Introduction
It’s great to be here today and to have the opportunity to speak directly to this audience. The tech and life sciences sectors are important industries, which bring many benefits to UK consumers and the wider UK economy. The Competition and Markets Authority (CMA) recognises the importance of these sectors and today provides the opportunity to engage in a two-way dialogue about the process and impact of UK merger control. So thank you all for having me.
International reach of UK merger control
1 . Could you please first explain the international reach of UK merger control. For example, we’ve seen the CMA take jurisdiction over the last few years on deals that are perceived to only impact the US and/or where the target has hardly any activities in the UK, or does not generate revenue in the UK – what’s the basis for this and why has the CMA intervened in these deals?
When we look at the jurisdictional reach of the UK’s merger control regime, it’s helpful to consider 2 different aspects: what deals does the CMA have jurisdiction to review and when does the CMA have the power to block a deal.
Our jurisdictional test includes a turnover test – similar to turnover tests used for notification requirements in many countries – and also has an alternative “share of supply” test. That may be less familiar to non-UK businesses and advisors. So, broadly speaking, if the merger parties together supply UK customers goods/services above the threshold of 25%, with an increment from the merger, we are able to review the deal. The test was deliberately designed to be applied broadly and flexibly, and the UK courts have endorsed this reading of the legislation. The principal aim of the test, as articulated by the Competition Appeal Tribunal in Sabre v CMA is to identify a merger which does not meet the turnover test, but in respect of which there is a sufficient prospect of a competition concern arising from an overlap in a relevant commercial activity as to render it worthy of investigation. [footnote 1] I’d like to highlight a number of points about the share of supply test.
Firstly, in terms of identifying relevant goods/services, the share of supply test is different to a “market share” threshold that some merger control regimes have. In particular, and as explained in our Guidance on the CMA’s jurisdiction and procedure (the Jurisdictional Guidelines), it does not require an assessment of the relevant economic market and there is no automatic read across to the substantive competition assessment. We will consider the commercial reality of merging parties’ activities; this could, for example, include taking account of the life cycle of the supplies in question, as we did in Roche/Spark, where we considered the parties had a material presence in the UK market by virtue of pipeline products. And when assessing if the share of supply threshold is met, the share doesn’t need to be measured in revenue terms. The legislation provides a non-exhaustive list of criteria that can be considered as part of the CMA’s assessment – of which revenue is only one factor – for example, cost, quantity, capacity, and workers employed. [footnote 2] It makes sense not to focus solely on revenue, given there can be competitive interactions between players even without revenue generating activities. For example, in digital markets users are often offered services free of charge and companies can therefore have a presence in the UK – and serve UK consumers – without necessarily generating revenue in the UK, as we saw for example in Meta/GIPHY.
Secondly, there is no de minimis threshold when considering the increment needed to satisfy the share of supply test. In some of the cases we have looked at – for example Sabre/Farelogix – there was a significant existing share of supply on the part of the acquirer combined with a small increment. This approach should not take advisors by surprise – it is founded on a precautionary gating principle that acquisitions that may lead to increments to pre-existing high UK shares of supply (which may often reflect positions of UK market power) merit investigation and careful scrutiny by the CMA.
Finally, to satisfy the test, there needs to be a UK nexus. This is broader than just company location; otherwise, simply situating a business outside the country would allow you to avoid merger control over a deal affecting domestic consumers. So, we look at the arrangements in practice, for example, if services are being provided to customers located in the UK, or where goods/services are ultimately delivered, supplied, accessed, or used. We aren’t limited by whether there is a direct contractual relationship between suppliers and customers, and the legislation allows us to look at making services available to potential users. [footnote 3]
So, in answer to the question, we’ve never asserted jurisdiction in relation to a merger that only affects the US – nor would we have any reason to want to do that. But we have looked at cases where the merger parties are serving UK customers but are based elsewhere, including the US, as explained. The UK is an important market for global businesses, so it is not surprising that in many cases a global business has activities in the UK.
But of course, just because we have jurisdiction to review, does not mean that there is necessarily a substantive competition concern and as mentioned the share of supply test does not have an automatic read across to the competition question. We have cleared mergers where jurisdiction was established on the basis of the share of supply test, for example, Roche/Spark and Google/Looker.
And it is worth recalling that the UK has a voluntary merger regime: merging parties can choose whether or not to notify a deal to us – and although we also have the power to “call in” deals that meet the jurisdictional test but are not notified, the CMA does not call-in every merger that meets the jurisdictional test. We use our review power proportionately. In addition to mergers that are proactively notified to the CMA, each year our mergers intelligence committee reviews between 500 and 700 transactions and considers whether to “call in” those transactions for phase 1 review. We only call in those mergers that have a reasonable chance of both raising competition concerns and meeting the jurisdictional test. In practice, therefore, very few of the mergers the CMA’s intelligence committee looks at are “called in”; for example, in 2020 to 2021, only 7 of the 550 mergers reviewed were called in.
