Our first episode kicks off with partners Ingrid Vandenborre, Andrew Foster and David Wales discussing a new era in global merger control law — including a changing regulatory atmosphere, different theories of harm and evolving rules of evidence — and what these topics mean for businesses worldwide.
Episode Summary
Around the world, regulators are rapidly evolving their approaches to merger control. The landscape has become increasingly complex and fragmented. Transactions that were once straightforward now take much longer and are more likely to be challenged.
Responding to a perception that their old tools were not working as well as perhaps they should, regulators have introduced a wave of new thresholds and regimes, and also are exploring novel theories of harm and demanding larger volumes of evidence to support mergers.
This premiere episode of the “Fierce Competition” podcast features three partners from Skadden’s Global Antitrust and Competition Group. Host Ingrid Vandenborre (Brussels) is joined by David Wales (Washington, D.C.) and Andrew Foster (Hong Kong) to discuss how companies can navigate this new era of merger control.
Key Points
- Regulators are looking beyond traditional theories of harm. In addition to horizontal theories, regulators are now focusing on vertical and also interconnecting theories of harm and examining how products and markets adjacent to one another can lead to issues.
- There’s a focus on new types of evidence. Regulators are applying more scrutiny to deal valuation and deal rationale. In the process, we’re seeing more questions about internal documents and a demand for huge document productions — particularly in the U.S., but Europe is beginning to follow suit.
- Competitor complaints matter more than ever. Although competitor complaints have always been a factor in China, they are now gaining force in the U.S.. This is part of a broader regulatory shift that is less focused on consumers and more geared toward preserving competition.
- Deals are still getting done. While the process has gotten more cumbersome, it’s not unmanageable. Companies need to approach mergers with a strategy that accounts for changes in the regulatory environment, whether that’s frontloading remedies or being ready for potential litigation.
Voiceover (00:00):
Welcome to Fierce Competition, a podcast from Skadden's Global Antitrust and Competition Group that explores antitrust policy and enforcement around the world. Join our colleagues from across the continents as we discuss the latest developments and what they mean to you in an increasingly complex legal and regulatory landscape.
Ingrid Vandenborre (00:21):
Welcome to this first episode of our new podcast, Fierce Competition. It's our brand new podcast series where we explore top trends in competition law and what it means for your business. In this first edition of our podcast, we're going to look at trends in global merger control. We really see a new era. My name's Ingrid Vandenborre. I'm a partner at Skadden's Brussels office, and I'm joined for this episode by Dave Wales, a partner in our Washington, DC office.
Andrew Foster (00:49):
Hello, everybody.
Ingrid Vandenborre (00:50):
And I'm also joined by Andrew Foster, partner in our Hong Kong office. Over the past couple of years, we've seen the regulatory landscape for merger control change. It's become a lot more complex, a lot more fragmented. We thought in this first episode we'd look at what that means for merger control, what it means for deal activity, and what companies need to think about when they navigate all of these intricacies.
(01:13):
It has become less clear generally when and where you have to file your deal in a world that's become a lot more complicated, and the outcome has even become less predictable. Wanted to raise, why do we think that is just generally as a starting point?
Andrew Foster (01:30):
Well, I think that certainly in jurisdictions around the world, including Asia and Asia Pacific, but Europe as well, and even now getting into Southeast Asia and South America, we're getting much more attention and interest from regulators to try to make sure that they're capturing every kind of transaction that they think needs to be seen. I think there is a perception that maybe the old tools were not working as well as they could have.
(02:06):
What that means is we've seen a raft of either new thresholds, new regimes or modifications to thresholds, which have brought far more jurisdictions into looking at things like value of the transaction rather than looking purely to revenues. We have lots of enforcers now wanting to look at things like monthly average users and whether you do R&D in particular in a jurisdiction.
(02:37):
It's gone from a set of regimes where most of us could look at targets revenues and figure out pretty quickly where we needed to file and why, to having to do a much deeper analysis and looking at many different types of things we had to look at in the past.
Ingrid Vandenborre (02:55):
Yeah. Do you agree, Dave?
