Platypus / Rhino - the break-up album

Three years into their divorce, how are the EC and CMA approaching parallel cases? Has single life become smooth sailing or should the regulators have paid closer attention to their prenup?  In our yearly analysis of divergence ratios for parallel cases, Platypus has previously tracked the CMA and European Commission’s initial break-up period (2022) and trend-spotted as the new divorcees begun to establish themselves independently of one another (2023). This year has been an important one for parallel review of cross-border mergers - so much so that Platypus and Rhino have teamed up to collate the first official break up album in the EC / CMA love story. 

Since our last review, there have been eleven completed merger cases reviewed in parallel by the Commission and the CMA. The authorities reached the “same” headline conclusion (i.e. unconditional clearance, conditional clearance, or prohibition) in just over half of these. But behind the headline lies a more complex picture – there is much to read into the lyrics of the tracks on this break-up album, and that’s just what we do in our joint Platypus/Rhino post. In short:

• Three parallel cases were cleared unconditionally on both sides of the Channel.
• Two parallel cases were conditionally cleared by both the Commission and the CMA (although both at different phases of review).
• One parallel case was abandoned following competition concerns expressed at Phase 2 by both regulators.
• Two parallel cases were unconditionally cleared by one regulator, but subject to remedies for the other (with one a piece for the CMA / Commission).
• Two parallel cases were cleared unconditionally by the CMA, but prohibited (or abandoned) by the Commission.
• One parallel case was conditionally cleared by the Commission, and first prohibited but then restructured and cleared by the CMA.

Friend zone – alignment in decision-making

Of the eleven completed parallel cases we have seen since Platypus’ last review, there remains significant alignment between the CMA and Commission in most areas. There were three cases unconditionally cleared both sides of the Channel, two at Phase 1 (Yokohama Rubber Co / Trelleborg Wheel Systems Holdings, Blackrock / Mubadala / Goldman Sachs / Equitix / Calisen Mapleco) and one at Phase 2 (Viasat / Inmarsat). The latter is particularly noteworthy, as it involved a complex assessment of dynamic competition and the Commission and CMA agreed that the entry of Elon Musk’s Starlink was a critical factor in the dismissal of competition concerns.

And when it comes to alignment on competition concerns in global markets, the Commission and CMA have also sung from the same hymn-sheet in several high-profile cases. Notwithstanding the coverage on divergent ultimate outcomes (more below), the Commission and CMA identified the same competition concerns in Microsoft / Activision. In addition, parallel phase 2 referrals in Adobe / Figma indicated that both authorities were ready to take a closer look at dynamic competition. Before the parties abandoned the deal, the CMA provisionally found that Figma could become a close competitor to Adobe in the future in spite of limited third party support for the position that Adobe and Figma currently compete in image editing software, and Figma’s position that it is neither present in the image editing market, nor could it offer image editing software due to significant technological barriers to entry and a lack of commercial rationale to pivot its business. Similarly, the Commission sent a Statement of Objections in which it found that “absent the transaction, Figma is significantly likely to enter these markets and grow into an effective competitive force.”

Just yesterday, the Commission provided our resident mammals with an early Valentine’s Day present in the form of a conditional clearance in Korean Air lines / Asiana Airlines. The deal was also cleared conditionally at Phase 1 by the CMA following its acceptance of undertakings relating to slots at London Heathrow Airport and Incheon International Airport near Seoul, which would facilitate Virgin Atlantic Airway’s entry on the routes. Meanwhile in Brussels, the Commission undertook an in-depth review and has now also cleared the deal, albeit subject to substantial commitments. To appease the Commission’s concerns on cargo, Korean Air must divest Asiana’s global cargo freighter business (including freighter aircraft, slots, traffic rights, flight crew, and other employees, as well as customer cargo contracts, among others) to an approved buyer. In addition, to address the Commission’s concerns on passenger routes, Korean Air will make available to T'Way, a rival South Korean airline, the necessary assets to enable it to start flight operations on four overlap routes (including slots and traffic rights as well as access to the required aircraft). And in a novel move, Korean Air has committed not to complete the merger until T'Way has started operating on the four routes. The CMA and Commission were thus aligned in terms of substantive concerns and overall outcome - while the remedy packages differ, this reflects the different (and more extensive) routes the parties flew into the EU compared to the UK, although the Commission went further than the CMA in requiring T’Way to actually fly the relevant routes before completion.

We were on a break – alignment masquerading as divergence?