As I mentioned, it is important to note that there is also a jurisdictional element to our substantive assessment: where we have jurisdiction to review a deal, we can only take action where we identify a substantial lessening of competition in the UK. So there is in effect a requirement for a UK nexus at this point too; we have to show that the deal creates competition concerns in the UK (reflecting our duty to protect UK consumers).
Finally, the UK government announced last week a broad set of reforms to the UK competition and consumer regime following a public consultation last year. The changes are subject to legislation and therefore will take some time and are not anticipated to come into effect this year. But taking a forward look, the changes to the merger regime include introducing an additional test to determine jurisdiction aimed at “killer acquisitions” and other mergers that do not involve direct competitors, such as vertical and conglomerate mergers. The test would remove the need for an increment if one of the merger parties has a significant UK presence, established where the party has both a share of supply of 33% and a UK turnover of at least £350 million. There will be a specific UK nexus criterion, details of which are to be set out.
These reforms are distinct from the proposed reforms to establish a separate merger regime for firms with ‘strategic market status’ – the large digital players – whereby these firms would be subject to closer scrutiny. We are waiting to see which proposals the UK government decides to take forward. But in any event our current powers enable us to review digital mergers closely where we have the jurisdiction to do so under the current regime and where potential competition concerns arise.
Innovation competition in the tech and life science sectors
2 . How does the CMA analyse a tech or life sciences merger’s effects on innovation competition? Does the CMA see its approach as more expansive than other leading authorities around the world? In particular, what is the CMA’s position on acquisitions by digital platforms?
It’s worth noting at the outset that the importance of innovation efforts as a parameter of competition (and the critical role that merger control plays in protecting innovation) is well-established in the CMA’s decisional practice, the practice of other competition / antitrust authorities and the economic literature. There has been a sharper focus on assessing innovation competition in recent years given the nature of markets in which innovation competition is a feature.
The CMA has assessed the loss of innovation efforts in previous mergers, including in relation to digital markets and the life sciences sector. We have reflected the importance of innovation competition in our updated Merger Assessment Guidelines (MAGs). Our guidelines draw together decisional practice over the years reflecting our improved understanding of dynamic markets and recent contributions in the economic literature.
But the CMA isn’t an outlier in this regard. There is broad consensus across leading competition authorities on the policy approach on innovation competition. The European Commission’s horizontal merger guidelines (which date from 2004) discuss the importance of innovation as a parameter of competition. The FTC/DOJ horizontal merger guidelines (published in 2010) provide for the assessment of innovation, and there is a public inquiry underway to update the guidelines in light of the unique characteristics of digital markets. And in 2021 the CMA, Australian Competition and Consumer Commission (ACCC) and Bundeskartellamt issued a joint statement on merger control enforcement explaining the potential competitive harms that can arise in dynamic markets where innovation is a feature. The joint statement emphasised the importance of robust scrutiny of mergers where dynamic competition is a feature, explaining that the inherent uncertainty in these forward-looking assessments does not mean that a potentially anticompetitive merger should be cleared. The new leadership of the DOJ and FTC have expressed very similar policy positions in a number of recent speeches. And this is all grounded in the economic literature. [footnote 4]
So we don’t see our approach as more expansive but rather it is built on established principles and applied similarly to other leading authorities.
Looking at acquisitions in digital markets in particular, innovation competition is particularly important in these markets. The importance of innovation in digital markets in particular was highlighted in the Furman Review, a report prepared by a digital competition expert panel for the UK government. Markets with digital platforms are typically highly concentrated markets with features such as high barriers to entry due to network effects. This can result in high market concentration, such that market power is easily created or entrenched, and is likely long-lived – and that we are therefore concerned even about an incremental loss of competition. Therefore, the major digital platforms should expect close scrutiny when undertaking acquisitions. And we would encourage those companies to engage early with the CMA in respect of their proposed mergers.
Of course, none of this means that the UK – or CMA – is anti-tech or anti-innovation. Quite the contrary. We think it is appropriate to apply a high degree of scrutiny to acquisitions of nascent competitors by large digital players so that digital markets continue to develop in a way that fosters innovation and competition, stimulating growth and benefiting UK consumers. This is advantageous for the many companies seeking to grow their businesses in these markets (and for investors in these companies, including those considering exit strategies). And close scrutiny does not amount to a policy of blocking competitively benign mergers; we have recently cleared several mergers involving major platforms that did not give rise to competition concerns, including Google/Looker, Amazon/Deliveroo and Facebook/Kustomer.
The CMA’s approach to future and dynamic competition
3 . Can we just laser in on the CMA’s distinction between potential/future competition on the one hand and current/dynamic competition on the other, as it has very important practical significance. On tech and life sciences deals in particular, we often hear acquirers tell us that the company they’re planning to buy is an innovator but isn’t active in the relevant product mark
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