UK Competition and Markets Authority opens consultation on merger efficiencies guidance

The Competition and Markets Authority (CMA) has issued draft revised guidance on its approach to assessing rivalry-enhancing efficiencies as it looks to improve the UK's merger regime. The consultation on the proposed updates to UK merger controls, published on 3 June, draws on responses to a call for evidence launched in January and sets out proposed changes to its merger assessment guidelines (MAGs). The consultation is open until 1 July.

The revised guidance is part of the CMA's efforts to embed its 4Ps framework of pace, predictability, proportionality and process into its merger control function to support growth, investment and business confidence in the UK's competition regime. The focus is on rivalry-enhancing efficiencies: merger-driven improvements that enable firms to compete more effectively against their rivals. 

The CMA's draft revised guidance is intended to replace the text currently in paragraphs 8.2 to 8.27 of the current framework and takes into account both stakeholder responses received and findings from the CMA's own internal review. 

Current approach

Under the existing MAGs, the efficiencies must enhance rivalry in the supply of products where a substantial lessening of competition (SLC) may arise; be timely, likely and sufficient to prevent an SLC from arising; be merger specific; and benefit customers in the UK.  

In practice, many efficiency claims are not accepted because the supporting evidence is difficult to verify and substantiate. In its consultation document the CMA references a number of situations where efficiencies have not been sufficient to prevent an SLC.

The draft revised guidance proposes changes in three areas: the analytical framework, the evidence base and the treatment of dynamic efficiencies.

Analytical framework 

The CMA proposes to retain its current analytical framework. Addressing stakeholder concerns that the evidentiary threshold is too high and inconsistent with its assessment of harms, the CMA has confirmed that rivalry-enhancing efficiencies form part of its overall assessment of the competitive impact of a merger and are therefore subject to the same evidentiary standards as its assessment of potential harms.

The applicable standard differs by phase. At phase 1, the evidence must be sufficient to satisfy the CMA that rivalry-enhancing efficiencies would prevent a realistic prospect of an SLC. At phase 2, the CMA will assess on the balance of probabilities whether an SLC arises, taking into account any rivalry-enhancing efficiencies. 

The CMA proposes a case-by-case approach, taking efficiency claims into account only where they are supported by verifiable evidence, such as operational and financial data, strategy and merger rationale documents, transaction materials and evidence on the merger firms' track record in realising similar benefits in previous mergers. The CMA also proposes more explicitly to encourage early engagement on efficiency claims, to address stakeholder concerns that efficiencies are only assessed after the assessment of harm. 

Application of criteria

The draft revised guidance provides additional clarity on how criteria on timeliness, likelihood, sufficiency and merger specificity apply in practice.

The CMA's approach on timeliness will recognise that different types of efficiencies can arise over different timeframes having regard to market-specific context, such as evidence on investment and innovation cycles. To compare costs and benefits occurring over time on a consistent basis, the CMA will apply appropriate discounting to expected future gains. It will also consider the timeliness of expected efficiencies alongside the timing of any harm arising from the merger.

On likelihood, the CMA will consider whether the merged entity has both the ability and the incentive to deliver the claimed efficiencies. Where efficiencies are plausible but uncertain in timing or delivery, remedies may be used to secure them and address the regulator's concerns. 

The CMA will consider for sufficiency the overall competitive impact of a merger, across both price and non‑price factors. It will consider how harm and efficiencies vary over different timeframes, including situations where short‑term harm precedes longer‑term benefits, and whether time‑limited SLCs can be addressed with proportionate remedies.

The regulator will also assess merger specificity and whether efficiencies are reliant on the merger or could realistically be achieved by alternative means. Practical and commercial realities matter: the CMA will consider the feasibility, costs, risks and barriers of alternatives, and whether it would be commercially rational for the merging parties to pursue them. 

In assessing the likelihood of claimed efficiencies being realised, it will take a balanced approach, considering both practical barriers to realisation and the commercial incentives of the merged entity to deliver them.

Evidence base

The draft revised guidance sets out the types of evidence likely to be relevant to the CMA's assessment. These include operational and financial data, strategy and merger rationale documents, transaction materials, and evidence on the merging firms' track record in realising similar benefits in previous mergers. In addition to evidence from the merger parties, the CMA may also seek additional evidence from third parties, industry experts, sector regulators or other sources.

Greater evidential weight is likely to be placed on materials generated in the ordinary course of business. Where internal documents do not address all aspects of the CMA's framework, there is scope for merging parties to supplement their evidence with bespoke analysis, with the weight placed on such analysis dependent on the extent to which it is supported by other evidence.

The draft revised guidance also clarifies that, while precise quantification is not necessary or, in many cases, possible, quantitative evidence can assist the CMA in understanding the likely magnitude of both potential adverse effects and claimed efficiencies.

Dynamic efficiencies 

Mergers can generate long-term customer benefits by increasing the merged entity's ability or incentive to innovate, invest or undertake research and development (R&D). These dynamic efficiencies are distinct from static efficiencies such as one-off cost synergies.

Stakeholders noted that dynamic efficiencies are inherently uncertain, may arise only over long periods and are difficult to estimate and evidence. They called for the CMA to give greater consideration to dynamic efficiencies in its competitive assessment than it currently does, with greater flexibility in assessing timeliness and likelihood.

The CMA's internal review found that the impact of mergers on innovation is case specific. For horizontal mergers, the evidence suggests that, on average, mergers between close competitors tend to lead to negative effects on innovation and investment. The review found that, in many cases, they do not create dynamic efficiencies sufficient to increase overall innovation incentives. 

The draft revised guidance clarifies that the CMA will take a case-by-case approach to dynamic efficiency claims, as it does for static efficiencies. and will take them into account only when supported by verifiable evidence. On timeliness, the guidance acknowledges that certain dynamic efficiencies, such as increased R&D productivity, may not be expected to be fully realised for a period of several years. The CMA will have regard to market-specific context in such cases. 

Osborne Clarke comment

The CMA's draft revised MAGs signal a shift towards greater willingness to accept appropriately evidenced efficiencies arguments, continuing a trend seen in the regulator's practice over recent years. 

Three themes in the new guidance stand out for merging parties engaged in deal planning.

• Dynamic and innovation efficiencies. The CMA is more willing to credit innovation-based efficiencies, even where outcomes are uncertain or will only materialise over several years.  This is particularly relevant for R&D-intensive sectors.
• Remedy design as an efficiency tool. Time-limited behavioural remedies may be used to manage short-term harm where longer-term efficiencies are credible but uncertain in timing. Parties should consider early on whether remedy packages can be structured to lock in efficiency commitments.
• Evidence and timing. Internal documents remain central; however, robust economic analysis plays an important supporting role, provided it is grounded in well-evidenced assumptions and parameters. There is a clear incentive to identify, evidence and quantify efficiencies from the outset and to engage with the CMA early, before theories of harm harden.

Please get in touch with us for any support on deal-specific strategy or in preparing a response to the consultation ahead of the 1 July deadline.

Mattie Lefevre, a trainee solicitor with Osborne Clarke, contributed to this Insight.