David Wales (02:56):
Yeah, I think so, Ingrid. As you probably can tell, in the US, the Biden administration has been very aggressive in merger enforcement. We have lots more to talk about on that front. But the unpredictability that you commented about, in some ways, that's driven by the fact that in the beginning of the Biden administration, they actually tried to pass laws that would actually prohibit mergers. They've appointed two leaders at the FTC and DOJ that are very aggressive in looking and going after mergers.
(03:22):
Part of their mantra is that previous antitrust enforcement was too lax, but they've also really focused on deterrence. Their view is it's not our job to tell you what mergers may be lawful. You can figure that out, but we're going to push the envelope and look for deals that are anticompetitive and broader theories, really anti-remedy, which is another big factor that makes it harder for makers to really think about how to get a deal done that has antitrust issues.
(03:47):
They really are pushing the envelope on the substance when it comes to vertical issues, potential competition, conglomerate theory even. In fact, they look more like the European enforcers maybe and Asia than they ever have before. I think it is much more challenging for makers to figure out how do I get through not only the US, of course, but also as you guys know, the rest of the world in this new environment.
Ingrid Vandenborre (04:10):
I think this is a good point. We see that test change between and across jurisdictions. You said the US is taking up some of what's happening in Europe, but there's a lot of divergence, different theories of harm, different outcomes routinely now in cases that we're seeing. I think that reduces a lot more uncertainty for companies that are doing M&A. You've got not only different outcomes, but often it means extended timetables and transaction costs.
David Wales (04:36):
Yeah, for sure. The agents are talking to each other. They are coordinating. They've always been doing that, but I think there's more risk of divergence on substance. We've seen that in some cases. I know we're going to talk about, but also to remedies, because it's really hard. You may have a remedy in the US or not, depending on the current stance, but have a more receptive audience in Europe and Asia for a remedy than you do in the US.
Andrew Foster (05:00):
It used to be that China was the real risk of divergence. As the EU and US went, so went the rest of the world. I think that not only is that very much changing, as I'm sure we're going to talk about, but in particular in Asia, we have seen regulators that have traditionally been quite mature and reasonably stayed, including the Fair Trade Commission in Japan and the Fair Trade Commission in Korea become much more aggressive, much more aggressive in their enforcement.
(05:29):
They're trying to call in transactions that don't even meet even the new expanded thresholds they have. It just seems like there's a real appetite now, which, of course, just brings more uncertainty to your deal planning.
Ingrid Vandenborre (05:41):
I think if we want to summarize what we're going to talk about today, I think we're seeing changing theories of harm as the first item. It's become a lot more troublesome, more quickly for regulators. We see differencing standards and evidence and factors of analysis between countries.
(05:59):
Maybe those would be our big factors that we can talk about. Maybe let's kick it off with the first one, these evolving theories of harm, maybe to ask, does it mean that the traditional theories of harm horizontal overlaps, that's all gone, regulators don't care about traditional theories of harm anymore? What do we think about that?
Andrew Foster (06:17):
No. I mean, that's certainly not true. I think the old traditional analysis still has to be done. That's still your starting point. That's still the basis for any valuation that you're going to do on looking at how any particular transaction will be evaluated by the regulators. But I think on top of that now, there is a much deeper toolbox that certainly does try to pull in conglomerate theories and much more novel theories of harm to try to grapple with what are very dynamic and fast moving industries.
(06:54):
Ones that I think, as Dave alluded to earlier, it seems some administrations think perhaps we're not being sufficiently evaluated using the traditional tools.
Ingrid Vandenborre (07:06):
We see definitely in Europe, for example, the competition authorities are looking at interconnecting theories of harm. They're looking at how products and markets adjacent to one another can lead to issues. Certainly not traditional overlaps only, but in addition to looking at those overlaps, so looking at butterfly they call it effects of transactions having multiple links across multiple markets. Google-Fitbit's one example.
(07:33):
But even so the recent or the upcoming, I think we should say we're all thinking about it, the Booking.com decision in Europe that will come out, it's related to adjacent markets and what that means for companies that are becoming active in different markets related to one another. Before we dive into ecosystems though, because I think that's where we're trending to, we're thinking about that, Dave, what's happening in the US in this front? How aggressive is the US? Are the agencies looking at that?
