider merger control
at the outset.
In the UK, the somewhat misleading “voluntary” nature of the merger control system can lead to regulatory risks and uncertainty. While there are no fines for choosing not to notify a potentially qualifying deal voluntarily, the Competition and Markets Authority (CMA) can assert jurisdiction at any time up to four months after a completed deal has been publicly announced if they believe it does qualify under the regulations. An unexpected investigation after completion has taken place can cause serious business disruption – particularly if, as is increasingly likely, hold separate undertakings are imposed.
What factors should alert me to seeking merger control advice?
- Merger control should not be dismissed on the basis of transaction size alone. Experience shows that even where transactions involve relatively small targets, operating in innovative markets, market foreclosure issues can still arise – particularly where IP is involved.
- Markets involving innovative products or services (such as digital media) may be defined very narrowly. The CMA can, and routinely does, consider multiple alternative market definitions, starting with the narrowest plausible definition which captures the overlapping activities. In technology and digital media markets, innovative or niche products and services may form distinct markets.
In October 2014, the CMA announced that it intended to refer the acquisition by Immediate Media of certain assets of Future Publishing for a detailed Phase II investigation, unless the parties offer acceptable undertakings in lieu of reference. This decision was reached on the grounds of narrow market definitions – including the market for genealogy print magazines, to the exclusion of online family tree resources. The parties must now consider whether to offer undertakings, which can be expected to include divestments of competing titles.
- Consider the likelihood of complainants from customers, suppliers and/or competitors. Complaints to the CMA after completion are likely to cause the CMA to request information from the parties.
Why should I consider merger control up front?
- Post-completion investigations pose substantial risks, which warrant careful evaluation at the outset:
- The CMA routinely imposes “hold-separate” undertakings (requiring the parties to suspend any further integration prior to clearance) where it decides to review a completed acquisition. Hold-separate undertakings are invariably costly and time consuming to comply with, and can cause substantial business disruption.
- The CMA may require remedies – typically divesture – to be given as the price for securing Phase I clearance.
- The threshold for referral to Phase II is surprisingly low – the CMA has the discretion to refer where it considers the risk of a substantial lessening of competition lies between the merely fanciful and 50/50.
- Phase II inquiries typically run for six months and can be both costly and time consuming. In the worst cases, they can result in the transaction being unwound.
In Key Publishing’s recent acquisition of Kelsey Publishing’s Aviation and Military History Portfolio, the CMA initiated an investigation after completion. Hold-separate undertakings were imposed while the CMA carried out its review. This required the purchaser to preserve the target business’s assets and prevent it taking any further steps towards integrating the businesses (including regarding IT services, customer lists, changes to or transfer of key employees and sharing of strategically sensitive information).
- The CMA actively monitors merger activity. Even though the UK operates a voluntary notification regime, the CMA is under a duty to monitor announced mergers, and pays close attention to sectors which directly affect consumers.
- The CMA will place weight on any complaints from customers or suppliers. This is generally how otherwise unreported transactions are picked up by the CMA.
- The CMA’s four month review deadline does not start running until news of a completed transaction has “entered the public domain”. In other words, keeping secret about an acquisition is not a way of avoiding merger control.
Although the UK merger control regime is based upon a voluntary notification process, the consequences of not notifying the CMA, if it subsequently chooses to review, can be significant for all parties. Accordingly, assessing the likely market impact of a transaction (and how the ‘market’ is likely to be defined) is strongly recommended for any digital media transaction which results in overlaps, even if confined to niche sectors.