In response to the ever-evolving digital age, the way consumers shop and businesses compete are also rapidly changing. As such, the Competition and Markets Authority (“CMA”) had to reassess its approach to evaluating mergers in the digital market and also address the concerns and recommendations put forward by the previous reports on digital markets, naming the Furman Report and the Lear Report.
Following its consultation on the draft revised merger assessment guidelines in November 2020, on 18 March 2021 the CMA published the final revised version of the guidelines.
Substantial lessening of competition
When assessing the competitive effects of a merger, the CMA refers to the substantial lessening of competition (“SLC”) test, which looks at whether the merger is likely to substantially lessen competition in the market or, in other words, whether the merger has an anti-competitive effect. The revised guidelines clarified the definition of SLC and the factors that the CMA will take into account when making the assessment of whether the lessening of competition is considered “substantial”. Moreover, the CMA set out that each merger will be considered in its own merit. Whilst the CMA has put forward some example scenarios of when a merger would constitute SLC, it emphasised that such examples were not to be interpreted as thresholds. The revised guidelines further explained that the CMA will take a forward-looking approach in the assessment of SLC, giving consideration to the present and future effects of the merger.
In the revised guidelines, the CMA offers an explanation of what counterfactual is, and its approach to it.
Counterfactual refers to the competitive situation without the merger, which is compared against the prospect for competition with the merger when the CMA carries out the assessment of SLC. Rather than being a test, counterfactual is more of an analytical tool that the CMA utilise in deciding whether a merger will give rise to SLC. The revised guidelines offered various scenarios in which the CMA may apply a different counterfactual, such as entry or expansion by one of the merger firms, the existing firm scenario and where competing bids are involved.
Horizontal unilateral effects
By way of background knowledge, horizontal mergers happen between firms that offer competing products. Unilateral effects can arise in horizontal mergers when the rivalry between the competing firms are removed and the merged firm profits from raising the prices as a result of such merger. This has been identified by the CMA as the most common type of theory of harm.
The CMA has revised the guidelines in relation to its approach to the measuring of the concentration, which is used to predict the intensity of market competition. This can be carried out in different ways and the relevance of each will be case-specific. The revised guidelines also explain that the measure of concentration can provide useful evidence in relation to the assessment of closeness of competition. The CMA provided example scenarios to demonstrate how the smaller the number of significant market players, the stronger the prima facie expectation is that the firms are close competitors, which in turn would raise concerns for competition in a proposed merger. Firms carry the burden of proving that they are not in fact close competitors, and the type of evidence relied on by the CMA vary on a case by case basis.
Potential and dynamic competition
The CMA has added the element of “dynamic” to the potential competitions in the revised guidelines, in line with their forward-looking approach to assessing mergers. What this means for firms is that the CMA will not only look at evidence on how firms currently compete, but also evidence as to how such competition will likely to develop in the future. The revised guidance also put forward that unilateral effects can arise from the elimination of potential or dynamic competition and sets out the approach which the CMA will take when assessing the loss of potential and dynamic competition.
The revised guidelines revealed that the CMA rarely considered coordinated effects when assessing mergers, although it is the authority’s intention to reflect on the impact that mergers in concentrated markets have and on the potential for firms to coordinate going forward.
Coordination happens when firms within the same market limit their rivalry based on a common understanding. This could be through price fixing or the division and allocation of market, by geographic area or customer characteristics. Coordination ultimately can arise in a merger and result in SLC. As such, in its assessment, the CMA will consider any pre-existing coordination, and whether the conditions for coordination would be strengthened or weaken by way of a merger. The revised guidelines also set out the framework for assessing coordination, in order to evaluate the effectiveness of the merger.
Vertical and conglomerate effects
The CMA addressed the effects of non-horizontal mergers, which can occur between firms with no direct competition, or when they do not operate in the same or relevant market. The concern raised is therefore not a loss of direct competition but the foreclosure of rivalrous businesses. The revised guidelines went into depth with the three main foreclosure theories of harm, and set out the factors which the CMA may consider in its assessment of a firm’s incentive to merge:
- input foreclosure – where the merged firm reduces its downstream rivals’ competitiveness through its upstream position, such as, refusing to supply, increasing the price or worsening the quality of products;
- customer foreclosure – where the merged firm restricts competitors’ access to customers by reducing purchases from its upstream competitors;
- conglomerate effects – where the merged firm has the ability to leverage a strong market position in one market across to a similar market in which it is also active, in order to target a largely overlapping customer base.
The CMA explored the two main ways in which SLC can be prevented in a merger: merger efficiency; and entry and/or expansion of third parties. In assessing the efficiencies resulting from the merger, the CMA will consider whether the merger will result in stronger rivalry in the market, while in analysing the effectiveness of entry and expansion, the CMA will consider the timeliness, likeliness and sufficiency in preventing an SLC.
The revised guidelines laid down the different categories of merger efficiencies, set out frameworks which will be adopted by the CMA when assessing whether either of the two countervailing factors would prevent SLC from happening in the course of a merger, as well as considering the rivals and customers’ responses to the merger.
Market with SLC
The CMA clarified the role of market definition in the revised guidelines, offering a more flexible approach to defining the term. This will seek to improve the process of evidence gathering as part of the CMA’s assessment of competitiveness in mergers. The revised guidelines offered two market definitions: product markets; and geographic markets, and further explored the factors on both demand and supply-side in each of the markets.
WHAT THIS MEANS FOR FIRMS
These revised guidelines will apply to all mergers taking place from the date of their publication.
Firms currently considering or going through mergers should thoroughly consider the points raised in the guidelines in order to ensure that the contemplated mergers do not result in SLC.
To review the guidelines in full, please see: CMA guidelines
For more information, and any guidance or advice on mergers, Cleveland & Co, your external in-house counsel™, are here to help.