Innovation and merger control

August 2018  |  FEATURE  |  MERGERS & ACQUISITIONS

Financier Worldwide Magazine

August 2018 Issue

Merger control authorities appear increasingly willing to exercise their right to block mergers, demonstrating a strong appetite for enforcement. With more deals facing regulatory scrutiny than seemingly ever before, it is vital that merging companies are prepared to have their potential deals rigorously assessed.

One of the biggest factors influencing merger control reviews is innovation. The European Commission (EC) (which operates alongside and must co-exist with national merger control regimes in most of the European Union’s 28 Member States), the US Department of Justice (DOJ) and the Federal Trade Commission (FTC) are now equally concerned about the competitive harm caused by the potential reduction of innovation as they are with increased prices and reduced output stemming from a merger.

Companies in the pharmaceutical and agricultural sectors, for example, have been consolidating at a rapid pace, to the point that a handful of companies now dominate those markets. And with such domination comes less pressure to pursue innovation, which, in turn, has led to a decline in research and development (R&D) spending, as well as reduced competition.

In 2016, the FTC challenged 22 mergers after determining that they would likely result in competitive harm in the form of higher prices, reduced quality or lower rates of innovation. Though the majority of those challenges result in negotiated settlements which were designed to maintain competition in the affected markets while still allowing the merger to proceed, the FTC did block three deals, including Staples’ proposed $6.3bn acquisition of Office Depot.

The DOJ too is more actively scrutinising proposed deals, particularly in the agribusiness space. US Congress has also expressed an interest in agricultural deals. In September 2016, the Senate Judiciary Committee held a hearing on ‘Consolidation and Competition in the US Seed and Agrochemical Industry’.

For companies operating in the EU, the EC’s approach to innovation and dealmaking is nothing new. In a July 2014 address to the European Parliament, president Jean-Claude Juncker argued that “Jobs, growth and investment will only return to Europe if we create the right regulatory environment and promote a climate of entrepreneurship and job creation. We must not stifle innovation and competitiveness.” European Commissioner for Competition Margrethe Vestager has also echoed these sentiments, noting that it is her responsibility to ensure that companies which dominate the market don’t misuse their power to stop others competing” and that “they don’t shut down innovation before new ideas have the chance to show customers what they can do”.

The Commission’s Horizontal Merger Guidelines also dictate that a merger between an incumbent and a potential competitor can give rise to anti-competitive effects where the “potential competitor significantly constrains the behaviour of the firms active in the market”. According to the Guidelines “the effect on innovation” is a factor which must also be considered in merger control.

In Europe, the proposed mergers of GE and Alstom, Dow and DuPont, and Bayer and Monsanto were examined by the EC on innovation grounds. The EC’s decision to clear the $130bn merger between Dow and DuPont was one of the most important rulings in some time. The EC was concerned that innovation could suffer as the combined parties’ incentive to develop and bring new pesticides to market would be reduced. DuPont was ordered to divest its global R&D unit as a way of ensuring that innovation would not be diminished.

Industry consolidation can have a dramatic impact on product pipelines and on companies’ ability to get their products to market. This is particularly pertinent in industries such as the pharmaceutical and technology sectors, which dedicate considerable resources to R&D and so may wish to merge with a firm that could potentially produce similar products. Such mergers raise significant questions, however. It is not currently clear how parties can demonstrate that their mergers will not harm innovation.

The EC’s decision in the Dow/DuPont merger could have serious implications. Companies must be wary when pursuing deals which involve markets where innovation is a key parameter of competition. Their deal planning should consider innovation and make allowances for it early in the process.

Innovation will continue to be a major consideration for competition authorities around the world. There are, of course, areas of uncertainty, particularly in the EU where the bloc’s future relationship with the UK remains unclear. At present, if a merger is notifiable at EU level, the UK’s Competition and Markets Authority (CMA) does not have primary jurisdiction to review that merger. However, in the aftermath of Brexit, the UK’s merger control regime will be outside the EU and it is possible that both the European Commission and the CMA will need to review deals, adding a further level of complexity to the process. This could, at least in theory, lead to a divergence in the treatment of innovation during merger reviews, post-Brexit.

© Financier Worldwide

BY

Richard Summerfield