See original article in english International Mergers Conference #2 The counterfactual scenario in times of crisis


International Mergers Conference #2 The counterfactual scenario in times of crisis

2ème webinaire de la conférence « International Mergers » 2021 organisée par Concurrences et University College London, en partenariat avec Cleary Gottlieb, Intesa Sanpaolo et Oxera, avec Fabrizio Di Benedetto (Team Coordinator - Antitrust Affairs, Intesa Sanpaolo), Cani Fernandez (Président, Comisión Nacional de los Mercados y la Competencia), Frédéric Jenny (Chairman, OECD Competition Committee | Professeur, , ESSEC), Nicholas Levy (Associé, Cleary Gottlieb), Birthe Panhans (Deputy Head of Unit - Mergers case support and policy, DG COMP) et Barbara Veronese (Associée, Oxera).

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Frédéric Jenny introduced the panel, highlighting the importance of counterfactual scenarios in merger control. According to the EU Horizontal Merger Guidelines, it consists of “compar[ing] the competitive conditions that would result from the notified merger with the conditions that would have prevailed without the merger.” The counterfactual is the hypothetical scenario in which the merger would not take place. One can find the counterfactual by combining two sets of considerations : the first is a static set of considerations – assessing what the premerger reality of the market was. The second is an assessment of the likelihood of events that could come and change the market, either the structure of the market (for example, is there a likelihood of entry in the market or is there a likelihood of innovation) as well as the likelihood of changes in the behaviour of firms (are there going to be coordinated effects, are there going to be unilateral effects) once the merger has taken place. The whole process requires gathering a lot of information from the parties, but also suppliers, competitors, and customers of the merging firms to get a better sense of what is the dynamic and the reality of the merger. In the context of a crisis, this task is made even more difficult as major and unpredictable market changes occur – as seen in the CMA’s decision Amazon/Deliveroo. In addition, remedies engineering is made harder : in a time of crisis or a perspective of crisis, some remedies may not be as available as they are in more normal times — for example, structural remedies may be more difficult to consider because it is unlikely that anybody would buy the assets that would need to be sold.

Barbara Veronese started by saying that an economist’s job in the context of a merger is to provide a forward assessment using data and information on markets, but uncertainty should never be downplayed. Businesses deal with uncertainty routinely, and even more so when engaging in a merger. In a merger, businesses and their executive are making a big investment or entering a new market. They weigh this decision against a counterfactual market to assess what the investment could develop in terms of value, what would be the efficiency gains of scale, and whether the deal could take them to a different level in the market. Crisis does impact these perspectives : for instance, Air Canada recently contemplated acquiring Transat. It saw a market landscape and an opportunity that they priced over $700 million in June 2019. Soon after, in a year, the value they saw in those market and target was reduced to less than $200 million, equivalent to a discount of around 75%. What are the foreseeable consequences of the Covid-19 shock ? Probably fewer deals all else equal. On the other hand, failing firm defences may seem, at least in probability terms, more credible than at other times precisely because of all the negative effects of doing a deal under this transaction now when valuating businesses is trickier. The last consequence would revolve around the entry. Entry through acquisitions provide an easier way into a market during turbulent times, facilitating ideas and innovations on the market overall – one should be vigilant not to block or hinder entry that would contribute to more competitive markets.

In times of crisis, merger economics should remain disciplined and focused on evidence-based scenarios. Weighing the likelihood of various hypothesis and estimating the reach of potential effects on the competitive process will always carry a dose of uncertainty and judgment. Therefore, building and developing several credible counterfactuals, as a tool to factor in uncertainty, may bring a better understanding of the risks for all parties involved in the process.

