Canary Wharf, Not Love Island. Post-Brexit Divergence Ratios: The Prime -Time TV Sequel
The season finale was not just any storm in a port – and it made for gripping viewing. After an in-depth second series, the European Commission conditionally cleared Cargotec/Konecranes in February 2022. For the British remake, the ending was completely changed: the CMA blocked the deal with a new twist on a now-familiar procedural story.
Platypus was expecting this stunning finale – but for a different prime time special. The one where the CMA blocks the Big Tech deal where the EC had accepted a behavioural remedy. But the CMA confounded audience expectations by clearing Facebook/Kustomer at Phase 1 – the subject of our first divergence post. This time round, of all the deal profiles out there, Canary Wharf blocked a €4.5 billion one between two European-based port equipment players in a European market.
In the pre-Brexit era, the soft rule of merger control comity among sophisticated jurisdictions is that a greater deference is given to the jurisdiction with the greater nexus (here, both parties were Finnish and of the parties’ European-wide turnover, EEA-wide sales falling under EC review would presumably dwarf UK sales). Whatever convention may have existed to this effect was, well, more of a guideline than a rule.
So, this rupture was a big deal from a comity perspective. It is not so much that the divergence was deal-fatal and outcome-determinative (although it was, with the support of the DOJ), or that it was some 15 months into parallel review (although it was). What was really striking is three-fold. First, it does not get much more “signature EUMR” than EEA-wide industrial B2B, the kind of deal the EC has been doing since the 90s. Indeed, had the deal only been notified, say, six months earlier on 28 November 2020 instead of on 28 May 2021 it would have been an old-school one-stop shop clearance and the UK would not have had a look in. Second, not only were the EC and CMA looking at the same EEA-wide markets, but the UK nexus was no larger than normally the case: no UK parties, and a (probable) single-digit proportion of global sales in the UK. Third and most ominously, it was on the topic of divestiture remedy composition, ranking low down the predictions list of areas of potential cross-Channel divergence.
Before its post-Brexit powers, the case that put the CMA firmly on the map in 2020 was its prohibition of Sabre/Farelogix, taking the happy all-American reality show ending for the parties (having beaten the DOJ in a US court) and reshooting the last sequences as No Survivor.
While there was regime divergence, there was full inter-agency comity: the CMA veto was on all fours with the DOJ opposition to the deal, the EU lacked jurisdiction, and the case was deemed squarely to fit in the dynamic market cross-hairs of CMA merger policy post-2018 and in line with the transatlantic agency mood towards perceived “incumbent/disruptive challenger” deals. A similar story applied to the common CMA/FTC position in Illumina/PacBio.
Lest we be accused of monopolising popular culture metaphors for UK merger control, it was thankfully the CMA itself that reportedly pointed out at the Law Society Conference that merger control is not Love Island — where outcomes are decided by popular vote. Platypus feels duty-bound to run with this official analogy.
Substantive alignment – the honeymoon phase
As the agencies are keen to point out, there was considerable convergence on substance. The EC and CMA both found five common horizontal overlap market problems. In the port cranes sector:
- rubber-tired gantry cranes;
- straddle/shuttle carriers (one market);
and in so-called mobile equipment, or MEQ:
- reach stackers;
- empty container handlers; and
- heavy-duty forklift trucks.
Substantive disalignment – couple's therapy
The CMA also found horizontal problems in two further markets - automated stacking cranes (ASC) and automated terminal tractors (ATT). The ATT problem was based on counterfactual findings and a potential competition theory of harm based on projected entry by Konecranes absent the merger. The ASC problem was based on more classic factors of high combined shares and closeness of competition.
While only the press release is available for the EC, these last two horizontal theories of harm are not cited as competition concerns and the press release should certainly name-check all problem areas.
Conversely, the EC found a vertical (customer foreclosure) concern involving Elme, the main competing supplier of Cargotec’s Bromma MEQ spreaders - given the vertical integration of Konecranes' MEQ business with Cargotec's spreaders business, it found that the transaction would have restricted access to a material customer base for competing MEQ spreaders suppliers. We assume (based on the CMA’s final report) that Konecranes was an important customer of Elme and would now presumably favour captive purchases from Bromma instead. However, the CMA found that this reduced demand effect would not be enough to weaken Elme as a competitor.
