DAMITT Q2 2021: Move Over Big Tech – Traditional Industries See More Merger Investigation Activity
- Despite Big Tech headlines, the percentage of significant U.S. merger investigations involving technology companies was below the average for the last decade. By contrast, merger investigations in traditional sectors like industrial products and services and financial services increased. Meanwhile, healthcare and pharmaceuticals remained the largest focus of significant U.S. merger investigations, in line with historic averages.
- The 11 significant U.S. merger investigations concluded during the first half (H1) of 2021 under the Biden Administration (5 DOJ; 6 FTC) are well below the 17 concluded in H1 2020 (6 DOJ; 11 FTC), but close to the 12 concluded at the start of the Trump Administration in H1 2017 (4 DOJ; 8 FTC).
- The duration of significant U.S. merger investigations declined compared to last quarter. The average duration for H1 2021 was 12.1 months, but there remains a wide disparity for individual investigations even within the same industries.
- An announced joint review of existing merger guidelines encouraged by the White House, combined with new leadership at both antitrust agencies, foreshadows potential bigger changes ahead.
- Similar to the U.S., significant EU merger investigations concluded over the last 12 months focused on traditional sectors like industrial products and financial services. The percentage of significant EU merger investigations involving technology companies remained low. In sharp contrast to the U.S., the share accounted for by healthcare and pharmaceutical transactions – which accounted for the second largest proportion of significant EU merger investigations over the last decade – fell to only seven percent.
- The new guidance on Article 22 referrals may impact the industry breakdown of significant investigations in the future in light of its stated focus on technology, pharmaceuticals and financial services deals. The first two Article 22 referral cases are already undergoing or heading for Phase II investigations.
- The EU Commission concluded a near-record low number of eight significant EU merger investigations during the first half of 2021. The increased levels of notifications over the same period however hint towards increased activity in the second half of the year.
- The average duration of significant EU merger investigations remained high, with Phase II investigations setting a new record of 18.3 months over the last six months.
The Dechert Antitrust Merger Investigation Timing Tracker (DAMITT) is a quarterly study from Dechert LLP’s Antitrust/Competition practice 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.
In light of the procedural differences between the EU and U.S., DAMITT defines “significant” EU merger investigations to include transactions subject to the EU Merger Regulation (EUMR) and resulting in either a Phase I remedy or the initiation of a Phase II investigation.
DAMITT calculates the durations of significant investigations in both jurisdictions from the deal announcement date through the completion of the investigation, and therefore includes the time attributable to pre-notification consultation efforts.
The Duration of Significant U.S. Merger Investigations in Q2 2021 Declines as the Number of Investigations Increases
The Average Duration of Significant U.S. Merger Investigations
Following an unusually high 14.0-month average in Q1 2021, the average duration of significant U.S. merger investigations dropped to 11.1 months in Q2 2021, resulting in a combined average duration of 12.1 months in H1 2021.
The 12.1-month average duration reflects a slight decline from the rolling 12-month average of 12.5 months. Q2 2021 saw three significant merger investigations that ended in consent decrees in less than seven months—which helped drive the average down. Those three transactions represented nearly half of all investigations concluded in Q2 2021.
At the same time, two transactions were abandoned in H1 2021 after undergoing significant merger investigations that lasted more than 20 months. Excluding those two abandoned deals, the average duration would have been 9.6 months.
The Number of Significant U.S. Merger Investigations
The U.S. antitrust agencies concluded seven investigations in Q2 2021, resulting in 11 total investigations for H1 2021. Those 11 investigations split relatively evenly, with five concluded by the DOJ and six concluded by the FTC.
The 11 transactions concluded in H1 2021 trail behind the 17 transactions concluded during H1 2020, when the DOJ concluded six significant investigations and the FTC concluded a full 11 significant investigations.
At the same time, H1 2021 saw a similar number of significant investigations concluded as in H1 2017, at the start of the Trump administration, when the DOJ concluded four significant investigations and the FTC concluded eight significant investigations.
Unlike Q1 2021, most transactions concluded in Q2 2021 with a consent decree. Two of the seven transactions however, concluded with the filing of a complaint to enjoin the transactions. Those two complaints were evenly split between the DOJ and the FTC.
Of note, nearly half of the significant U.S. merger investigations concluded in H1 2021 ended with a complaint or an abandoned transaction. By contrast, in H1 2017, only two of 12 significant merger investigations concluded with a complaint or an abandoned transaction. In fact, more investigations concluded in a complaint or an abandoned transaction in H1 2021 than resulted in a complaint or an abandoned transaction in either 2017 or 2018, the first two years of the Trump administration.
