Notable Changes in Global Regulatory Regimes
Gil Ohana, the senior director of Antitrust and Competition at Cisco Systems, reaffirmed that it is still possible to complete significant tech mergers and acquisitions, even horizontal mergers, in the right product space. The review process may be lengthy and the outcomes harder to predict, but regulatory approvals can still be obtained in time with the right global strategy and enough foresight.
Paula Riedel, a partner at Kirkland & Ellis’ London office, observed that, in Europe, there is tension and divergence in regulatory approaches between the European Commission (EC) and the Competition and Market Authority (CMA) on global deals post-Brexit. For example, in the proposed Microsoft / Activision merger, the EC and CMA came to similar conclusions about the potential anticompetitive risks in the emerging cloud gaming market. However, they differed in their respective approaches to enforcement. The same 10-year behavioral remedy proposed by Microsoft was accepted by the EC but rejected by the CMA; the latter prohibited the merger, citing the insufficiency of the proposed remedy to address concerns in the cloud gaming market. Microsoft is appealing the CMA’s decision.
Craig Minerva, a partner at Axinn, Veltrop & Harkrider’s Washington, D.C. office, noted that, in the United States, there has also been a shift in enforcement posture. In particular, the U.S. Federal Trade Commission (FTC) and Department of Justice have (DOJ) broadened the scope for theories of harm and issued statements disfavoring the use of remedies to address potential antitrust concerns. As a result, some merger cases are decided in federal court, and courts have ruled in favor of the merging parties in several recent decisions. The courts tend to adhere more closely to conventional antitrust law, despite the recent change in enforcement policies due to the change in administration.
Ninette Dodoo, a partner at Freshfields Bruckhaus Deringer’s offices in China, remarked that like the U.S. and Europe, Asia is witnessing more robust enforcement of antitrust laws. In China specifically, while most deals do not lead to competition concerns and can be reviewed under the simplified procedure, some can raise concerns such as high-profile, transformative tech deals that attract public attention. In 2022, more than 80% of the total number of transactions reviewed in China were under the simplified case procedure. All deals reviewed under the simplified procedure, including some tech-related deals, were cleared unconditionally and within the Phase 1 statutory review period of 30 calendar days. Semiconductor deals, however, have attracted close scrutiny in China. For example, of the five deals in 2022 that required remedies, three were semiconductor deals.
Vertical Mergers
In the tech space, vertical mergers are becoming increasingly common. The novel nature of technology and tech deals expands the scope for theories of harm the merging parties need to address. The panelists discussed lessons learned from advising vertical mergers.
Ms. Riedel enumerated three potential theories of harm for vertical mergers in the tech space. Traditionally, common theories of harm for vertical mergers involve input foreclosure and customer foreclosure. In the U.K., there are now increasing concerns about harm to dynamic competition. For example, in tech mergers, when a near dominant acquirer is buying a target in a vertical market, there can be concerns about entrenching the market power of the platform. Indeed, all three theories of harm raised in the Google / Fitbit merger were dynamic in nature.
Mr. Minerva expected the U.S. antitrust agencies' forthcoming merger guidelines to provide insight into any new thinking on vertical mergers. As the courts are not required to rely on the merger guidelines for their decisions, the new guidelines are less likely to be considered probative in the long term unless they are also well-reasoned and grounded in mainstream principles like the widely accepted horizontal merger guidelines.
Ms. Dodoo commented that when it comes to vertical mergers, decisions of the State Administration for Market Regulation (SAMR) like its predecessor the Ministry of Commerce, show a particular concern about input foreclosure i.e., access to inputs, such as core raw materials, infrastructure or data, which can shape the remedy negotiations. The decisions also point to concerns about bundling and leveraging theories of harm (but less to portfolio effects).
The panelists agreed that while ordinary course business documents are increasingly relied upon compared to economic data, economists will continue to provide foundational analyses for merger reviews. Mr. Ohana explained that in addition to predicting the effects of the potential merger with standard economic tools such as vertical arithmetic and econometrics, economists also inform the parties about the potential economic implications of their business documents. As agency economists will invariably examine how the parties’ documents translate into key model inputs such as product margins, understanding these documents through an economic lens in the early stages of the deal has proven valuable, especially in complex global mergers.
Managing Mergers Across Jurisdictions
The interconnectedness and idiosyncrasy of global merger fillings increasingly make it as much a project management exercise as a legal exercise, for which planning the timeline and coordinating a global strategy is particularly important. The panelists shared the following key insights:
Ms. Riedel warned that not hitting notification thresholds does not necessarily mean there will be no investigation of the deal. For example, there has been a seismic shift in the EC’s approach. Until recently, the EC had been unable to capture killer acquisitions in tech, in which leading platforms acquire nascent potential competitors because the EC has fixed revenue thresholds for merger reviews. With the reframed usage of Article 22, member states can refer cases that fall below the national thresholds to the EC for review. Therefore, planning and ensuring that transaction documents provide for those contingencies is essential.
Mr. Minerva acknowledged that merger reviews have taken longer over the past several years. For the U.S. timeline, if there is no litigation or enforcement action, deals can usually clear faster than those in many other jurisdictions. On the other hand, if there is interaction between U.S. and foreign timelines, U.S. agencies do not have to litigate as quickly as they otherwise would if foreign agencies have not already approved the deal. Based on the results of recent decisions, merging parties have been relatively successful. The DOJ won the Penguin/Random House lawsuit but lost quite a number of their other recent cases.
The possibility of going to court can deter deals that may be potentially viewed as anticompetitive by regulators. However, in litigation, there have been more victories by the merging parties. Since different parties have varying appetites for risk and timing, businesses need not be deterred from pursing deals.
Mr. Ohana observed that there are also other jurisdictions that tend to have long timelines, such as Brazil and India. Merging parties should prepare for a wide margin of time if planning to file in those jurisdictions. Creative remedies may be needed due to the complicated merger landscape. Being willing to accept what is required will go a long way towards completing these deals.
Ms. Dodoo added that while coordination across jurisdictions is key, it should not be assumed that the same remedy offered in the U.S. or the EU will be accepted in other jurisdictions. For example, approval in China has sometimes required an additional component to address concerns that are unique to the China context even if other antitrust agencies have imposed a global remedy. Such ‘add-on’ remedies can be structural or (often) behavioral in nature. In other cases, remedies have been imposed China whereas other antitrust agencies have not. A recent example is the GlobalWafers / Siltronic deal where the parties were required to address China-specific concerns.
Mr. Minerva and Ms. Riedel opined that remedies may also see further developments in the U.S. and the U.K., where the regulators have expressed aversion to imposing and/or accepting behavioral remedies. Such a stance may not be sustainable with other jurisdictions adopting such remedies. Although attempting to find a structural solution is the best way to get a deal passed in the U.K. in the present, this may change over time.
Overall, our expert panelists recognized the impact of global competition policy shifts on both the sentiment of the business community and terms of engagement with regulators. They are confident that parties that understand the nuances of global merger control and prepare for contingencies early on can prevail despite regulatory uncertainties.
