Whereas the CMA unconditionally clears the overwhelming majority of software program offers at Part I, 50% (3) of the CMA’s lively Part II investigations concern software program corporations (NortonLifeLock/Avast, NEC Software program Options/Capita Safe Options and Providers, and Dye & Durham/TM Group). Coupled with different latest CMA interventions in software program offers, gone often is the days when the CMA seen software program markets as aggressive, fast-paced, and modern.
Under, we determine 5 key factors that buyers ought to remember when considering transactions involving software program enterprises.
1. The CMA is extra interventionist in software program mergers in comparison with different antitrust authorities
Of the ~35 software program circumstances that the CMA reviewed since 1 January 2019, the CMA referred to Part II, prohibited, and/or required cures in 13 circumstances (two of which the events deserted). The CMA’s intervention charge in software program offers is due to this fact 37%, which is considerably larger than the European Fee’s (“EC”) intervention charge of ~4%.
2. The CMA might go to important lengths to ascertain jurisdiction over software program offers with little or no UK nexus
The “share of provide” limb of the UK jurisdictional thresholds supplies the CMA with broad discretion over the transactions it critiques. The CMA doesn’t must outline an “antitrust” market (which it should for the substantive antitrust evaluation) earlier than establishing that events account for 25% or extra of UK provide. The CMA can as an alternative contemplate “any cheap description of a set of products or providers” and account for any items or providers inside that description that concern the UK. For instance:
The CMA’s Mergers Intelligence Committee (“MIC”) known as within the accomplished acquisition of Looker Knowledge Sciences by Google late in 2019. Looker supplies enterprise intelligence (“BI”) instruments (predominantly within the US) designed for information exploration, analytics, and internet advertising providers generated by suppliers resembling Google. The CMA adopted a broad body of reference in regards to the provision of BI providers within the UK that “automate the ingestion, evaluation and visualization of internet analytics information” in an effort to create a horizontal overlap for the aim of the share of provide threshold.1 The CMA rejected the events’ arguments that their merchandise had been differentiated, and held that the share of provide take a look at solely requires the CMA to think about “any cheap description of a set of products or providers” – not an antitrust market.
In June 2019, for instance, the CMA prohibited the anticipated acquisition of Farelogix by Sabre Company (“Sabre”). The CMA discovered that Farelogix was engaged within the provide of journey reserving and associated IT providers within the UK on the idea of its relationship with American Airways, which had an interline settlement with UK airline British Airways. Farelogix processed solely a small variety of American Airways tickets (round 60) that included a British Airways interline section. The CMA nonetheless held that British Airways took “lively and acutely aware steps” to acquire Farelogix’s providers, that Farelogix was entitled to some worth on account of these ticket gross sales, and that the share of provide take a look at doesn’t require a minimal increment. In Might 2021, the CAT agreed.
These two circumstances reveal the CMA’s means to outline exceptionally slim or broad classes of provide and determine UK nexus primarily based on restricted UK actions to ascertain jurisdiction over transactions it needs to research.
Additional, the CMA’s revised jurisdictional thresholds, which had been introduced in April 2022, intention to develop CMA jurisdiction over “so-called ‘killer acquisitions’ that danger the event of recent services or products”. They suggest a brand new various threshold, which might be happy in offers the place the acquirer has each:
An present share of provide of products or providers of 33% or extra within the UK or a considerable a part of the UK; and
UK turnover in extra of £350 million.
This new threshold would get rid of the necessity for the CMA to reveal that merging events compete (e.g., on the idea of a pipeline product) and can imply that a big enterprise or personal fairness sponsor buying a goal firm with no UK actions might nonetheless be throughout the CMA’s attain.2
These reforms are usually not anticipated to return into drive till no less than 2023, however the present case regulation supplies the CMA with sufficient ammunition to evaluate probably the most important international transactions.
3. Small transactions is not going to essentially escape scrutiny
No case appears too small for the CMA. In August 2018, Swedish firm Tobii accomplished its acquisition of UK rival Smartbox for £11 million. Each events are lively within the provide of bespoke communication software program and gadgets for individuals with advanced speech and language wants (often known as augmentative and assistive communication (AAC) options) and generated simply £7.8 million in UK gross sales mixed. The CMA known as within the transaction and issued an preliminary enforcement order (“IEO”) in September 2018 stopping additional integration.