Some caution is warranted when extrapolating broader trends from this data. It is worth noting that investigations concluding in H1 2021 were all initiated under the prior administration. Moreover, the new leadership at the DOJ and the FTC have recently been nominated or confirmed, respectively. There will likely be some lag in time before the data will start to show the results of any new changes in policy.
The Average Duration of EU Phase II Investigations Hits a DAMITT Record While the Number of Investigations Falls
The Average Duration of Significant EU Merger Investigations
The average duration of significant EU merger investigations remains high: Phase I remedy cases resolved in H1 2021 averaged 9.3 months, while Phase II investigations averaged 18.3 months.
EU Phase II proceedings
The average duration of Phase II investigations resolved in H1 2021 stands at 18.3 months – the longest duration recorded for the 2011-2021 period tracked by DAMITT and nearly three months longer than the previous 2019-record of 15.6 months. On a rolling 12-month basis, the 16.8-month average duration for Phase II investigations is up from the 15.5-month average in the previous rolling 12-month period. These results should still be considered cautiously given the limited number of significant EU investigations concluded in H1 2021.
The high average duration for Phase II investigations resolved in H1 2021 is largely attributable to the EssilorLuxottica/GrandVision and AirCanada/Transat investigations, which lasted 20 months and 21.5 months, respectively, from announcement to clearance/withdrawal. Both of those investigations were suspended for more than 100 working days, in part due to COVID-19 related complexities. As noted in the DAMITT Q1 2021 report, the review of the EssilorLuxottica/GrandVision deal was suspended in part due to the difficulties of carrying out a market investigation during a lockdown; the delays in the Air Canada/Transat investigation appear to have been linked to pandemic-related turmoil in the airline industry.
Stop-the-clocks will likely continue to play a significant role in the duration of 2021 significant EU merger investigations. The AON/Willis Towers Watson investigation (which was cleared in early Q3 2021) was suspended for more than 40 working days and the ongoing Phase II investigation in Hyundai Heavy Industries Holdings/Daewoo Shipbuilding & Marine Engineering has already been on hold for more than 250 working days.
On a brighter note, for companies planning transactions that meet EU notification thresholds, the average duration of pre-notification contacts (i.e., from announcement until notification) of Phase II investigations concluded in the rolling 12-month period ended H1 2021 decreased by 17 percent compared to the previous rolling 12-month period.
Phase I Remedy
Phase I remedy cases concluded in H1 2021 lasted an average of 9.3 months. This average duration is mainly a function of the limited sample size of three cases for H1 2021 and one extremely long investigation. The median duration for investigations resolved in Phase I with remedies in H1 2021 was seven months, nearly 30 percent below the 2020 median and more in line with 2011-2019 durations. On a rolling 12-month basis, the duration of Phase I remedy cases averaged 10.5 months, up from 8.2 months in the previous 12-month period.
The average duration for Phase I remedy cases is heavily impacted by the length of pre-notification discussions. The average duration from announcement to notification in Phase I remedy cases was 8.5 months in the rolling 12 months which ended H1 2021, two months longer than the previous 12-month period. Pre-notification contacts are a longstanding feature of EU merger reviews: Merging companies typically commence pre-notification discussions with the EU Commission staff very shortly after the transaction announcement, if not before.
The Number of Significant EU Merger Investigations
Only two significant EU merger investigations concluded in Q2 2021: the EU Commission cleared a merger in Phase I subject to remedies and the parties withdrew a notification following a Phase II investigation. This represents a 36 percent decrease from the quarterly average observed over the 2011-2020 period tracked by DAMITT. If H2 2021 continues at the same pace, 2021 would record the second lowest number of significant investigations since DAMITT started tracking, and a 30 percent decrease compared to the average of 23 significant investigations per year observed for the past five years.
There are signs that the number of significant EU investigations will pick up in the second half of the year. The near-record low number of significant EU investigations observed in H1 2021 may be at least in part a consequence of the COVID-19 pandemic that led merging companies to delay if not abandon many deals. As noted in previous DAMITT reports, the number of deals notified to the EU Commission in H2 2020 was 20 percent below 2019 levels over the same period. The number of deals notified to the EU Commission caught up with 2019 levels in Q1 2021 and skyrocketed in Q2 2021 to 119, approximately 70 percent more than Q2 2019 levels.