Divergence on remedies – the deal (heart) breaker
The commitments offered by the parties to the EC “fully address the competition concerns identified” and consisted of:
- Konecranes’ MEQ business (including for MEQ spreaders) – which solved both horizontal and vertical concerns for the EC, so the difference in vertical substantive analysis was not outcome-determinative.
- Cargotec’s full cranes and straddle/shuttle carrier business (the so-called KAS business) — which spanned all the other horizontal issues of the EC (and CMA, noting that the CMA considered that the commitment by Konecranes to terminate its partnership arrangement with Terberg would be effective in remedying the SLC in ATT), so we think any differences in horizontal analysis were also not outcome-determinative.
The CMA had provisionally found that the divestiture of either Konecranes’ Port Solutions division or Cargotec’s Kalmar division would be a potentially effective remedy, but the parties unsurprisingly pushed for the same remedy package accepted by the EC. However, the CMA found “substantial and wide ranging” composition risks with the remedy proposal and ultimately prohibited the deal.
Mix and match (maker or breaker)?
A classic mix-and-match remedy, rather than the sale of one overlapping business, involves combining disparate assets from two parties to form a single remedy package to solve a single overlap concern. Both the EC and UK share a common concern that this is a risky bet and there are very few B2B market examples. Decisive for the EC in Cargotec, however, was that what it saw was “not ..… a classic mix-and-match but as two self-standing remedies packages [quote Apr. 9] … that completely remove the overlap [and] are standalone viable businesses.” [quote Mar. 31]. The EC added for good measure that “when 60 market participants say this can actually work, twice, this can solve our concerns, you of course see [that] we don't have discretion.” [quote Mr. 31].
Conversely, the CMA took the view there were synergies for each merging party in having a cargo handling equipment (CHE i.e., port cranes and MEQ) portfolio and that the respective buyers of the KAS and MEQ businesses would lack this and as a result be weaker. It found therefore that it was more the need for portfolio breadth saying that “two separate purchasers of the Divestiture Businesses would not be able to compete with the Merged Entity as effectively as if they had a full CHE offer (i.e. in a similar way to how the Parties currently compete, or in the future will compete, to win customers).”
Carve-out (my heart with a spoon)
The CMA further took the view that even when — at a late stage — the parties offered to sell to a single purchaser (solving the lack of CHE portfolio issue), the remedy offer then ran into carve-out risks as the portfolio was being sliced out of two existing portfolios and merged into a new one. This was despite the fact that the competition issues identified related to separate product markets (rather than the classic mix and match problem in one on the same problem market). So, according to the CMA even a single buyer was not going to be a silver bullet.
For good measure, the CMA doubled down and also said that while a single buyer mitigated some composition issues, it also reduced the pool of potential buyers, which increased the risk a suitable buyer could not be found.
This stance can be reconciled with zero-risk tolerance remedies policy logic, but on this, CMA cases have their own divergence ratio. For example, in FNZ/GBST, a completed software deal (and one on which, for full disclosure, Platypus acted) the CMA first ordered the deal unwound and rejected the offer of a carve-out remedy; however, in a subsequent remittal (the CMA having withdrawn its prohibition decision for errors, following FNZ’s application to the CAT to challenge the CMA’s decision), the CMA then accepted a carve-out remedy despite strenuous objections from the target whose business was the subject of the carve-up and in the face of significant customer concerns. It requires some delicate post-Brexit cargo-handling to reconcile the treatment of carve-out remedy risks across the two cases, but it does show that the CMA can (at least in unusual circumstances) be accommodating rather than predictably zero risk-tolerance towards carve-out remedies in all cases. Interestingly, the zero-tolerance approach involved a comity cost in Cargotec that was not present in FNZ/GBST, which was not objected to by the ACCC.
Clash of the regulators – trouble in paradise?
In trying to preserve their conditional clearance, the parties argued that the CMA’s market test was insufficient, including because the CMA did not seek the views of non-UK customers. The EC had conditionally approved the deal based on market-testing the remedy with over 120 written Q&A responses, plus a further 67 responses on Cargotec’s KAS business. In contrast, the CMA took its decision by way of top up on the responses to its Remedies Working Paper (RWP). This was based on 13 customers operating container handling terminals of different sizes in the EU, response hearings with five European customers, and response hearings with two GTOs with UK operations - ‘in the round, not materially different’ feedback from that summarised in the RWP.