Platypus and Rhino found two parallel decisions which, while appearing to be divergent outcomes, don’t seem so far apart when we scratched the surface. Hitachi Rail / Ground Transportation Systems Business of Thales was cleared in Phase 1 with remedies in Brussels and was referred to Phase 2 by the CMA before also being conditionally cleared. Despite the in-depth review in London, a protracted Commission investigation involving a pull and refile meant that the Commission (conditionally) cleared the deal after the CMA, with structural remedies relating to the Hitachi mainline signalling business (in the UK, France and Germany) being required by both regulators.

Interestingly, Cochlear / Oticon Medical was referred to the Commission by 13 Member States for review under Article 22. But by the time the referral had been made, the CMA had already partially blocked the transaction, and the parties subsequently notified only the transfer of Oticon Medical's cochlear implant business to the Commission (this having already been cleared by the CMA). The case is therefore one where the CMA’s intervention led to a restructuring of the deal notified to the Commission. We will never know whether the Commission (like the CMA) would have also found concerns in relation to the market of bone conduction solutions and prohibited that part of the deal, but the regulators were aligned on their lack of concerns in relation to the cochlear implant business.

And then of course there is the divergence that masquerades as alignment – Microsoft / Activision was cleared conditionally by both the EC and the CMA, but as our esteemed readers know well, following a procedural rollercoaster which led to the ultimate “Phase 3" clearance being officially a “Phase 1” decision. While both authorities identified the same competition concerns, the CMA did not consider the remedy package accepted by the EC was sufficient to remedy its concerns in Phase 2. The result is that there was one remedy for the EU (an access remedy to license Activision games, including Call of Duty and World of Warcraft, royalty-free to certain cloud gaming providers), while in the UK, the cloud gaming business was carved out upfront after Microsoft re-notified a new version of the deal which excluded Activision’s cloud streaming rights outside of the EEA (which were sold to Ubisoft). The remedy package ultimately accepted by the CMA was a very light set of undertakings from Microsoft in relation to the terms of that agreement with Ubisoft.

We are never ever getting back together

There has been notable divergence on big-ticket big-Tech M&A this year, with the Commission challenging the CMA for the crown of World’s Most Feared Merger Control Authority (at least from the vantage of Silicon Valley), prohibiting two tech mergers which were cleared unconditionally by the CMA in Phase 1.

One stark example of divergence on the substantive analysis is Booking.com / eTraveli, which was cleared in Phase 1 by the CMA and later blocked following a Phase 2 review by the Commission (and the prohibition is currently under appeal). The Commission’s main theories of harm in this case are novel in the sense that it is a conglomerate case in which the concern is not about leveraging dominance into new or nascent markets but about Booking.com adding functionalities that protect / entrench the acquirer´s dominant market position in its core market. In addition, the counterfactual adopted by the Commission did not reflect prevailing conditions of competition but an assumption that Booking would exit its successful flight Online Travel Agency (OTA) business.

The CMA considered, but dismissed, a similar theory of harm in its Phase 1 clearance: “the CMA’s investigation focussed on the change in market structure in the supply of accommodation OTA services in the UK brought about by the Transaction and, in particular, on the impact of the potential loss of eTraveli as a customer retention and/or acquisition channel for rival suppliers of accommodation OTA services.” Unlike the Commission, the CMA found that eTraveli was “not a particularly important customer […] acquisition channel” for hotel OTAs.

It is of course difficult to know the extent to which the divergent outcomes were driven by different evidence on market structure and customer behaviour in the EU and the UK (given the Commission’s decision is not yet public). However, it is not immediately obvious this – as opposed to different approaches to the question of foreclosure – is the driver of the divergence.

Instead, as we have previously discussed on our sister blog, it would appear that the Commission has applied a particularly strict standard to Booking due to its entrenched dominant position in the hotel OTA market. DG COMP representatives have stated that they will be very careful when a deal risks raising barriers to entry and expansion in the dominant platform’s core market and there are only limited challengers in the market. In addition, the Commission hierarchy has repeatedly said it is willing to entertain novel theories of harm to deal with digital mergers, and that the current non-horizontal merger guidelines reflect past precedent, but do not capture the evolution of the EC’s thinking in recent years.

The plot has further thickened with the Amazon / iRobot saga. The proposed acquisition of the Roomba-maker was also cleared unconditionally at Phase 1 by the CMA but subsequently abandoned following concerns raised by the Commission (in addition to the US FTC).

