It is becoming harder to get mergers cleared in the UK. The Competition and Markets Authority (CMA) is taking an increasingly sceptical view and wants to go further by getting government to change the rules to make it even easier to block mergers involving large technology companies. Why has the CMA raised the bar, and is there a case for further change?

The CMA is getting tougher on mergers… 

Chart 1 - Percentage of Phase 1 decisions that are a referral to Phase 2

Chart 2 – Percentage of Phase 2 case decisions that are prohibitions

Source: Analysis of CMA data - Merger inquiry outcome statistics.  Both charts look at the period since the creation of the CMA 

The CMA recently issued a statement (jointly with the German and the Australian competition authorities) in which it made clear that it was willing to intervene in mergers even when the prospect of consumer detriment was far from certain, and that it was going to be more sceptical about evidence provided by merging companies to justify their plans.  

The statement provides two reasons for this stance. First, it says there are more mergers in dynamic and fast-paced markets where benefits and detriments are uncertain. Second, it is concerned about increasing concentration. Taking each in turn: 

• When looking at a dynamic market, the CMA must consider how it might develop in future, rather than relying on evidence about its current state – inevitably, this means the likely impact of mergers is less knowable. However, it does not mean the impact is more likely to be harmful than beneficial. The joint statement notes that even small transactions can tip markets – for example the acquisition of a small start-up could remove what would have turned out to be a major competitive threat to the purchaser in time. But the statement downplays the potential for small transactions to have far-reaching benefits – by accelerating scale-up and adoption of new technology, driving productivity and growth, and by recycling early stage capital and entrepreneurial talent into the next generation of businesses.  
• The purpose of merger control is to prevent higher concentration and the lapse of dynamic, competitive markets into ossified oligopolies. While several studies have found increases in concentration in US markets, the CMA’s own State of Competition report found that industrial concentration has been fairly stable over time in the UK, if anything declining in the last five years. 

The tripartite statement suggests the CMA has allies but not yet a broad coalition internationally in support of a tougher stance on mergers. In our view, the arguments are not clear cut, and the debate is far from over. 

…And the CMA would like to go further 

Earlier this year, the CMA updated its Merger Assessment Guidelines to reflect the approach used in recent cases (such as PayPal/iZettle and Amazon/Deliveroo). In so doing it recognised that it already makes judgements about future developments without concrete evidence, and confirmed the latitude it has under the current regime: 

“the absence of certain types of evidence (…) will not in itself preclude the CMA from concluding that the SLC [substantial lessening of competition] test is met on the basis of all the available evidence assessed in the round.” 

Nonetheless, the Digital Markets Taskforce (which sat in the CMA) proposed steps to make it even easier for the CMA to block mergers involving large technology companies (those with “Strategic Market Status”), recommending that such mergers be evaluated against a lower standard of proof.  

To block a merger today the CMA has to show that it will cause harm to consumers on the balance of probabilities. Under the Taskforce’s proposals the lower realistic prospect standard of proof would suffice. Under this standard, which currently applies at phase 1 and is recognised by the courts to be a low threshold, the CMA would have wide discretion to block a merger at phase 2 as long as it believes that the likelihood of an SLC is “greater than fanciful”.  

Given the CMA already enjoys wide latitude to undertake forward-looking analysis, it is not clear that there are strong grounds to weaken the standard of proof. Ex post analyses of past merger decisions commissioned by the CMA (KPMG (2017) and Lear (2019)) found analytical shortcomings in the case studies analysed (e.g. too much weight on constraints from other competitors, or overly cautious interpretation of forward-looking evidence), meaning different conclusions may have been warranted on the basis of the evidence available. But it is not obvious that constraints in the regime prevented the CMA from acting. 

Weighing the relevant factors

The CMA is right to be sceptical about merger benefits. And it is right to tailor its approach in dynamic and fast-paced markets, making forward-looking assessments rather than relying on evidence of the status quo. However, it is not clear that the CMA needs more latitude than is permitted within the current regime to cope with fast-moving markets, or that the benefits of (even) tougher enforcement would outweigh the costs.  

Anecdotally, we hear business founders and early stage investors express concerns that a tougher merger regime risks blocking the “route to exit”, a key consideration for early stage investors. More generally we hear scepticism that competition rules take proper account of start-ups and innovation. There is a risk that an increasingly intrusive merger regime casts a cloud over the prospects of exit via private sale in the UK, chilling investment in start-ups.  

The key thing is that, in updating the competition framework for an increasingly digital economy, government and the CMA consider not only the (uncertain) risks from merger activity but also the (also uncertain) potential benefits. And not just the efficiencies and customer benefits associated with each individual transaction, but also the wider impacts on innovation and productivity of the regime. 

Mary Starks is a Partner at Flint.  She wrote this piece with input from another Flint Partner, Simon Maunder.  To find out more about how Flint can help you navigate the risks and opportunities of these developments get in touch.