Deals: More deals face intense scrutiny

A UK-EU divide has opened up over the Microsoft deal for Activision Blizzard, creator of Call of Duty. Image: ALAIN JOCARD

One impact of Brexit felt by dealmakers is the increased presence of the UK Competition and Markets Authority (CMA)and the level of scrutiny it now applies to mergers and acquisitions.

Since Brexit, the CMA has had greater scope to intervene on a wider range of cross-border M&A transactions that would previously have been reviewed only by the European Commission – the CMA prohibited three M&A deals in 2021-22, some 5.5 per cent of all deals it reviewed, but in the previous decade, it stopped an average of one transaction a year, around 1.5 per cent of deals reviewed.

Those involved in relatively large deals with an international context will have felt the effects, says Charles Livingstone, the partner who leads Brodies’ competition law practice. He says: “Anyone handling big international deals now has to think about UK merger control, as well as the EU’s and others where relevant.”

He went on: “In the tech space in particular there are what are often called killer acquisitions, where a large company buys a small one before it can become a competitor. The CMA has been coming up with some creative approaches to its share-of-supply test to establish jurisdiction over deals it thinks could be killer acquisitions.

“The normal threshold is £70 million of UK target turnover or a combined 25 per cent share of supply in a UK market where both parties are active. The CMA has interpreted share-of-supply to catch businesses with no UK turnover by reference to such things as having people physically present within the UK.

A recent example of a large, global deal in the tech space is Microsoft’s ongoing attempt to buy Activision Blizzard – the firm behind Call of Duty – for almost $70 billion. First announced in early 2022, the deal is being scrutinised by regulators.

Livingstone says: “Prior to Brexit, the CMA would have had no jurisdiction over this deal. It has blocked the deal because of worries about the potential effect on competition in the supply of cloud gaming services.

“The EU also identified some concerns about competition, but it was willing to accept undertakings from Microsoft to make Activision games available via any cloud game streaming service… but unless all the relevant regulators clear the deal, it’s blocked.”

He says the CMA’s position on this Microsoft deal reflects its preference to avoid “behavioural solutions” to address competition concerns. In contrast to the EU, it has shown it would rather not accept the acquirer’s undertakings that it will do certain things once the deal goes through that would address potential competition issues.

“Blocking a deal is obviously quite a blunt instrument,” he adds, “but the CMA prefers structural remedies to behavioural ones. This situation introduces an extra variable for anybody working on a merger strategy.”

Another way in which the UK’s approach differs from the EU’s is the former is voluntary but the latter is mandatory. Deals that fall within EU jurisdiction must be notified and cleared, but Livingstone says in the UK there is a need for judgement on whether to notify the CMA.

That applies even if, for example, the target company has a UK turnover of more than £70m and the share-of-supply test is met.

He adds: “If a deal isn’t notified and the CMA has concerns about the deal, it could potentially be unwound after completion. The businesses involved need to weigh these things up to decide whether to notify the deal proactively.”

He says that the CMA has a mergers intelligence unit which keeps track of deals, to pick up any that might be of interest. It has four months from the deal attracting a sufficient level of publicity to call it in for scrutiny.

A major shake-up of the system in the UK is currently under way due to the recently published Digital Markets, Competition and Consumers Bill, which states its aims as removing unfair practices and promoting competition. It is part of a broader trend in the UK, EU and US to intervene more aggressively in the digital economy.

The bill will see the UK turnover threshold for CMA jurisdiction rise to £100m, and the share of supply test changed to exclude deals where no party has a UK turnover exceeding £10m. But Livingstone says the biggest change will be the addition of a third test to catch acquisitions by, or of, large businesses, regardless of the other party’s UK turnover or market presence.

This will apply where one of the parties has a UK turnover of more than £350m and either supplies or purchases at least33 per cent of the total amount of a particular good or service supplied in the UK or part of the UK, as long as at least one other party is a UK business or carries on activities in the UK.

He says: “This third test is intended to ensure the CMA can have jurisdiction over acquisitions by big tech and other large buyers. The CMA will also be able to designate certain big tech businesses as having strategic market status, which among other things, will require them to notify the CMA in advance if they are making an acquisition.”

Livingstone concludes: “Between the Digital Markets, Competition and Consumers Bill and the National Security Investment Act 2021, there are a lot of changes for dealmakers to navigate. This is the biggest shake-up in the UK’s merger control regime in over two decades.”