David Wales (07:58):
Yeah, very aggressive, Ingrid and Drew. I think probably the place to really focus on is the new merger guidelines, the proposed merger guidelines that are no longer horizontal or vertical. It's everything in one. They've really come out with 13 key principles. We'll see when those get finalized in the US. As you guys know, it would be a big question as to whether the courts will adopt those merger guidelines, which really do push the envelope we think beyond even the current state of the law in the US.
(08:27):
But if you think about the horizontal versus other theories, as you guys teed it up, what they've really done is horizontal theories are very much alive and well. In fact, they're doubling down on those theories by trying to lower the thresholds under which you decide that a merger may presumptively raise competitive harms. There's a 30% a threshold set for horizontal overlaps where above 30% combined share, there's a presumption that the deal has a problem.
(08:53):
But they've also teed up just the fact that there is evidence of direct competition between the parties as something that may be enough to raise concerns, which obviously could pull in a lot more deals. But they also have a long laundry list of additional theories that really go beyond just your traditional vertical or horizontal theories for sure. Conglomerate theories, potential competition theories and a bunch of new ideas that they think hopefully they can convince a judge to be more aggressive on.
(09:22):
We're also seeing more aggressive cases too. If you look at some of the cases that have been brought in the vertical range, but also in potential competition, they really are pushing the envelope here. It's funny. If you look at what Europe had done in the past, it's almost as if they're following that playbook and trying to really explore some of those more exotic theories.
Ingrid Vandenborre (09:41):
How about Asia, Drew? Do you see the ecosystem issues and other coming up there?
Andrew Foster (09:46):
Yeah, no, absolutely. It's funny, and you mentioned starting to look at adjacent markets. When we do our notifications for the Chinese authority, they specifically ask us to identify any neighboring markets. You already have to go through an exercise where you're setting out for them explicitly what you think is a neighboring market. We had a previous case which involved avionics and aviation inputs, and we asked SAMR, we asked the regulator, what does that mean adjacent? What do you mean?
(10:24):
They basically said anything that goes into a plane. They thought that was enough. They can stretch that. You can be doing an automotive semiconductor case and, anything that goes into a car. They're trying to really think in a very broad way to capture everything that they possibly can. China, of course, has written into its statute. It has a statutory mandate to look not only at traditional theories of competitive harm, but also to look at the impact of transaction on the development of the national economy in China.
(10:58):
That obviously leads to some divergent effects as well. But they've also been watching very carefully what the European Union has been doing. They're very interested in testing out the new dynamic theories that the EU tends to be leading are at the forefront on. But I will say that they're probably not... Particularly not Korea and Japan, I would say they're not out there breaking new ground. While ecosystems are a huge factor in China and Alibaba and WeChat, both had their ecosystems effectively not dismantled, but had the walls cracked by the regulators.
(11:37):
Those are not theories that they really have been pushing quite as hard as they have been in the West. I think they're more trailing here.
Ingrid Vandenborre (11:46):
In Europe, and let's hope not all regulators follow all the breadth of what the European authorities are doing. Just to give an example, there's really focus on what is called ecosystem, but there's no real definition of what an ecosystem is. Meta's ecosystem was identified as a concern in its acquisition of customer, which was a startup platform that was looking at cloud-based customer relationship management services. It was cleared without conditions in the UK and Germany, but with remedies by the commission based on that ecosystem idea.
(12:20):
The thought was that Meta would steer more customers towards the ecosystem, and it's feeding generally a foreclosure theory of harms. You're foreclosing customers from going to competitors. We're seeing that same theory broadly come back in other cases. It was the case in the Microsoft-Activision transaction. I mentioned the Booking-eTraveli case. There as well it's adjacent markets. You've got hotel accommodation and you've got flight travel. Those are adjacent. Customers want both.
