John Bodrug is a partner at Davies Ward Phillips and Vineberg LLP.
As global M&A activity continues to grow, so too does the merger review timeline for complex multinational deals. In some cases, the review process can extend well over a year. Eyewear maker Luxottica and ophthalmic lens maker Essilor recently announced that they expect to close their merger in late September after receiving clearance in China, more than 18 months after announcing their proposed transaction in January, 2017. Similarly, Dow/Dupont and Bayer/Monsanto each took about 20 months to obtain regulatory clearances, while Agrium/PotashCorp took about 15 months. In Canada, the Competition Bureau’s average review time for complex mergers has increased from about 36 days in 2015-16 to almost 53 days in 2017-18.
In light of this trend, companies considering embarking on a merger transaction may need to prepare for a lengthy – and potentially costly – period of uncertainty. Pending regulatory approvals, the businesses normally cannot be integrated, creating challenges for managers while competitors seek to exploit the uncertainty by targeting key employees, customers and suppliers.
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One reason for some of these delays is that competition authorities are increasingly looking beyond the typical “horizontal” competition issue, which focuses on whether the parties are direct competitors and whether the merger will allow the new entity to raise prices in the markets in which the parties compete.
They are now also more closely scrutinizing “vertical” mergers between a customer and a supplier, as in the case of Luxottica and Essilor. While Luxottica and Essilor each have some retail operations, their businesses are largely complementary: Luxottica sells eyewear while Essilor makes lenses. Consequently, the focus of global competition regulators appears to have been on whether the transaction would allow the merged entity to foreclose competition in lenses or frames by tying or bundling their products together or otherwise restrict access to their products by downstream competitors.
“Vertical foreclosure” was also the theory underlying the U.S. government’s recent unsuccessful challenge to the AT&T/Time Warner merger. Almost 20 months after that merger was announced, a U.S. Federal Court determined that the government had failed to prove that the merger was likely to harm competition. Rather, the court noted that mergers of purchasers and suppliers are not presumptively harmful, and many of them in fact create significant integration efficiencies. Even the U.S. government acknowledged that combining AT&T’s communications distribution with Time Warner’s entertainment content would lead to US$352-million in annual cost savings for AT&T’s customers.
Despite the acknowledged rationales of increased or more efficient competition for vertical mergers, the Essilor/Luxottica transaction was a protracted process. In Canada, the Competition Bureau cleared the merger in about 10 months, without publicly commenting on the extent of its review – although that transaction may have contributed to a detailed advocacy statement it issued calling for less restrictive regulation of prescription eyewear to enable increased competition from online retailers. The U.S. and European Union antitrust authorities took more than 13 months to clear the transaction, as the U.S. government reviewed more than one million documents, interviewed more than 100 market participants and obtained extensive data from 20-plus third parties, while the EU’s investigation included market test feedback from nearly 4,000 opticians.
In contrast to the Canadian, U.S. and EU authorities, the Chinese competition authority determined that Essilor and Luxottica products were essential for competitors in China. Its clearance therefore prohibits the merged firm from imposing unreasonable supply conditions on optical retailers in China, or pricing its own products below cost.
While it is understandable that government authorities will closely examine mergers in the healthcare sector or other consumer-sensitive businesses, such long and extensive reviews can be costly in terms of both government resources and the foregone public benefits that can flow from mergers that enhance competition.
The tendency toward more extensive reviews may continue as government authorities grapple with many emerging issues where analytical underpinnings – such as platform competition, the competitive significance of “Big Data” and the impacts of mergers on incentives to innovate – remain relatively underdeveloped.
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The key takeaway for business leaders seeking to embark on a merger is that, rather than focusing solely on the intended merger benefits, they may need to consider – and prepare for – both the significant implications of long merger reviews and the delayed realization of the merger efficiencies. They need to recognize that competition authorities can devote significant time and resources to identifying and testing every possible theory of economic harm, seemingly without balancing against the costs and foregone merger benefits.
While not all proposed mergers can expect the degree of review and delay experienced by Essilor/Luxottica, that transaction illustrates the types of regulatory risks that need to be taken into account early in a merger planning process and the mindset that competition regulators often bring to their reviews.