In the parties’ view, the European Commission’s decision, and in particular the outcome of its market testing on remedies, was a material consideration to which the CMA should have had regard in reaching its decision on effectiveness of their remedy proposal. While the CMA confirmed that it cooperated with other authorities (the EC, US DOJ and ACCC) on substance and remedies, it was at pains to stress that its inquiry was carried out independently. The CMA says that it will cooperate with other authorities on appropriate cases but “there is no obligation on the CMA to take investigative steps identical to those taken by other authorities such as the European Commission or to seek access to the evidence base collated by other authorities as part of their own independent investigations.” The CMA concluded that it was not incumbent on it to replicate the EC’s market test.
Senior CMA staff at the Law Society conference recently confirmed that the CMA takes a different approach to the EC in areas including market testing remedies: “We don’t decide [whether to accept remedies] by just the number of thumbs-up and the number of thumbs-down that are submitted on the remedy … We look at the broader evidence base and we assess that against the difficult statutory tests that we have to apply.” The CMA representative noted that while the EC would probably send third-party questionnaires to a larger proportion of the customer base, the CMA will likely focus on a narrower set of customers but “have a more in-depth form of engagement”. Quality over quantity is the message.
No love lost for divergence ratios?
We previously flagged (i) the difficulty of obtaining parallel EU/UK Phase 1 remedy outcomes and (ii) that divergent approaches to access remedies for non-horizontal concerns could also give rise to issues. However, the CMA’s approach in Cargotec adds another complication to aligning remedy packages for global deals. Commissioner Vestager told GCR that “… the CMA and the [EC] had the same assessment of the market, so it was down to the former’s ‘fierce stance’ against accepting mix-and-match remedies when the EU agency thought that, in this specific case, such a proposal could be accepted.”
The other Anglophone common law (and commonly-minded) regulators piled on in support on the CMA following its decision, with the US DOJ saying it “will not accept patchwork settlements that do not replace the competition that is lost by a merger” and the ACCC added that it “was also unclear that the proposed divestiture remedy, made up of mix and match assets from both companies, included all the critical assets, personnel and technology essential for the divested businesses to function successfully and compete with a combined [firm]”.
The DOJ in its press release made explicit an argument the CMA had not made in its 659-page Report: that the merged firm would surely be keeping the more attractive of the two of businesses for each overlap, such that the merged firm in the EC outcome would be a “best of breed” and even a single divestment buyer would not. This amounts to a response to the critique that, to the extent a “portfolio synergy” view is taken — rather than the EC view of separate “standalone viable businesses” — the merged firm in the EC outcome would have itself had a portfolio spliced together from that of both parties pre-merger (and in that sense on par with a single buyer).
See you in (divorce) Court?
However, those same regulators would have faced an uphill battle in prohibiting the deal, given the prosecutorial nature of their respective systems. Ironically, therefore, they were more hawkish when they did not face the burden of court proceedings, but could easily back the CMA. This left politically isolated the “moderate” EC, who arguably has more power than the DOJ/ACCC to determine the fate of a deal under its civil administrative law system, that felt it had no discretion but to accept the remedy due to prior EUMR jurisprudence.
Under UK law, the CMA is not slowed down by litigation model constraints of the DOJ or ACCC, nor the constraints of EUMR jurisprudence: the CMA would certainly not describe itself as lacking discretion on remedies (or substance), and it does not face meaningful court intervention except on due process issues. Therefore, the CMA will likely be the key prosecutor/judge for global deals involving complex remedy packages. And parties will need to consider whether a deal that is doable in Brussels, and that like their litigation chances in US or other courts, can find a way through in London.
The CMA has confirmed that it sees no obligation to replicate the EC’s findings – even when they concern the same markets and remedy packages. Nor, if it does not like what the contestants are offering, does it have any trouble disregarding the popular vote and mix-n-match-making a few Raptors amongst the bronzed bods: Love Island, meet Jurassic World.