Birthe Panhans concurred that the pandemic has had a profound impact on markets. However, in terms of the EU merger control procedures, we observe quite a remarkable stability so far. This is a sign of the strength and robustness of the framework and its procedures. Throughout the pandemic, the Commission has kept up its investigative and enforcement activities and ensured effective merger control despite the challenging circumstances. Both the number of notifications and the merger control processes have been in line with the practice of previous years. The outbreak has indeed had an impact on procedures – it changed the way views are exchanged with the companies involved in investigations be they merging parties, third parties, or any other stakeholder that takes an interest in the merger investigations. All exchanges went virtual but rights of participation and defence were always guaranteed. This was a quick transition, as market investigations had been run electronically for years already. The outbreak also had an impact on the companies’ ability to pro-vide information to the Commission under the regular merger timeframe. This has led to a higher number of stop-the-clock decisions extending the timeframe of some Phase II investigations, and longer periods during which the clock was then stopped. There are signs that companies have adapted to working under the pandemic conditions, however, and are now better able to provide the necessary information in the EU merger control timeframes.

The corporate context of merger control was also different, as dynamics changed between merging parties. Disagreements on the opportunity to renegotiate transaction prices because of the pandemic have sometimes led to delays in notifications or in the time taken to reply to requests for information (as there was litigation or negotiations ongoing). This sometimes led to extending the timeline of the merger control review. Finally, the pandemic has led to financial difficulties for some of the merging companies -creating additional pressure to secure a merger clearance. Derogations from standstill obligations under Article 7(3) EUMR occurred and were dealt with diligently by the Commission. However, their number did not substantially increase compared with prior years.

The Covid-19 consequences on EU merger control procedures ultimately depend crucially on the products and services at stake. Entertainment and travel spending have dramatically decreased during lockdowns, but the coming months may bring a surge in spending on these activities and goods. In some industries, there may be strong demand swings that level out over time to pre-pandemic patterns while in others, fundamental shifts may last long after the pandemic. The EU Merger Guidelines do not specify the timeframe that the Commission will look at in assessing mergers – it focuses on evidence showing with sufficient likelihood that effective competition will be significantly impeded due to the merger. The Commission will both assess the situation in the immediate future, which may still be impacted by the specific conditions of the pandemic, but also look at the situation further ahead in the future -which may be shaped already by post-pandemic conditions.

Cani Fernández followed up, mentioning that the Spanish Competition Authority (CNMC) has been very active during the pandemic, clearing seventy mergers in 2020 and contemplating a new record in mergers assessed in 2021. She agreed that, at the earliest stages of the pandemic, companies found it hard to answer the request for information, as remote workers sometimes struggled to access and manage databases from home. The CNMC was flexible in granting extensions when requested. It also remained conscious of the need for quick decisions. Even at the time of the state of alarm in Spain when all administrative deadlines were suspended, it continued with business as usual as much as possible. Protocols, means and tools were, in turn, adapted : for instance, a dawn raid Covid-safe protocol was launched to be able to detect gun-jumping practices in a given case. This took place amid a merger review, ensuring that all relevant precautions were taken (PCR tests before and after the dawn raid). Procedures are still being adapted at the CNMC – it also remains flexible and attentive to the delays and obstacles that companies may face in their relations with the authority.

In the context of merger control, the difficulty of providing counterfactual scenarios is increased by the high uncertainty about the performance of the effects and whether they are going to be permanent, whether the changes in consumption habits during the Covid-19 pandemic are here to stay or whether they are going to be mitigated. This may require enforcers to extend the temporal scope of the analysis to integrate potential effects that are going to be mitigated in a longer time. Depending on the nature of a market perturbation, remedies (behavioural or structural) may be appropriate to limit the adverse effects of a merger. However, enforcers have to be very thorough while taking such steps and must remain aware of timing - structural and cyclical shock indeed require very different responses from enforcers.

Nicholas Levy mentioned that the pandemic has coincided with an intense debate over the purpose, the scope, the modalities, and the architecture of merger control. He agreed that agencies and processes have proved to be remarkably resilient during the pandemic. Deadlines have been maintained, agencies have taken a significant number of decisions, remaining flexible on derogations, in a near-seamless move towards digital and remote working.

