Three regulatory considerations for your M&A activity
June 05, 2018
When looking at acquisition opportunities, it is important to consider the merger control process that will apply, the competition authority that may need to be consulted with and consider who within your sector is already doing this effectively. This is an essential element of starting early and hitting the ground running; it enables you to develop clear plans for value realisation to ultimately boost your M&A success.
In the UK, the Competition and Markets Authority (CMA) has the power to obtain and review information relating to mergers. The CMA routinely consults the sectoral regulators about any mergers in which they are likely to have industry-specific knowledge. Under the EU Merger Regulation, the Director-General for Competition has jurisdiction over mergers that have an ‘EU dimension’. It can also, in certain circumstances, progress into a merger investigation for mergers that don’t have a strong EU dimension where it is commanded by those involved in the deal; or EU Member States. Building this early into your strategy, having a clear understanding of how the process works and the implications for your potential acquisition(s) will help you deliver deal success.
In the UK, once consulted, the CMA will undertake a Phase 1 review and, if it determines there is sufficient requirement, it will refer a merger for an in-depth Phase 2 investigation. This happens when:
- A relevant merger has been created or where arrangements or planning are in progress which will result in merger activity
- The creation of that situation has resulted, or may be expected to result, in a substantial lessening of competition within any market or markets for goods or services in the UK.
Outside of the CMA process, the Secretary of State (Business, Energy and Industrial Strategy) has the power to take into account the public interest considerations relating to: national and public security, newspaper and other media mergers and the stability of the UK financial system. Separately, there are currently ongoing consultations on including a review of national interest for some transactions.
Where the timing requirements set out in the Enterprise Act which covers CMA merger review activity are met, the potential deal will be considered in the UK where enterprises cease to be distinct; turnover exceeds £70m or where the new entity will supply more than 25% of the market. The EU triggers are based around a number of different parameters in terms of turnover.
So what does this mean for your proposed M&A activity?
There are several different aspects to consider when looking at your M&A position in relation to your industry:
Consideration one: Strategy relating to your specific market
Your strategy is vital to your future success; it can provide you with a competitive edge.
To increase the chances of deal success, early on you should consider the following:
- The value and the potential price to pay as part of an acquisition that would make the deal worthwhile. You may consider paying a premium to remove the risk of losing a target to a competitor which, as concentration within your industry increased, would result in any future deals being completely blocked.
- If a competitor makes the acquisition move first, you may lose a potential market advantage as well as not being able to acquire any future divested assets or operation due to your existing market share. This may include undertaking your own internal analysis of your organisation’s operations and structure to determine what your future state could look like to avoid your market position being compromised.
- The potential deals within the industry and conduct a preliminary economic analysis to assess the potential hurdles and required divestments; of which the latter would drive your carve-out planning.
The synergies that can be achieved with the parts of the target business that can likely be retained.
Consideration two: Planning for merger activities
Effective early planning for any merger activities, particularly around integrating two businesses can enhance your market position as well as shareholder returns. In this instance, success is determined by the need to understand key merger delivery activities:
- The target due diligence work needed as part of any merger activity
- Identification of synergies and dis-synergies from the merger as well as the implementation costs associated with delivering these
- Integration feasibility reviews to determine the complexity (or not) of integrating the two distinct entities
- If required, how a ‘clean team’ would run; particularly considering the impacts on involved employees who may not be able to move back to their old roles should the deal not go through
- Development of a robust end-to-end integration plan prior to the merger being completed to allow you to understand the one-off implementation costs required to deliver the full deal value
- Planning for ‘day one’ to ensure you take control and safeguard continuity of service to your customers
- Ensure no value is left on the table with robust post-deal transformation planning
- Identification and planning of any carve-out activity that may need to occur including identifying any post-deal services that may need to be provided to the new owners of your divested operations
Consideration three: Interaction with the competition authority
A clear strategy should be developed as to how and when you inform the regulator as their final decision can fundamentally impact the value of your merger or acquisition and, even potentially, its viability. Early on, ask yourself:
- What would be the impact on your deal be if you don’t inform the regulator but they initiate an investigation?
- At what point in the process do you notify the regulator of your intention through the identification and acquisition process?
- Do you ask for economics advice to assess what the regulator’s decisions may be, e.g. divestment requirements, to assist with your strategy planning and investigation processes?
By considering your strategy, and planning your interaction with authorities, your business will be in a stronger position to protect, or improve, its standing in the market and deliver real value out of the deal while also avoiding unexpected surprises through the market review and approval process.
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