More hurdles, higher hurdles? – getting the deal through in the post-COVID-19 world

Merger control – getting the deal over regulatory and political hurdles – has in recent years become less predictable and more complicated. Systemic shifts in how competition authorities and their political masters believe transactions should be assessed are likely to be accelerated by COVID-19, with merging parties facing a more complex environment in future. Finsbury’s Head of Merger Control, John Gray, offers his analysis.

The father of modern business management theory, Peter Drucker foresaw much in the modern economy: outsourcing, the ‘knowledge society’ and the value of corporate purpose. He was though candid about his ability to predict the future, which he likened to “trying to drive down a country road at night with no lights while looking out the back window”. For anyone making predictions for the world post-COVID-19, his analogy should probably be extended to hand the driver in that car a very thick blindfold indeed.

When it comes to assessing the impact of the COVID-19 crisis on M&A and in particular, merger control – the essential business of convincing regulators and politicians of the merits of a transaction – emerging trends which pre-crisis were making merger clearance less predictable and more complicated, are likely to be accelerated by the crisis. There are three aspects that merging parties will need to give close consideration:

  1. The Great Wall of China will get even higher. Originally built to keep out Mongol invaders, today the western economic powers are rapidly building their own wall to keep in Chinese investment, through a series of often quite openly Sinosceptic foreign investment screens. While the use (and abuse) of CFIUS by the Trump administration has been well documented, there is a none too silent revolution taking place within Europe, with both the European Commission and Member States (and the UK) reducing their openness to Chinese investment. The COVID-19 crisis has delivered a dramatic expansion of such measures, initially to protect clinical and healthcare industries, with several EU Member States now equipped with far-reaching powers to block unwelcome ex-EU investment, reaching a recent zenith with Germany considering prison sentences for failure to obtain pre-clearance. The risk is that with these powers in place, the old adage of holding a hammer leading to everything appearing as a nail becomes true. On 21 April the EU Internal Market Commissioner, Thierry Breton called for even the European tourism sector to be protected from “aggressive investment strategies from non-European countries”.
  2. What is a good merger? The simmering tensions within the global competition policy community between the Borkian and neo-Brandeisian schools, has it is fair to say, not yet become a topic of water cooler conversation. The eventual outcome of this debate should though concern every merging party. Put simply, the victor will get to define how competition regulators decide, what is a good merger? The Borkian School currently ascendant (named after former Solicitor General of the United States, Robert Bork) sees the market share of merging entities as only one consideration, with how this scale would be used to deliver efficiencies to benefit consumer welfare – particularly with lower prices – the critical consideration. Big, according to Bork, was not necessarily bad and often very good. This pre-eminence has in recent years been challenged by the neo-Brandeisians (following the tradition of former Associate Justice of the Supreme Court of the United States, Louis Brandeis) who argue that mergers should not solely be judged on delivering lower prices, but also their wider societal impact, such as on employment, democracy and the environment. What may give the neo-Brandeisians further impetus are new economic priorities in the post-COVID-19 world, such as security, resilience and reliability. Professor Amelia Fletcher, former Chief Economist of the UK competition regulator, posed the question recently that too great a focus on efficiency had perhaps led to lack of economy-wide preparedness in the UK. This argument might well hold true in the supply of PPE and at times, groceries. Merging parties might in future need to think beyond just narrow price benefit to consumers as part of an already hardening attitude against mergers.
  3. A gilded cage is still a cage. Despite the colossal amounts of fiscal support being provided by national governments, there will inevitably be significant disruption in almost every economic sector. Marginal players will go out of business and already strong businesses will find themselves even stronger, with greater market share. A very welcome windfall to a large extent, but the ability of such beneficiaries to then undertake strategically important acquisitions will be very heavily circumscribed by competition regulators, seeking to re-inject competition into sectors that have seen it disappear overnight. Merging parties, who have found themselves strengthened as a result of the economic dislocation of COVID-19, will have to be wary of both regulatory and political perceptions of their scale and influence, and how they have acquired their position. Conversely, those businesses that have benefitted from government recapitalisations may see M&A activity brought to a halt, as the European Commission is considering.

The economic dislocation resulting from COVID-19 has barely begun, let alone ended. Merging parties will in future need to navigate increasingly complex territory, which discriminates on grounds of nationality, with shifting perceptions of who should be the winners (and the losers) from a merger assessment and on what terms.