(12:51):
The combination of those two, that's not so self-evident as not raising an issue. That's going to be viewed as, oh, it's problematic because all of a sudden you have something that you can combine. The troubling thing is, and we're raising this with the regulators in the submissions that we make, because there is no definition of what an ecosystem is, they're describing it or coming up with it as they go. I think the common factor is there is no clear horizontal link and there is no clear vertical link.
(13:18):
It doesn't have to be defined as a clear conglomerate link in the definition. It's none of the above, but there's somehow an adjacency that is relevant. The main concern, the main harm, which is probably what unites the theories most, is not so much the structure, but the harm, is a foreclosure of harm. That you have a combination of products in related or adjacent markets that somehow the combination of which in one player is going to foreclose others by enabling that company to do things, whether tying or bundling or leverage in some form.
(13:53):
But it all seems to be related around foreclosure theories. In the Booking.com case, it's very much around raising rivals' costs. I think that's even the basic denominator that there's a concern, frankly, that regulators are not so much looking at what is bad for consumers. Even if it's good for consumers, even if you have a better product or a lower price, the question's starting to become, well, are you raising rivals' costs? Is this merger going to make it harder for competitors to come in because the products become better, cheaper, more sophisticated, more combined?
(14:27):
Because I think the agencies are acknowledging in the Booking.com case that this may be something customers want. Customers may want a combined offer and that would be great, but the authorities think that it creates a barrier, so maybe we should not have that combined offer, which is a bit shocking I think to us, antitrust professionals. The first thing should be the consumer price choice, but not so much the intermediaries, the market participants that may have a increased cost of being in the market.
(14:57):
The question is, on the one hand, do we really want this stepping away from traditional theories of harm? Are we not set with horizontal vertical conglomerate? Is there room to come up with these raising rivals' cost? Dave, what's the US' take on the ecosystem part the way I described it?
David Wales (15:12):
Yeah, I think, Ingrid, it's shockingly similar in the US. I think the way I look at it is the US authorities say, "Trust us. We know it when we see it." It's not necessarily horizontal. It's not necessarily vertical. If you look at the new merger guidelines, they're not horizontal merger guidelines. They are just the guidelines.
(15:30):
They really do take all of these concepts when it comes to entrenchment, to platforms, multi-sided platforms, just lay out all the different theories that you might actually think of when it comes to ecosystems and platforms with the idea that they're just going to wait to see what cases come down the pike and then hopefully use some of those guidelines to convince judges that even though it may not fit within the box of a horizontal case or a vertical case, that they can try and convince them that there's an issue.
(15:55):
We've already seen some of this too. I mean, if you look at the Meta case by the FTC, that's a platform case, has some Section 7 merger elements to it, some monopolization elements to it. If you look at the new Google ad tech case, same thing. There's a lot of platform type issues there. I think the agencies are really trying to push the envelope on that. The one thing I'll say is in the current merger guidelines, they talk about multi-sided platforms, and that's always been a big challenge for the agencies.
(16:22):
We saw that in the Sabre-Farelogix case. They lost at least at the district court level, but, of course, was blocked at the CMA, which goes back to the global enforcement point. But they really just say in there, it's almost as if it's like, hey, here's the potential theories you might have in multi-sided platforms. It could be competition on the platform. It could be competition between the platforms. It could be competition to disrupt the platform. We just think all those things raise issues.
(16:48):
There's no discussion of when that might apply, when it might not apply. Jonathan Kanter this week when pressed on, hey, we have these new merger guidelines and they really express all the ways you could find problems with deals, but they don't really talk about how to decide whether a deal actually raises issues and when it may not raise issues.
(17:06):
He said, "Well, basically we're not the rotten tomatoes of enforcement. It's not our job to actually have a recipe for you that tells you when your deal is anticompetitive. We just know it when we see it basically, and we're looking for these types of cases."
Andrew Foster (17:23):
Shouldn't we say that that's exactly not true? Shouldn't he be giving us guidance so that we can...
David Wales (17:28):
Well, it goes back to the point, Drew, of deterrence, right? I mean, they like the idea of people worrying about deals. The one thing that we also heard from the DOJ and the FTC this week, which was a little interesting, was they think that their goal of deterrence is working, that they are seeing fewer deals that raise issues. I think part of that is if you're specific, then that may not be the case. If you're too transparent and if you want to litigate, you don't want to be that transparent. I think that's the unfortunate reality in the US.
