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The Dechert Antitrust Merger Investigation Timing Tracker (DAMITT) is a quarterly release from Dechert LLP reporting on trends in significant merger control investigations in the United States (U.S.) and European Union (EU).
In the U.S., “significant” merger investigations include Hart-Scott-Rodino (HSR) Act reportable transactions for which the result of the investigation by the Federal Trade Commission (FTC) or the Antitrust Division of the Department of Justice (DOJ) is a consent order, a complaint challenging the transaction, an official closing statement by the reviewing antitrust agency, or the abandonment of the transaction with the antitrust agency issuing a press release.
Given the procedural differences between the EU and U.S., DAMITT defines “significant” EU merger investigations to include transactions subject to the EU Merger Regulation and resulting in either Phase I remedies or the initiation of a Phase II investigation.
DAMITT calculates the durations of significant investigations in both jurisdictions from the date the deal is announced until the completion of the investigation, and therefore includes the time attributable to all pre-notification consultation efforts.
The number of significant U.S. antitrust merger investigations has increased in 2019. DOJ and FTC resolved 20 significant merger investigations in the first three quarters of 2019, outpacing the 15 investigations completed during the same period in 2018. Q3 2019 was particularly busy for the agencies, with 10 significant investigations resolved, marking the busiest quarter in the past three years.
Over the RTM ended Q3 2019, 28 significant investigations concluded, compared to 24 in the prior RTM. At the current pace for 2019, the level of the Trump administration’s antitrust merger enforcement activities is similar to that of the Obama administration from 2011–2014, though behind the prior administration’s final two years in office.
Notably, the Trump administration has been seeking to block mergers at a near-record pace this year. During Q3 2019, four significant investigations concluded with an FTC or DOJ complaint seeking to enjoin the transaction – tying the record set in Q4 2015 for the most in any one quarter since DAMITT began tracking these statistics in 2011.
With a total of five complaints through the first three quarters, 2019 is on pace to challenge the record of seven complaints filed under the Obama administration during 2015.
Despite the increase in significant investigations and complaints during Q3 2019, none involved vertical aspects. By contrast, DAMITT observed that 30 percent of significant investigations that concluded during the first half of 2019 involved vertical aspects (i.e., at least one vertical allegation identified in the complaint, one vertical remedy included in the consent decree, or one vertical issue mentioned in the closing statement).
The EU Commission concluded five significant merger investigations in Q3 2019, the same number that was resolved in Q3 2018. These new investigations bring the total number of significant EU merger investigations concluded through 2019 YTD to 16. This is broadly in line with the equivalent period in 2018. However, 29 significant investigations concluded in the RTM ended Q3 2019, ten more than during the prior RTM period.
All significant EU merger investigations resolved in Q3 2019 were cleared with remedies: two transactions in Phase I and three transactions in Phase II. These new investigations bring the proportion of significant EU investigations concluded with remedies in 2019 YTD to 81 percent.In contrast, four cases were cleared without remedies (i.e., unconditional clearances) in 2018, which was twice the historical average according to the Commission’s statistics as observed in the DAMITT 2018 Year in Review report.
The proportion of cases that has been cleared with remedies in 2019 YTD is more in line with the 86 percent figure for conditional clearances that has been observed since 2014, which coincides with the overhaul of the EU merger control regime.
The duration of significant U.S. merger investigations has increased together with the quantity of significant investigations. The average duration of significant investigations concluded during the first three quarters of 2019 was 12.6 months, up from an average of 9.8 months for the first three quarters of 2018.
The median investigation length increased by one month, from 8.9 months in the first three quarters of 2018 to 9.9 months over the same period in 2019. The average duration of significant U.S. merger investigations for the RTM ended Q3 2019 was 12.4 months – almost three months longer than the 9.6-month average during the prior RTM ended Q3 2018.
As first observed in the DAMITT Q2 2019 report, there continues to be a stark difference in timing depending on which of the U.S. antitrust enforcement agencies conducts the review. On average, significant investigations concluded by the FTC over the last 12 months have taken 3.9 months longer than those concluded by DOJ. The DOJ announced reforms to streamline the merger review process in late 2018, and those efforts appear to be having an impact.
The duration of significant Phase I remedy cases continues to increase, as previously noted in the DAMITT Q2 2019 report. The average duration of investigations resolved in the RTM ended Q3 2019 was 8.7 months, up by 1.5 months from the average of 7.2 months in the prior RTM period.
