Canadian legal software provider Dye & Durham Ltd. will likely be forced to sell a British company it bought last year after Britain’s competition authority found the takeover would reduce competition and lead to higher prices there.
That is a blow for a company that has specialized in consolidating legal software providers and hiking prices, particularly in Canada. D&D stock fell 11.8 per cent on the Toronto Stock Exchange Wednesday, a much steeper drop than tech stocks as a whole during a bad day across the markets. Its shares had rallied in the previous four sessions after sinking to their lowest level since the weeks after its July, 2020, initial public offering.
Britain’s Competition and Markets Authority, or CMA, stated in a notice of possible remedies Wednesday that it had provisionally found that Toronto-based D&D’s $156-million purchase last July of TM Group (U.K.) Ltd. “has resulted or may be expected to result in a substantial lessening of competition” for software used by real estate professionals to order property-search reports in England and Wales.
“At this stage, the CMA has identified only one potential structural remedy: the divestiture of TMG,” it stated. CMA has the legal authority to force such an outcome.
D&D said in a statement it “disagrees with the CMA’s provisional findings and is evaluating its potential options,” adding it complies with “all laws and regulations in every market in which it operates.”
The CMA began investigating the deal last October and considered a range of evidence, including the two businesses’ strategic documents; a survey of customers; and other information provided by customers, competitors and other industry players.
In a summary of its provisional findings, the CMA said D&D and TM overlapped in the supply of property-search software business and that their combination “eliminates one of the largest” suppliers in the market, creating “a market leader with a very significant share.”
“We need to ensure that fees for search reports are competitive and that we continue to see innovation in digital services to make the process easier and faster,” Richard Feasey, chair of the CMA group that conducted the inquiry, said in a statement. “By reducing competition in an already concentrated market, we have found that Dye & Durham’s purchase of TM Group could increase the costs and reduce quality in these services.”
The CMA also called out the companies for not notifying the authority of the deal in advance, though D&D said it had no obligation to do so under British law.
D&D has faced a backlash in Canada for its strategy of buying up providers of real estate software and then sharply increasing prices, sometimes by hundreds of percentage points. The strategy has prompted dozens of complaints to the Competition Bureau of Canada and a class-action lawsuit, and law firms have had little choice but to pass the costs on to property buyers.
Similar concerns to those raised by the CMA could hamper D&D’s proposed $3.2-billion acquisition of Australia-based Link Administration Holdings, local media reported this month, though D&D chief executive officer Matt Proud said he didn’t expect the deal would be stopped by regulators. Canada’s competition regular has taken no action on its deals here.
Vass Bednar, executive director of the master of public policy in digital society program at McMaster University in Hamilton and an advocate for changes to Canadian competition laws, said the CMA’s “very swift, significant and necessary” review “once again illustrates the disconnect between evolving citizen/consumer expectations of Canadian competition law and the current reality. That’s why we need to use these case studies to educate people about how the competition act works and where it does not, and also make connections to a consumer protection issue: price gouging.”
BMO Capital Markets analyst Thanos Moschopoulos called the CMA’s findings a negative but not unexpected development, adding in a research note a forced sale of TM “would likely have a relatively modest impact to the stock’s value,” as the British company represents less than 8 per cent of D&D’s third-quarter net income and under 14 per cent of revenue for the period. He estimated in a “worst-case scenario” that D&D would fetch only $100-million for TM in a forced sale.
Mr. Moschopoulos said in an interview he would be “reluctant to draw broader conclusions” about how the CMA’s actions could affect D&D’s roll-up strategy. “The question with any mergers and acquisitions story is, ‘Will they run out of things to buy?’ It would seem there’s maybe not much more they can acquire” in Britain. “But they can acquire in other geographies and adjacent areas.”
In a separate release Wednesday, a private investment vehicle affiliated with Mr. Proud called Plantro Ltd. said it had bought $52.5-million of stock Tuesday, at an average $21.83 a share. That increases Plantro’s D&D stake to 11.5 per cent from 8 per cent.
The purchase was made a year after a management group including the CEO offered to buy out D&D at $50.50 a share – more than twice the stock’s current level. An independent board committee ended a strategic process to look at the proposal last October, concluding D&D would stay the course. The board authorized a large stock award to Mr. Proud instead.
Shareholders expressed disapproval at last December’s annual meeting by voting down a resolution to grant 600,000 options to company directors, and two members of the compensation committee drew far fewer votes in support of their re-election than other directors.
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Sean Silcoff