Andrew Foster (17:59):
That, of course, takes a page from exactly how the Chinese authorities are. They have always declined to publish any guidance or guidelines that would hem them in. They do not like to put those types of clear guidelines out into the world, which, of course, does a disservice to any business thinking about a transaction. Because while it's great for lawyers, it's not great for our clients.
(18:31):
Going back to Ingrid's point about looking at raising rivals' costs, I mean, that again is something that has long been current in China. The first people that they're going to go talk to are the trade associations or your competitors. I mean, Chinese stakeholders, obviously customers are vitally important in the process, but so are your competitors and so is the industry regulator, and those are the first people that SAMR is going to go talk to.
Ingrid Vandenborre (18:57):
That may be a good lead into the second part that we're going to talk about. We talked about the different theories of harm. Evolving views on evidence is our second theme here because it becomes increasingly complicated to the cases before these competition authorities. There's a lot of focus on new types of evidence that we didn't see before. Deal valuation, deal rationale is becoming central. They want to second guess exactly why the deal was done.
(19:26):
They want to see why exactly you evaluated at the amount that you did, what that implies in terms of how the parties think the market will evolve and assumptions build into that. And then crucially, much more questions about internal documents and huge document productions. We're seeing even in Europe as a standing rule, you have all of the second request production goes to the European authorities and then some on top. It's becoming even worse.
(19:53):
The timeframe is extending. We're seeing that I think across jurisdictions. It's just unbelievable if you compare how we were advising on a timeline for getting a deal done five years ago compared to what we're advising now. Let me know what you think. What's the most dramatic evolution there? Maybe Drew, you want to start how you look at timetables?
Andrew Foster (20:18):
The timetables are always, if we think first about China, very much driven just by the fact that there is this consensus based approach taken in China and that necessarily means it's going to take time. It take months and months. They ignore their own timelines. They talk to everybody that they can possibly talk to. I think the one benefit of China is that you don't have these document productions, at least not yet. They are not yet looking at the internal documents in the same way that they are in the EU and the UK and the US.
(20:53):
But unfortunately, while China still does not do that, we have very much seen Korea and Japan start to make requests. They want a selection of those internal documents. They are being pointed to them by the other regulators. As Dave mentioned, the regulators are all talking. We are now getting requests where we are getting specific lists of documents from a CMA production that they want to see, from an HSR production that they want to see.
(21:21):
And then if you go down to Australia, they are certainly exactly on that boat and firing off very similar, very invasive, very burdensome document type productions, as well as depositions of senior executives. I mean, certainly that's all adding a lot of weight into the system from our side.
Ingrid Vandenborre (21:45):
Dave, in the second request, productions were born in the US, but is there development there also in how that's being dealt with and other evidence types?
David Wales (21:54):
Yeah, for sure. I think that it's interesting if you think about maybe the three buckets of evidence that have historically been most relevant in a merger investigation. There's what we call direct evidence, which is really documents what the executives might say about the deal, the marketplace. There's structural evidence, market shares, number of competitors in the space, and then there's economic data and analysis. It was interesting to hear Jonathan Kanter talk about his view on those and it really was, hey, if any of those go positive, we're going.
(22:25):
I mean, there's going to be be a challenge. But I think that in today's world, the reality is that the significance of that evidence is starting to change. Because especially if you read the guidelines, shocker. The structural presumptions are alive and well and being expanded because that's where they really feel like in tough cases where you're pushing the envelope on theory, speculative theories allegedly. You want to have that presumption, and that's where the agencies have failed when they don't have that structural presumption, high market shares and a horizontal case.
(22:54):
It's really hard to bring cases. They really liked the idea of using the executives' words against them. They've doubled down on looking at that evidence. To your point too, Ingrid, deal models, are you baking in things that might suggest there's market power, like the price itself? You're paying so much for this merger or this acquisition, that must be anticompetitive. But it also puts in perspective the economic evidence, which had always been the cornerstone for modern US enforcement.