There has also been a slight increase in the average duration of Phase II proceedings. Investigations concluded in the RTM ended Q3 2019 lasted an average of 13.9 months, compared to 13.4 months in the prior RTM period.
EU Phase II Proceedings
The 15.6-month average duration for Phase II proceedings resolved in 2019 YTD is more than three months longer than the 2018 average of 12.5 months. As observed in the DAMITT Q2 2019 Report, this increase is likely related to three complex Phase II investigations that were concluded in Q2 2019, for which the average duration was nearly 18 months.
The average duration of Phase II proceedings concluded in Q3 2019 YTD will have been pushed up further up by E.ON/Innogy, which took 18.5 months from announcement to decision. Notwithstanding the significantly higher 2019 YTD average duration, Phase II investigations concluded during the RTM ended Q3 2019 averaged 13.9 months, only 0.5 months longer than over the previous RTM period.
Article 10(3) of the EU Merger Regulation allows merging companies to grant “voluntary” extensions of time. These extensions are commonly conceded by merging parties at the urging of staff. All Phase II investigations concluded in Q3 2019 YTD entailed the use of such extensions, adding the statutory maximum 20 working days to the investigation period in all but one case.
This is consistent with the pattern of the maximum possible extension being invoked over the 2011-2018 period tracked by DAMITT.
EU Phase I Remedy Cases
On average, Phase I remedy cases that concluded in 2019 YTD lasted 7.6 months, up from the 6.8-month average observed over the same period in 2018. The average duration of investigations concluded in the RTM ended Q3 2019 of 8.7 months is longer than the 7.2-month average in the previous RTM period.
This suggests that the trend of year-on-year increases observed since 2016 may well continue. Phase I investigations resolved with remedies now tend to require more than five times the theoretical duration of the fixed timetable under the EU Merger Regulation.
In both the EU and U.S., since 2011, merging companies have been steadily granting the reviewing agencies more time in the early parts of investigations.
Extensive contacts and discussions with the EU Commission, so-called “pre-notification” discussions, have been a longstanding key feature of EU merger control. The duration of the pre-notification period is the reason why the duration of significant investigations tracked by DAMITT far exceeds the formal timetable provided by the EU Merger Regulation.
Merging companies in the U.S. are increasingly following a similar playbook by devoting more time to working with the agencies pre-notification and prior to the issuance of a second request. As a result, the average duration from deal announcement to the issuance of a second request in a significant investigation was 70 days for 2019 YTD – an increase of 19 days since 2011.
This increase is substantial given that the HSR statute provides for only a 30-day waiting period after the submission of an HSR filing until the agencies must decide whether to issue a second request.
Strategic Extensions of Pre-Second Request Discussions Do Not Necessarily Shorten Significant U.S. Investigations
Either voluntarily or at the request of an agency’s investigating staff, companies often delay their Hart-Scott-Rodino (HSR) pre-merger notification filings, or pull-and-refile their notifications prior to the issuance of a second request. Typically, the hope is that the additional time on the front end of an investigation will enable the agency’s staff to decide not to issue a second request, or at least to narrow and streamline a significant investigation. However, DAMITT data shows that this strategy is often not a successful one in significant investigations where a second request is issued.
Based on publicly available data, for about 60 percent of the U.S. significant merger investigations comprising the DAMITT database, companies are increasingly spending more time on pre-second request discussions than they did several years ago. For significant investigations that concluded in 2019 YTD, the average time from deal announcement to the issuance of a second request was 70 calendar days, up from 51 days in 2011, but down from the DAMITT record of 94 days in 2018. The median was 73 calendar days for 2019 YTD, up from 51 days in 2011, but down from 80 days in 2018.
As shown in the chart below, the average pre-second request period for significant investigations made its biggest increases between 2011 and 2016, but this average has begun to show signs of leveling off after spiking in 2018.
Despite the increasing use of this pre-second request strategy over the past several years, merging companies might not be making a wise investment of their time if their goal is to achieve shorter overall investigations. For 2019 YTD, when companies subject to a significant investigation allotted more than the median time (73 days) for pre-second request discussions, the average duration of the significant investigation was 14.2 months. By contrast, merging companies allotting less than the median time endured significant investigations lasting an average of 10.9 months. DAMITT shows a similar trend for the 2011–2018 period.
