In May 2020, Cornerstone Research hosted an expert panel that addressed topics related to alternative counterfactuals in merger enforcement, from potential competition to the failing firm defence.
At a Cornerstone Research webinar held in May 2020, expert speakers from private practice and academia addressed alternative counterfactuals in merger enforcement, covering topics that ranged from potential competition to the failing firm defence.
Failing firm defence |
COVID-19 impact The failing firm defence is expected to increase, but according to the European Commission (EC) and Competition & Markets Authority (CMA), standards for accepting failing firm arguments will remain high. The CMA has indicated that it will not treat completed mergers or acquisitions differently from proposed transactions.Recent ‘refresher’ to the CMA Merger Assessment Guidelines (2010) In an updated document, the CMA adopts a broader, more holistic approach to the third limb of the failing firm defence, ‘looking at the overall market structure and taking all relevant parameters of competition into account’. This revision allows a focus on assets rather than sales, and provides guidance on the CMA’s current approach to failing firm cases (even though it does not appear to be formal guidance in terms of the Enterprise Act 2002). Industry changes |
Potential competition and uncertainty |
Foreseeability The CMA guidelines describe that the CMA will only adopt sufficiently probable counterfactuals. However, predicting potential competition and the likelihood of future entry is challenging for competition authorities (e.g., projecting a start-up tech firm’s success).Less certain counterfactuals The law and economics communities are debating whether agencies should accept much less certain non-standard counterfactuals in potential competition cases, particularly for transactions that may affect future competition in digital markets. Complements or substitutes Types of evidence Dynamic counterfactuals |
EvidenceCompetition authorities demand a high level of proof from parties before accepting a failing firm counterfactual. In potential competition cases, the evidence will help reduce uncertainty but is unlikely to remove it. |
Documentary evidence Documents require careful assessment, and should be weighted according to source, quality and magnitude. The CMA considers independent evidence to be more useful.Internal documents Some internal documents carry more weight than others. In Illumina/PacBio, the CMA emphasised valuation documents on expected future market developments over customer documents that discussed concerns about PacBio’s continued existence. Internal documents must be considered in the appropriate context, as companies may have an incentive to reassure suppliers and customers about the firm’s viability. Ability and incentives Complementary assets |
The views expressed herein do not necessarily represent the views of Cornerstone Research.
Washington
