Over the next 12-18 months, the pandemic’s impact on how consumers spend their money means that the Competition and Markets Authority (CMA) is likely to review a number of M&A deals against a backdrop of falling demand and potential, if not immediate, financial failure. The review of Amazon-Deliveroo has gained a lot of attention because it seemed to signal a softening of the CMA’s stance on these issues.
Demand for Deliveroo’s services has fallen with the pandemic (alongside challenges with sourcing meals from restaurants) and the CMA initially accepted Deliveroo was only able to stay in business because of the Amazon deal. As a result, it found that Amazon’s acquisition of a minority stake in a company it might otherwise have competed against was not anticompetitive – it (provisionally) decided that without the deal Deliveroo would not have been around to compete.
These initial findings were hotly contested. Typically, a firm must be much closer to financial failure than appears to have been the case for Deliveroo for such an argument to be accepted. The CMA has now revised its provisional findings, still clearing the acquisition, but no longer on the grounds that Deliveroo would have exited but for Amazon’s investment.
Navigating this kind of scenario, where demand is falling and industry consolidation may avoid future – but not necessarily immediate – financial failure, seems a realistic prospect in a range of industries post-pandemic. However, Amazon-Deliveroo – if the CMA’s initial provisional findings had stood – would have been an outlier in terms of it accepting the failing firm defence.
Its instructive to look at the CMA’s approach in other cases with similar facts, but where the failing firm defence has not been a determining factor. Four merger reviews that have occurred to us are:
- Bottomline’s acquisition of Experian’s payments gateway business in 2019 – demand for Experian’s customer-deployed payments software was switching to more up-to-date cloud-based software prior to its acquisition;
- Capita’s planned acquisition of Vodafone’s paging business in 2017- the electronic paging customer base had shrunk by more than 80% compared with its high point in the 1990s by the time of this deal;
- DX’s acquisition of The Legal Post (Scotland) in 2016 – physical exchange of documents, as arranged by DX and Legal Post, is being replaced by electronic document transfer; and
- Sportech’s acquisition of Ladbroke’s football pools business in 2007 – football pools had an ageing and declining customer base (with many customers lost following introduction of The National Lottery in the early 1990s).
The overriding lesson from these cases is that declining customer demand, and the rationale this provides for industry consolidation, cuts little ice with the CMA in an initial (Phase 1) review. In each case, the CMA decided at Phase 1 that consumers would be harmed by the loss of competition. Like Amazon-Deliveroo, all were referred for an in-depth Phase 2 investigation (except DX/Legal Post, where the small size of the physical document exchange market could not justify a Phase 2 review).
At Phase 2, the outcome for these cases was – like Amazon-Deliveroo (so far) – positive. Bottomline and Sportech both had their acquisitions unconditionally cleared. (Capita/Vodafone, however, abandoned their deal rather than go through the Phase 2 review.)
The lesson for UK businesses and investors looking at post-pandemic consolidation opportunities in sectors where customer demand has fallen is that, no matter how good the rationale for a deal, it will be tough to get a quick clearance decision if a small number of suppliers is being shrunk even further.
It’s worth taking the time to assess CMA clearance risks early, and deciding whether there is appetite for a second phase CMA review. These cases, including Amazon-Deliveroo, show that the CMA can be sympathetic to the challenges facing businesses where consolidation has a sound business, but not anti-consumer, logic.
To discuss the issues in this blog, or to talk about how we can help assess CMA clearance risks for transactions, feel free to get in touch.