One of the key functions of the CMA - outside of preventing collusion and abuse of dominance as mentioned in Part I - is merger control. All mergers are done to increase growth and product/service offering in a particular market, whether that be retail, oil, telecoms, PropTech or otherwise. The buyer and seller, joining up in the target company, will be securing a stronger position in their respective market. The CMA is simply asking: what is the net effect of this merger on competing suppliers?
“The CMA will consider any merger in terms of its effect on rivalry over time in the market or markets affected by it. When levels of rivalry are reduced, firms’ competitive incentives may be dulled, to the detriment of the customers”
The criteria for launching an investigation is set down in the Enterprise Act (EA) 2002. It applies to both completed and anticipated mergers as long as the following is satisfied:
i. Two or more enterprises cease to be distinct
(a) Combined UK turnover exceeds £70 million
(b) Existing or eventual share of goods / services market is / will be 25% or more
CMA Merger Control: Assessment Process
Ultimately, the CMA is searching for signs that a target company will result in a substantial lessening of competition (SLC). This is a two-stage process. Phase 1 is all about the prospect of SLC; and if the chances are high, then a full Phase 2 investigation is launched. The CMA can "freeze" stages if there are issues with info-gathering, but the general process is as follows:
What is Substantial Lessening of Competition (SLC)?
SLC is a wide-ranging and broad economic concept. It doesn’t come with pre-defined market share thresholds that must not be exceeded. Nor does a market need to have a set number of top competitors. There are no fixed measures or tools of analysis.
The CMA are essentially analysing the entire supply chain from top to bottom; an attempt to understand the target company’s ability to unilaterally raise prices, lower quality, reduce innovation or force collusive coordination or foreclosure on suppliers across their combined chains. For now, the key thing to consider is if the buyer and seller are merging horizontally or vertically.
Horizontal Merger = two competitors, offering similar products or appropriate substitutes, at the same level of the supply chain i.e. two retailers or two manufacturers coming together. The CMA will focus on the customer's cost of switching to another supplier in the relevant market; to check if remaining competitors can viably cater to these converted customers. Worse still, to keep surviving the remaining competitors may resort to explicit collusion or coordination (see Part I).
Vertical Merger = two companies in the same industry but at different levels of the same supply chain i.e. a “downstream” shoe retail outlet and “upstream” manufacturer or wholesale shoe distributor. The CMA will focus on both upstream and downstream effects i.e. if the merger unfairly prevents "upstream" suppliers competing for business, or if by owning an "upstream" supplier, the target company can now get access to rival "downstream" client confidential commercial data.
Merger Control in Action: Nvidia and Arm Ltd
In January 2021, the CMA launched an investigation into Nvidia’s £29bn deal to buy Cambridge-based Arm Ltd - one of the world’s leading chip designers. Nvidia primarily makes graphic processing units (GPUs) i.e. circuit boards that accelerate the loading of images in games and phones - it does not make chips. Arm, however, does make chips and operates on an “open-licensing” model.
This means it is a neutral chip designer that licences its IP to tech businesses across the globe, such as Apple and Qualcomm. Its architectures are now used in 95% of all smartphones.
In brief, the two parties are not direct competitors. Rather Nvidia is a customer of Arm, so this amounts to an example of vertical integration. The CMA is concerned that Nvidia will increase prices, reduce offering and innovation to its own competitors. As a tech multinational, Nvidia’s competitors don’t just lie in the field of GPUs, either - they compete in some form or other with data centres, self-driving automotive and IoT companies. Therefore, the anti-competitive effects could be both far-reaching and drastic.
Nvidia has promised to implement firewalls so that it can’t access Arm’s confidential customer data. The merger has now entered Phase II under orders from the Secretary of State for Digital and Culture.
Merger Control: “Trending Topics” for Interviews
The CMA Post-Brexit = EU legislation no longer applies in the UK, which has left the CMA with a greater sense of power. Furthermore, the CMA’s “share of supply” jurisdictional test is extremely flexible. Experts predict the CMA will use this to claim greater jurisdiction over matters with only a limited UK element - a power grab that may lead to more Phase I investigations over the next few years.
Covid-19 & “Distressed” M&A = The Covid crisis has led to business losses if not outright failures. One way companies can potentially skip accepted merger control limits is if the acquired company is failing i.e. without intervention the company would exit the UK market leading to fewer consumer options and worse-off competition. This happened with Amazon (buyer) and Deliveroo (so-called failing firm) in 2020. As Amazon offers its own grocery delivery service, it was thought a merger would lead to clear SLC by creating a dominant giant. Therefore, the failing firm defence could overturn key pro-competitive measures. Eventually, Amazon’s 16% stake was cleared for different reasons, but this could be a hot topic over the next few years.