At Part I, the CMA rejected the events’ arguments that the markets had been de minimis and concluded that the transaction resulted in a considerable lessening of competitors. The CMA recognized issues, for instance, of potential non-price partial foreclosures – whether or not the merged entity may degrade the standard of its software program to rivals (e.g., by decreasing interoperability), or tailor enhancements in its software program to learn its personal downstream enterprise.3 The CMA appeared to prioritise qualitative proof (such because the views of shoppers, rivals, and proof from inner paperwork) over quantitative proof (resembling diversion ratios).4
Having rejected behavioural cures provided by Tobii, the CMA opened a Part II investigation, and finally issued its first ever unwinding order in March 2019, obliging the events to reverse the deal. The order pressured the events to terminate a reseller settlement underneath which Smartbox had agreed to behave as a reseller of Tobii merchandise within the UK and Eire, and compelled Smartbox to renew provide of a spread of merchandise it had agreed to not provide and to reinstate R&D initiatives that it had agreed to droop. The CMA issued its remaining report in August 2019, requiring Tobii to divest Smartbox to an accredited purchaser.5
Equally, Bottomline Applied sciences accomplished its acquisition of sure expertise and property from Experian (the Experian Funds Gateway (EPG)) in March 2019 for roughly $12.5 million. The CMA known as within the transaction, imposing an IEO in Might 2019. In August 2019, earlier than launching a Part I investigation, the CMA issued an unwinding order, obliging the events to reverse any integration, restore pre-integration market situations, and to not use any commercially delicate gleaned from the deal. Via its IEO, the CMA supposed to keep away from prejudicing the CMA’s merger investigation and any doable cures that will have been required. Regardless of its IEO and unwinding order, the CMA finally accredited the deal.
4. Transactions involving software program in delicate industries usually tend to entice scrutiny
The CMA’s urge for food for intervention and intense scrutiny in software program offers might enhance because the sensitivity of the sector(s) involved will increase. For instance, the CMA intervened in software program offers regarding:
Bespoke communication software program and gadgets for individuals with advanced speech and language wants in Tobii/Smartbox. (In the end blocked – mentioned above.)
Funds software program that enabled funds by way of the Bacs and Quicker Funds Direct Company Entry techniques in Bottomline Applied sciences/Experian. (In the end cleared – mentioned above.)
Parental engagement software program, administration info system software program to UK faculties, and funds software program to UK faculties in Montagu/ParentPay. The CMA ultimately dismissed horizontal issues on the idea of the events’ “modest” mixed share of provide (beneath 15%), however not earlier than detailed consideration of a variety of proof, from financial projections of misplaced margins, technical means to have an effect on product integration and interoperability, evolution of shares of provide going again nearly a decade, and relative prices of switching.
Important software program options to emergency service suppliers (together with police forces, hearth and rescue providers, and ambulance trusts) and transport service suppliers (resembling Transport for London and rail operators) in NEC Software program Options/Capita Safe Options and Providers. The events present quite a lot of software program options, together with (i) “built-in communication and management providers” utilized by management room personnel in day-to-day duties resembling pressing communications with emergency response employees, (ii) specialised software program to police forces to allow the planning and scheduling of shifts, and (iii) information administration techniques that allow the police to document and handle case-related info such because the processing of individuals in custody and case file administration for prosecutions. The CMA referred the deal to Part II in Might 2022 after NEC refused to supply cures in Part I. The CMA discovered that every software program market is concentrated, with the events typically being two of the three accessible suppliers, every with a big established buyer base.
Every of those offers arguably concerned software program corporations lively in delicate sectors (resembling training, well being care, and susceptible shoppers), and every concerned intense scrutiny (and in a single occasion prohibition).
5. CMA processes are unpredictable, convoluted, lengthy, and sometimes costly, and the CMA might depart from the strategy adopted by different authorities even in international markets
CMA processes could be notoriously unpredictable and very burdensome. In Bottomline Applied sciences/Experian, the CMA unconditionally cleared the deal, however solely after it ordered the events to unwind the transaction, opened an in-depth investigation, and rejected the events’ provide of undertakings, throughout a 12-month interval.