As to substantive review, the crisis is likely to cause changes in the market and competitive dynamics that could affect agencies’ analyses. However, the impact and effects of the pandemic will be fact- and industry-specific. In some areas, the crisis may have little effect at all — the provision of financial data, for example. In others — the production of cruise ships or the operation of cinemas for instance— the crisis may have a devastating effect, at least in the short term. Second, the crisis may call into question the probative value of historic data. For example, it is unclear whether historic data on airport slot utilisation will be meaningful to the assessment of a future merger involving competing airlines. Third, in some cases, market changes caused by the pandemic could affect the chances of securing approval. In this regard, three main sets of changes can be observed. Firstly, the pandemic is causing demand to change for many products. If demand declines, resulting in a greater capacity, that could, in turn, reduce antitrust concerns from a given merger because it would reduce the risk that merging firms may be able to raise their prices ; the excess capacity may constrain them. In contrast, if demand increases in a given industry, that could have the opposite effect of reducing excess capacity, resulting in a different conclusion in that market. The second set of changes relates to changes in supply. If, for example, an industry experiences significant plant closures during the pandemic, capacity will fall. That may make it harder to secure approval for a merger in that sector. Thirdly, the pandemic is likely to weaken some competitors, increasing the availability of the failing-firm defence.

As to the already observable consequences, the U.K. experience is instructive about the challenges involved in factoring in the implication of the pandemic, particularly in respect of transactions that have been reviewed while during the pandemic. The CMA has recognised that the pandemic may be highly relevant to assessing the counterfactual in certain markets, although, like other agencies, it appreciates the need to distinguish between sectors where the changes are cyclical and those that have suffered a permanent structural impact. Indications are that the CMA is likely to be cautious, having signalled an intention to focus on whether merging parties will be disproportionately affected by the pandemic relative to their rivals. Further and more generally, the CMA is increasingly examining merging companies’ other options to the notified transaction, to determine whether those options are less anticompetitive. The critical question for the future, however, is the broad direction of enforcement policy : will agencies use the pandemic as an occasion to bring about a more permissive merger regime or, as the CMA is doing, tighten enforcement ?

Fabrizio Di Benedetto pointed out that the definition of time of crisis is very different for each economic sector. The current crisis of the economy cannot already be considered a crisis for banks. Some of them will face difficulties in 2-3 years ; it will also depend on the length of public subsidies. So, for banks the impact of the current crisis will be very uncertain and establishing a solid counterfactual for the antitrust assessment will be tough. But also in times of uncertainty undertakings need legal certainty on the framework adopted by the authorities.

Building counterfactuals was difficult already before the crisis. The establishment of a counterfactual in times of crisis is more difficult, but authorities should not relax their practice. During the last year, Intesa Sanpaolo launched an offer for UBI. The merger posed some concerns : it was approved with structural remedies. Although the Italian Competition Authority decided to compare the post-merger scenario to the status quo, it was argued that the right counterfactual was a parallel merger between UBI and other banks. However, according to the Authority, no certain or unambiguous evidence emerged regarding UBI’s real possibility of setting up a third banking group. So, the Authority decided not to relax its practice, notwithstanding the increasing uncertainty. That was right : Mr. Di Benedetto believes that when the future is hardly predictable, transparency on the analytical tools and legal certainty should guide merger control.

Regarding remedies in times of crisis, the keyword is “flexibility” : in merger control, that means review clauses. Extended use of revision clauses for remedies should be adopted in current times : authorities could be in the position to adopt a prudent approach imposing substantial remedies, keeping the door open to the possibility to revise them. In times of crisis, structural remedies will not disappear : divestitures are the most suitable tool to ensure the compatibility of a merger with competition law. However, review clauses are rarely relevant for divestitures, given that they must be implemented within a short time frame after an authorisation. That is exactly the problem we’re facing today with structural remedies : they’re indispensable to solve competition issues, but they basically cannot benefit from the application of review clauses. According to the DG COMP Merger Remedies Study (2005) on average the divestiture period was 7.6 months. Mr. Di Benedetto believes that, in times of crisis, antitrust authorities should accept to grant more time to undertakings that are required to divest. That is necessary because today companies see difficulties in finding a purchaser for divested activities (e.g., bank branches are no more the main competitive driver of the industry, and the current crisis is showing the growing importance of online channels). In any case, competent authorities are well-equipped to monitor and sanction the conduct of the merging parties during the divestiture period.

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