(23:21):
They've really walked away from that and said, economics may not be that important, because the reality is there's not a lot of economic tools that really do support some of these more speculative vertical potential competition entrenchment theories. If you look at the cases too where luckily in the US they have to litigate, judges have shredded them on the lack of economic evidence. To tell you, Ingrid, Microsoft-Activision, other cases, there's really been a lot of criticism on that.
(23:48):
I think they've really focused more on the structural presumptions piece of this, the market structure, but also the documents. The one thing that the DOJ and FTC has always said is when you have uncertainty about how the marketplace is going to play out, we rely on the company's view of the world. That comes back to if they're saying, "Hey, this deal is going to give us power," or even if the market is defined this way, they're going to use that against you.
Ingrid Vandenborre (24:13):
In Europe, I think it's really the rise of internal documents where other evidence is being very much discredited. It's basically viewed as something the parties have developed, but it's not reality necessarily. It's all advocacy, and so they dismiss it. We've seen that in a couple of key cases where the commission came out and said very explicitly, "We make our decisions based on what's in the internal documents." We've been told that when we do put these economic studies in, they're inconclusive.
(24:43):
They're helpful, useful, thank you very much, but they're inconclusive to address the issues. In [inaudible 00:24:50] we know the commission used this innovation theory of harm and there the commissioner of [inaudible 00:24:55] already, so this is already a couple years ago, publicly stated that internal documents "help the commission make better decisions and understand the company's plans for the future." It is really something that they're looking to exclusion sometimes of other things.
(25:12):
Similarly, in the UK, the recent revision of the CMA's merger guidelines identify the importance of the internal documents. They refer to the fact that other data may be scarce, but internal documents are going to be increasingly relied on. Meta-Giphy decision was almost exclusively relied on in internal documents and we'll get to that maybe as well, third party evidence, the input and comments they're getting from third parties. That's maybe also a point to consider. To what extent do third parties play a role and do they come into the analysis more and more?
Andrew Foster (25:49):
It's one thing to say that you're going to rely on internal documents, but what they don't ever say is that they're going to rely on a very cherry-pick, small self-selection of internal documents. And then they very often are ignoring the great weight of the evidence just because they found a great soundbite from someone in marketing rather than somebody who has actual directional control over a company.
David Wales (26:11):
In the US even too, they go even further, Drew. They will say that the absence of bad documents should not be read to support the party's arguments either. It's like you can't have it both ways. I don't think judges have seen it that way. We certainly have seen that in some of the recent losses by DOJ, FTC where the judges said, "I think it is probative that I don't see documents talking about the ability to exercise market power as a result of this deal." I think it really is cherry-picking.
Ingrid Vandenborre (26:41):
At least in Europe, we don't have a court that selects that. I think as a result of that, we also don't have clear evidentiary standards. At some point in the US, you think this is going to go to court. In court, you have a clear evidentiary standard that will apply. You cannot share big documents. That's non-existent in Europe, just because the whole process with documents is relatively new. You see it's a very somewhat new and unsophisticated way of dealing with documents, frankly.
Andrew Foster (27:09):
It's interesting because I feel like in some ways, especially in Europe, you have this creep where the same evidentiary presumptions that they like to use against cartels are starting to creep into mergers. That's an unfair thing. But I think there's a very similar approach to evidence, which is that same cherry-picking.
Ingrid Vandenborre (27:30):
There's a particular focus, I think, on documents around, I mentioned, the deal valuation and what is the deal premium. I think there's this implicit assumption that when you have a company that is not on its face perhaps valued in the way that the deal valuation suggests from the regulator's perspective, the implicit assumption is that the buyer will leverage its market position based on the target in a way that is more or worse than what the target company alone in the market would mean. The mere fact of there being a very high deal value would reflect that increased market power almost directly.
(28:08):
That's the deal premium, and that makes synergies discussions very difficult. Because every synergy discussion, we saw that in the Booking.com deal, the way the parties had presented this was we'll have a common point for customers, this is going to be valuable, and it's turned into the theory of harm because the value that was the deal has become the issue that is the premium, that is how you're going to block others because you value this asset and it's become very clear. Deal value in the US is also very central to the assessment.