The Commission’s concerns related to a vertical foreclosure theory of harm and, more specifically, Amazon’s ability and incentive to foreclose iRobot’s rivals by preventing or hindering them from selling competing robot vacuum cleaners through the Amazon marketplace. Amazon abandoned the deal after deciding not to offer any remedies to address the Commission’s concerns. Indeed, the Director General of DG COMP, Olivier Guersent said that it was a “safe assumption” the Commission would have blocked the deal.

A vertical foreclosure theory of harm relating to competing robot vacuum cleaner providers was also one of three theories explored by the CMA in its Phase 1 decision. However, unlike the Commission, the CMA found that while Amazon would have the ability to harm the merged entity’s rivals selling robot vacuum cleaners on Amazon’s online store, it would not have the incentive to disadvantage those competitors, due to the size of the market in the UK, and the limited strategic benefit to be gained from such a strategy.

Unfortunately, given the deal was abandoned, we will not have the opportunity to see the Commission’s final decision. Therefore, while it is again difficult to know the extent to which the divergent outcomes were driven by different evidence on market structure and incentives in the EU and the UK, questions remain about whether they could, at least to some extent, have been driven by different approaches to the vertical theory of harm and, potentially, a stricter standard applied to Amazon by the Commission.

Finally, Broadcom / VMWARE is another example of a vertical case where the CMA ultimately cleared the deal, albeit following an in-depth Phase 2 review, but the Commission intervened following its own Phase 2 review in Brussels – its clearance decision was subject to an access and interoperability remedy.

The Commission's in-depth investigation found that the merger would harm competition in the global market for the supply of Fibre Channel Host-Bus Adapters (‘FC HBAs’), because Broadcom would have the ability and incentive to foreclose Marvell, the only rival on the market for the supply of FC HBAs, by restricting or degrading the interoperability between VMware's server virtualisation software and Marvell's hardware. The CMA also considered this theory of harm but found that the merged entity would not have the incentive to foreclose hardware rivals (including for FC HBAs), following inter alia an analysis of critical switching rates.

So while the deal was ultimately cleared on both sides of the Channel, the Commission extracted significant behavioural remedies.

These cases also point to a new trend for Platypus’ and Rhino’s post-Brexit divergence ratios: following years of being the most feared regulator on the block, particularly for tech deals, the CMA has had a less interventionist year and the Commission is arguably now catching up with or overtaking the CMA - at least for some types of (complex tech) cases.

Un-break my heart

The break-up album charting the latest trials and tribulations of our two favourite regulators shows that, while the Commission and CMA are broadly aligned on what theories of harm arise in cross-border tie-ups subject to their review, they have demonstrated irreconcilable differences on the impact of those theories of harm on competition and whether any concerns can be resolved by (behavioural) remedies.

Last year, our analysis found that truly divergent outcomes of EC / CMA review had been – for merging parties – mercifully rare: “to date, where outcomes have diverged, such divergence has generally been driven by different competitive conditions in the markets under consideration”. Now, as Platypus and its big brother Rhino reflect on 2023, that conclusion no longer holds, as our star-crossed lovers have drifted further apart. What has proved surprising to these majestic mammals is that the pendulum has not always swung in the expected direction, with the Commission proving to be the more interventionist regulator in the most high-profile cases (Booking.com/eTraveli, Amazon/iRobot, Broadcom/VMWARE).

So what does this mean for deal-doers and how can the risks of divergent outcomes be mitigated? Early strategizing to anticipate the potential for divergent concerns will be critical, as will flexibility on remedy proposals and timing. In particular, prolonged prenotification processes and staggered submissions may go some way to trying to sound out regulator concerns and anticipate potential remedy packages in advance, in a world where a ‘one-size-fits-all’ approach may prove futile. 

New digital platform regulation on both sides of the Channel also has scope to influence what we see in 2024 and beyond. The EU’s Digital Markets Act means that “gatekeepers” are now obliged to inform the Commission of every acquisition they make and the UK’s Strategic Market Status regime, which is expected to come into force in the Autumn, will impose a similar requirement to inform the CMA of material acquisitions and even minority investments. The new regimes may also impact how comfortable the regulators can be that behavioural remedies would address relevant competition concerns, and that such remedies can be effectively implemented and monitored.

For now, Platypus and Rhino hope that next year’s retrospective album will be giving more “unchained melody” than “cry me a river” vibes.

Statistics

*Simplified EU procedure

**Pull and re-file

Unconditional clearances