The writer is a director in the competition practice at Frontier Economics
The UK government wants to promote growth. The UK Competition and Markets Authority exists to promote competition. There was a time when these two goals seemed perfectly compatible. But the body’s recent veto on a merger between Microsoft and Activision Blizzard caused the latter company to complain that the UK was “clearly closed for business”.
The decision is all the more remarkable given that the EU has now allowed the merger. Notably, the two authorities didn’t differ much in their market analysis — both were worried about potential anti-competitive effects in cloud gaming — but the EU believed commitments made by the merging parties fully addressed these concerns, and indeed amounted to a “significant improvement” on the present situation. The CMA simply said no. Given the global nature of the market in which the parties operate, it’s now difficult to see how the merger can go ahead at all.
Independent competition authorities are free to disagree — and a degree of scepticism about “commitments” is healthy. But in this case, it’s an indication of a steady change in the behaviour of the CMA, which should be a wake-up call to government.
Take a look at the record. From its creation in late 2013 to the end of 2017, the CMA blocked only 30 per cent of mergers at the phase 2 “detailed assessment” stage. But from 2018 up until today, it has vetoed 57 per cent. Its updated guidelines (issued in 2021) seem to confirm a scepticism that mergers will have any beneficial effects, noting “the [evidential] difficulty involved in accepting prospectively that a merger is likely to lead to efficiencies”.
Of course merger-hungry managements may tend to overestimate potential efficiencies. But if you start from the view that benefits are highly unlikely, then the slightest anti-competitive concern could justify a veto.
There have been two other warning signs that the CMA is moving in a different direction. The body has been extending its reach to mergers that would have only a limited connection to the UK, in that one of the merging parties may have no current sales in this country. And it has reduced the scope for mergers to be cleared subject to “behavioural remedies”, leaving only “structural solutions” (often meaning a straight blockage) if it has concerns — as in the Microsoft case.
History may, of course, prove the CMA right. But is the authority underestimating the consequences of such a shift on entrepreneurial behaviour? If entrepreneurs think that they will struggle to sell businesses to existing companies, they may be more nervous about starting them in the UK. That doesn’t seem to fit well with the government’s aim to make Britain a nursery for start-ups. Meanwhile, larger companies may seek to avoid acquiring others in the UK to avoid CMA oversight.
The CMA should not ignore the fact that merger efficiencies can have many forms. The two companies may have complementary assets that can be used to develop new or enhanced projects.
The alternative to a merger — a set of contracts between the two companies — won’t always produce the right incentives. Nor can they ensure the application of one company’s superior technology or business model to the assets of the other.
By inference, the CMA’s preference seems to be for companies to develop their own new products or business models, but it makes no more sense to view this as a certainty than it does to believe every golden scenario presented by two parties that want to merge.
Finally, there are two challenges to mergers that are built into the process itself. The CMA undertakes months of work looking for possible anti-competitive effects — only at the end does it look at possible efficiencies or remedies. And the appeals process operates with the lightest touch: the judicial review standard that is applied by the Competition Appeal Tribunal in effect looks only at process, not substance, meaning that it is virtually impossible for merging parties to overturn the CMA’s findings, even where the reasoning may be shaky.
These shifts in the CMA’s attitude to mergers have taken place without any real oversight. Ten years on from the creation of the new competition regulator, it is time for an independent review. At the very least, this would enable the government to decide whether it is happy with the body’s current direction, or if finds it incompatible with some of its drive to incentivise business dynamism.