Voiceover (28:39):
It is. It is, Ingrid. That's very much the conversations. Why are you paying so much? But also it's even worse than that too because it's also this make or buy dynamic as well. It's like, well, if you're spending $50 billion on this company, shouldn't you have taken that money and tried to invest to enter in the same product space? It's a bit of like a social engineering type consideration, and I think that's a real push for them to try and make that point. You do see that in the merger guidelines.
(29:04):
You do see that in some of the commentary around the cases as to what would be better. Believe it or not, the guidelines actually say in them, and it was a very fascinating point, that in essence, organic growth is better than inorganic growth and actually cite to a case in the US. What was very interesting was just this week they admitted that that was dicta, not controlling, and something they put in there just in case they wanted to use it in a future case.
Ingrid Vandenborre (29:29):
I think this presumption of we assume that acquisition is not an appropriate way of growth and that only organic growth is the right way of growth is a very narrow and constrained way of looking at competition. We keep repeating that across cases, all of us, but I think it's very much how regulators see it, that acquisitions have become more of a bad thing in general. You have to disprove the whole assumption as it were.
Andrew Foster (29:57):
Which ironically is potentially dampening to innovation. Because if you're not going to get a return, if you can't sell the thing, what are you going to do? You got a job making it in the first place.
David Wales (30:06):
Yep, exactly. There've been studies on that too that have shown that that has dampered investment, which is a real issue in the US.
Ingrid Vandenborre (30:13):
One thing to mention that I did want to underscore, the commission, and I don't know to what extent it's true for the other regulators much, but the commission really sticks to its market test and this third party input. You can get really difficult process. If the commission can say, "Well, I understand all your advocacy. I'll get all your points. There's nothing bad in your documents, but we have these third parties that make these comments and, unfortunately, we're going to have to take those into account," that's a very difficult thing to deal with.
(30:41):
That's a struggle. A big part of the assessment is how are third parties going to feel about this transaction? How much do the other agencies... Are they functioning as platform for complaints? How does that work in the US, for example, Dave? Complaining, is that a big factor in the review?
David Wales (30:59):
It is. I think competitor complaints, third party complaints are becoming much more important. It's back to the point you'd made before, Ingrid, about how, at least in the US, it's pretty clear law that the antitrust laws are designed to protect competition, not individual competitors. But if you read the guidelines and all these different theories, they really are geared less towards consumers and much more towards competitors raising entry barriers, foreclosure that you talked about.
(31:22):
I think they're very much focused on that. When you think about the evidence that is pertinent to some of these more speculative theories, it's less and less customer views, because customers may not really appreciate how the market may play out and they may not really have thought or be concerned about some of these more envelope pushing theories. I think you're going to find the agencies relying less on customers, which really are the victims of some of these alleged mergers, and much more on competitors, what you find in the US.
(31:51):
We used to always criticize, cover your ears, Ingrid, we used to always criticize the Europeans for being too open to competitor complaints. Well, we think now there's a cottage industry in the United States of law firms representing competitors and going in and making a difference on deals. That's something new. It really goes into thinking about how am I going to defend this transaction and try to undermine competitor concerns. We certainly saw that in Microsoft-Activision, where the FTC relied on a single competitor and I think the court saw through that.
Ingrid Vandenborre (32:22):
Drew, what about in Asia, competitors complaining, is that a big factor there as well?
Andrew Foster (32:28):
Well, I mean, of course, from China it's written into the law, so it's quite big in China. As Dave alludes to, not only is there cottage industry, we used to get emails from one certain local counsel, who will remain unnamed, who would celebrate the successful complaint that he had brought to damage. He'd send it around to his whole list, which we always thought was maybe not the best marketing. But outside of China, I think it's probably less dangerous than it may be becoming in other jurisdictions.
(33:04):
I'll say, for example, in Microsoft-Activision, Sony's home jurisdiction in Japan, they looked very seriously at it, but the Japanese after a very thorough review were happy to give an unconditional clearance. Even in their home jurisdiction, they weren't getting a lot of credit. That being said, obviously if you're looking at national champions in any particular place, if you're looking at Samsung in Korea or Taiwan Semiconductor in Taiwan, they'll obviously be listened to.