In November 2019, the US Division of Justice (“DOJ”) cleared Google’s acquisition of Looker Knowledge Sciences, with Austrian clearance shortly thereafter. In December 2019, nevertheless, the CMA issued an IEO and known as within the transaction. The CMA finally unconditionally cleared the transaction in Part I, but it surely labored carefully with the DOJ and undertook an in depth evaluation each of horizontal results (together with potential competitors) and vertical results on international markets.
In November 2020, the CMA initially prohibited monetary software program firm FNZ’s proposed acquisition of GBST (however that the CMA had beforehand knowledgeable the events that it had “no additional questions” in response to a briefing paper). On enchantment, the CMA requested the CAT to remit the CMA’s resolution for reconsideration, having recognized “market share errors” in its evaluation. The CMA subsequently accepted undertakings provided by FNZ to promote GBST however with the suitable to purchase again restricted property regarding GBST’s capital markets enterprise.
After receiving unconditional Part I approvals within the US, Germany, and Spain, the CMA in April 2022 turned the one main competitors authority to refer NortonLifeLock’s $8 billion acquisition of Avast to Part II. The CMA concluded that the events’ differentiated choices (NortonLifeLock centered on paid-for options and Avast on so-called “freemium” options), and the aggressive constraints posed each by Microsoft (the most important supplier by quantity) and different OS suppliers resembling Apple and Google, had been inadequate to offset the lack of competitors. In stark distinction, the German Federal Cartel Workplace cleared the transaction regardless of the events’ excessive mixed shares, in mild of elevated competitors from platforms with safety options built-in of their OS. Equally, the Spanish Nationwide Markets and Competitors Fee concluded that the market share estimates might, in truth, overestimate the events’ place since they exclude free cybersecurity options resembling Microsoft’s Defender. The CMA will now be underneath important stress to substantiate its divergent strategy.
High suggestions for software program offers going ahead
Take into account whether or not the software program falls right into a delicate sector.
Take into account overlaps even on seemingly conservative bases or edge circumstances.
Take into account whether or not the goal supplies providers to UK companies or prospects, even when small or primarily based on an settlement between the goal and non-UK third social gathering.
At all times conduct a merger feasibility evaluation – don’t depend on the restricted measurement of a transaction or worldwide approvals and contemplate whether or not there’s a reasonable (and commercially acceptable) repair to any drawback.
Take into account probability of CMA call-in when contemplating international notification technique. In IAG/Air Europa for instance, the CMA opened an investigation very late within the EC’s Part II investigation. The events subsequently deserted the deal.
Account for doubtlessly appreciable uncertainty, delays, danger allocation (e.g., HOHW) and the necessity for goal cooperation in any deal paperwork.
Extra typically, buyers ought to remember the next when contemplating transactions with UK nexus:
The CMA can evaluate acquisitions of “materials affect”, which is considerably decrease than the EC’s “decisive affect”/“management” normal, and which has been discovered primarily based on an fairness curiosity of as little as 15% and a single board seat.
Transactions involving important multiples might entice higher scrutiny. In PayPal/iZettle, the CMA thought of whether or not the excessive consideration worth for iZettle (nearly twice that of a parallel preliminary public providing valuation) mirrored a discount in competitors.
Doc procompetitive rationale(s) for the acquisition in inner and exterior analyses, and put together for the potential of the CMA questioning administrators on the contents of inner paperwork and their interpretation (Impressed/Novomatic).
Keep in mind that the UK’s overseas direct funding (Nationwide Safety and Funding Act) regime may additionally apply and be a way via which the CMA learns of a deal. The regime is acquirer-agnostic (it bites overseas and UK acquirers) and may apply even within the absence of a UK subsidiary or property (i.e., UK gross sales alone are enough).
The UK merger management thresholds stay voluntary and non-suspensory. Nonetheless, the CMA’s liberal interpretation of its jurisdiction and interventionist strategy to software program offers in recent times (largely supported by the CAT) highlights the dangers of not notifying the CMA of software program offers. Events ought to conduct an in depth pre-transaction evaluation of the antitrust (and FDI) danger related to the deal, together with the sensitivity of the software program concerned, when deciding whether or not to inform the CMA and the implications for deal timelines and obligations in deal paperwork. And if events proceed with completion regardless of materials danger, they need to contemplate the price of reversing any integration undertaken