The additional time granted by companies in the pre-second request phase of the investigation may reflect a concession to the reality of the longer investigation process, or it may constitute a response to increased agency requests for more time.
Regardless of the explanation, this data suggests that spending more time in discussions with the antitrust agencies prior to the issuance of a second request will not necessarily shorten a significant investigation. On the contrary, companies may in certain circumstances be unnecessarily adding more time to the review process.
Extensive Pre-notification Contacts Remain a Key Feature of EU Merger Control and Tend to Increase in Both Phase I and Phase II Significant Investigations
Pre-notification contacts have been a longstanding feature of EU merger reviews. This is reflected in the EU Commission’s 2004 best practice guidance on merger control proceedings, which underlined the importance of pre-notification contacts.
Merging parties are advised to plan for at least two weeks for pre-notification contacts before filing a transaction with the EU Commission, even in simple cases. In practice, however, the duration of the pre-notification phase in complex cases can stretch for several months. This explains the delay between the announcement of transactions and notification in significant merger investigations, a metric tracked by DAMITT since 2011.
During the pre-notification phase, companies typically engage in extensive discussions with the case team over the scope and detail of the merging parties’ filing, which includes the submission of draft filings.
In recent years, the EU Commission’s increased focus on internal documents has contributed to merging parties spending more time and resources on pre-notification contacts. There is also the tactical consideration of spending extra time in pre-notification in the hope of getting clearance in Phase I with remedies and avoiding a Phase II investigation.
The risk of notifying a transaction without properly engaging in pre-notification is that the EU Commission will declare the filing incomplete. As a consequence, parties have to re-file, and the administrative clock will not start running until the Commission is satisfied that it has received all the information it needs to conduct its review.
The importance of pre-notification contacts was recently illustrated in Lone Star – Stark Group/Saint-Gobain BDD. The parties notified the transaction less than one month after the deal was announced, but the filing was declared incomplete nine working days after it was submitted. The parties refiled the transaction following a delay of more than one month.
Over the period tracked by DAMITT, the duration of pre-notification contacts shows a slow but steady increase for both significant Phase I and Phase II investigations. The median duration of pre-notification for significant Phase I investigations went from 3.6 months in 2012 to 5.5 months in 2019. Significant investigations resolved in Phase II saw the median duration of pre-notification jump from 3.4 months in 2011 to 7.5 months in 2019.
The average time between the announcement and notification of Phase II transactions resolved during the RTM ended Q3 2019 was 6.9 months, nearly one month longer than the average of 6.1 months in the prior RTM period.
The average duration of pre-notification contacts in significant Phase I investigations mirrored the increase in the overall duration. The 7.0-month average for Phase I remedy cases resolved in the RTM ended Q3 2019 represents an increase of 1.5 months from the 5.5-month average in the prior RTM period.
Such long pre-notification periods are however only the tip of the iceberg. As mentioned in the DAMITT 2018 Year in Review report, 73 percent of cases in 2018 were resolved following a simplified procedure. There is no sensible data on duration of pre-notification contacts in simplified cases, but experience indicates that these transactions can get to the state of notification within a few weeks.
New data reveals an increase in the use of pre-approved buyer remedies on both sides of the Atlantic, although they are still more frequent in the U.S. than in the EU.
There are some procedural differences in the buyer-approval processes in the U.S. and EU. In the U.S., the antitrust agencies may require an “upfront” buyer, or may in more limited circumstances allow a “post-order” buyer. When an upfront buyer is required, merging parties must find a willing and able buyer; negotiate a purchase agreement with that buyer for the assets to be divested; and present that purchase agreement, the buyer’s business plan, and other information to the agency as part of the approval process before the merging parties can consummate their transaction.
By contrast, for post-order buyers, the agency approves a merger and the assets to be divested, but allows the companies to close before a buyer has been approved. The companies then have a period (e.g., six months) after closing in which they must get the agency’s approval of the buyer and the divestiture agreement. Deferring the buyer approval process allows companies to close their transactions more quickly.
In the EU, the “standard” remedy is similar to the “post-order” buyer situation in the U.S., i.e., the companies can close their transaction and then have a specified period (typically around six months) – known as the “first divestiture period” – in which to complete the divestiture to an approved buyer. But if the Commission determines a pre-approved divestiture buyer is required, the EU (unlike the U.S.) has multiple variations on the process for approval.