(33:34):
But I don't think it's the same idea of having this cottage industry of complaints that are... I don't think it gets the same traction.
Ingrid Vandenborre (33:43):
I think maybe just to end, maybe we should be thinking about looking forward. What's the right strategy to get through deals and how do we think things are going to evolve going forward on those two points? Maybe Drew to start with you.
Andrew Foster (33:57):
Well, I mean, I think as all three of us are happy to report, I mean, we are still getting deals done. Sometimes it's taking longer and sometimes our advocacy has to be quite forceful, but I think it's true certainly not just for China, but around the world. I don't think that people should despair and think that this process is becoming unmanageable. But I think what it does mean is that you really do need to get out in front of it.
(34:21):
I think that it now becomes all the more important to do some very serious in depth analysis before you get started and to do it with the benefit of having these types of experiences to know that the world has changed, because I think that helps us evaluate the risk in a much more helpful way for our clients. Obviously digital platforms and tech deals are going to get a lot of scrutiny. I think we all know that. Semiconductor deals in addition in China in particular.
(34:56):
As Ingrid was talking about, deal rationale and valuation, those are issues that maybe the bankers should stop doing such a good job and stop getting so much money for their clients, but it's something we have to watch out for early on.
Ingrid Vandenborre (35:09):
We're almost ending on a positive note, but then we got into the more concerning. Dave, what do you think? Crystal ball gazing, how do you see things going?
David Wales (35:21):
I think, Ingrid, the good news is, as Drew said, tough deals can still get done. I think the strategy has to change on tough deals. You're not in an environment that's very anti-remedy. If you have a deal that could have otherwise been solved with a remedy, I think that really requires some front loading in terms of, what am I going to going to do to handle that? Am I going to have a buyer upfront? Am I going to litigate the fix? I think you have to comply to the second request much more often than you had to in the past.
(35:45):
You really have to put the US agencies to their proof. No one likes to imagine that a merger might be litigated, but the reality is you really have to have that credible threat. Because unlike the other jurisdictions, of course, in the US, the agencies have to go to court to block a deal. We're finding that in some of these more aggressive cases, they're losing. Again, no one wants to litigate a case, but that is starting we think to discipline the agencies on some level. There has been a few more settlements lately, especially by the FTC.
(36:13):
DOJ was forced to do on the [inaudible 00:36:14] case. I think if you have a deal that has real issues, you just need to think about that strategy and making sure you bake in if there's a remedy, if I do have to go to the mat on this, do I have time to at least threaten litigation? Because the reality is while the agencies are talking tough and maybe bringing some more cases, they have limited resources. They can't go after every deal, and the law hasn't changed.
(36:34):
They still have to go before a court to convince them that the deal's a problem. And that disciplines them. If you set it up correctly, you can really maximize that leverage on a deal and, again, get tough deals done.
Ingrid Vandenborre (36:46):
I fully agree with that. I think that it is duplicate deals done. I think you need to be better prepared, as we're all saying. I think better prepared, thinking about things ahead of time. How will regulators look at this? How do I manage the risk? How do I anticipate the questions that will come, the internal documents that they will see? How do I navigate that? And, indeed, thinking of remedies. Because regulators don't want to always be viewed as prohibiting deals, especially as the economic climate is changing.
(37:10):
I think that's across the board the case. It will be more difficult for them to continue the stance of on some speculative theory, we're going to hold this up, there's going to be more objection and discipline that's going to raise from markets, from industry participants, generally. I think there is hope to get things done. With that, I want to thank both of you. Thanks, Dave. Thanks, Drew. Thanks everyone for joining, and we'll look forward to welcome you to our next Fierce Competition Podcast. Thanks, everyone.
Voiceover (37:39):
Thank you for joining us for today's episode of Fierce Competition. If you like what you're hearing, be sure to subscribe in your favorite podcast app so you don't miss any future conversations. Additional information about Skadden can be found at Skadden.com.
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