A “fix-it-first” remedy, as that term is used in the EU, is the equivalent of the “upfront buyer” remedy in the U.S. Fix-it-first remedies require the merging companies to obtain approval for a divestiture buyer within the timetable for review of the original notification before the Commission will clear the merger.
Alternatively, in an “upfront buyer” EU remedy, the Commission will grant conditional clearance at the end of the investigation for a merger without identifying a divestiture buyer. But the companies cannot close their merger until an upfront buyer has been presented to the Commission and approved. In rare circumstances, the Commission has also accepted a “hybrid” of fix-it-first and upfront buyer elements.
Traditionally, DAMITT data show that both the U.S. and EU frequently did not require pre-approved buyers before allowing merging companies to close. But in recent years, as the numbers below show, both jurisdictions have increasingly moved toward requiring pre-approved buyers in an attempt to reduce the risk of divestiture failures.
Upfront Buyers Remain Standard Practice in U.S. Divestiture Remedies
The U.S. agencies’ insistence on upfront buyers remained high for 2019 YTD, with 80 percent of divestiture consents requiring upfront buyers. For the RTM ended Q3 2019, 88 percent of consents required an upfront buyer, an increase over the 73 percent of consents requiring an upfront buyer in the RTM ended Q3 2018.
This process can add significant time to the investigation. DAMITT has observed that investigations ending with consents requiring upfront buyers lasted more than two months longer than those with consents permitting the merging parties to find and negotiate with divestiture buyers after consummating their transaction.
The U.S. agencies have been vocal about their policy preference for upfront buyers on the belief that they may reduce the number of divestiture failures. This preference is confirmed by the data. Since the start of 2018, only three significant U.S. investigations resulting in divestiture consents did not require upfront buyers. All three were settled by DOJ; none by the FTC. This statistic suggests that DOJ may be more open than the FTC to post-order buyers in certain circumstances, particularly where there is significant interest in the divestiture assets by potential buyers and precedent for successful divestitures in the same industry.
Upfront Buyer and Fix-it-First Remedies Have Become More Common in EU Divestiture Remedies
Based on the EU Commission decisions published at the time of this report, 50 percent of cases that were resolved with divestiture remedies in 2019 YTD included either an upfront buyer, fix-it-first, or a hybrid of the two.
In contrast, between 2011 and 2014, less than 25 percent of cases that were resolved with divestiture remedies involved an upfront buyer, with no fix-it-first remedies. As outlined above, 2014 marked the first full year that followed reforms to the EU merger control regime. A more detailed assessment of the six cases that involved upfront buyer remedies between 2011 and 2014 reveals that those transactions involved highly concentrated markets (e.g., mobile telecommunications) and/or complex divestiture assets.
Since 2014, 44 percent of divestiture remedies involved an upfront buyer, fix-it-first, or hybrid remedies, a significant increase from the 2011–2014 period.
In Phase I, most divestiture remedy cases involved standard divestiture remedies (which are similar in form to the U.S. post-order buyer). Upfront buyer, fix-it-first and hybrid remedies accounted for only 22 percent, six percent and one percent of divestiture remedies, respectively.
In contrast, in Phase II, pre-approved buyers are required in 59 percent of divestiture remedy cases; 44 percent of Phase II divestiture remedy cases involved an upfront buyer, with fix-it-first and hybrid remedies accounting for six percent and nine percent, respectively. An upfront buyer requirement can delay the closing of the transaction by between one and eight months based on the available purchaser approval decisions since 2017.
While the circumstances of any individual transaction will vary from the DAMITT averages, current statistics suggest that parties to the hypothetical average “significant” investigation subject to review only in the U.S. would have to plan on approximately 13 months for the agencies to investigate a transaction, although the duration appears to depend to a surprising extent on whether it is the FTC or DOJ that conducts the investigation. As previously reported by DAMITT, companies should further allow an additional five to seven months if they want to preserve their right to litigate an adverse agency decision.
Deal timetables for EU cases where the investigation is likely to proceed to Phase II need to allow for a lapse of around 14 months from announcement to clearance. If the investigation is likely to be resolved in Phase I with remedies, the deal timetable should allow for approximately eight months from announcement to a decision.