This may cause the number of significant investigations in 2021 to eventually catch up to prior levels. At the time of this report, the EU Commission has already cleared one additional merger following a Phase II review and six significant investigations are ongoing – five Phase II and one Phase I with remedies.
On Both Sides of the Atlantic, Traditional Industries—Not Big Tech—Saw the Most Significant Merger Investigation Activity
While investigations into Big Tech conduct often dominate antitrust headlines in the U.S. and the EU, DAMITT data show that the percentage of significant U.S. and EU merger investigations involving technology companies was below the average for the last decade.
Healthcare and Pharmaceuticals, Industrial Products and Services, and Financial Services Saw the Most Activity in the U.S.
Healthcare and pharmaceuticals saw the highest volume of significant U.S. merger investigations for the last year. This focus on healthcare and pharmaceuticals transactions is consistent with historic averages for the last decade.
Beyond healthcare and pharmaceutical services, traditional business sectors like industrial products and services and financial services made up a growing percentage of significant U.S. merger investigations.
U.S. investigations that concluded during the last 12 months involved products and services as distinct as grain elevators, cement, salt, retail banking, and insurance brokering, among others.
Transactions involving technology companies, by contrast, fell to just 7 percent of all significant U.S. merger investigation activity over the last year.
The higher number of significant U.S. merger investigations related to industrial products and services and financial services is likely a reflection of increased merger activity in those sectors. This data should not provide any comfort to Big Tech, which is clearly on the radars of both U.S. antitrust agencies. Any increased focus on Big Tech from the new administration, such as the second request issued in connection with Amazon’s proposed acquisition of MGM, will not show up in the DAMITT data for some time. Nevertheless, the data provide a good reminder to other industries that the U.S. antitrust agencies are still closely watching merger activity in other sectors, which make up a clear majority of most significant U.S. merger investigations.
Industrial Products and Services, Financial Services, and Chemicals Saw the Most Activity in the EU
Industrial products and services saw the highest volume of significant EU merger investigations for the last year. This focus on industrial products and services transactions is consistent with historic EU averages for the last decade.
Beyond industrial products and services, the financial services sector has attracted increased scrutiny, accounting for one-fifth of significant EU merger investigations over the last 12 months. By comparison, financial services transactions only accounted for two percent of all significant EU merger investigations over the prior decade. Transactions related to chemicals also saw increased activity over the last year.
In one sharp difference with the U.S., healthcare and pharmaceutical transactions – which have historically accounted for the second largest proportion of significant EU merger investigations over the last decade – fell to only 7 percent of all significant EU merger investigations concluded in the past 12 months.
Transactions involving technology companies similarly accounted for just 7 percent of all significant EU merger investigation activity over the last year in line with historic averages for the last decade. As this demonstrates, contrary to what could be expected in light of the worldwide focus on Big Tech, technology deals continue to account for a very small share of significant EU merger investigations, with only one deal – Google/Fitbit – undergoing a Phase II review over the past 12 months. This low proportion of technology deals may relate to the fact that many technology deals do not meet jurisdictional thresholds. This has led for recent calls at EU and Member State levels for new procedures to address sensitive industries where significant transactions deals may fall below notification requirements.
As discussed in the DAMITT Q1 2021 report, the perceived gap in the EU screening mechanism was mentioned as one of the drivers of the new EU Commission guidance on the referral mechanism provided for in Article 22 EUMR. This mechanism allows Member States to refer cases falling below the EU thresholds but affecting trade between member states to the EU Commission for review. Two deals have been referred on the basis of the new guidance to date, one in the pharmaceutical sector and another in the technology sector (both of those industries have been highlighted by EU Commission officials as warranting specific consideration). One of those cases is already undergoing an in-depth investigation and the second is expected to follow suit.
Finally, the breakdown of the available data between significant Phase I and Phase II investigations also reveals differences in the proportion of Phase II investigations across sectors. For instance, over the 2011-H1 2021 period tracked by DAMITT, 89 percent of investigations in the healthcare and pharmaceuticals industry were resolved in Phase I with remedies, whereas a Phase II investigation was opened in 68 percent of investigations in the telecommunications sector.
The available EU Commission “established decisional practice” across industries likely plays a role in these differences across industries, allowing parties in some industries to better identify potential issues and remedies early on. External factors also play a role. For instance, COVID-19 is partly responsible for more transactions in the transportation or retail sectors going to Phase II over the last 12 months.
Changes to U.S. Merger Guidelines May Impact the Number and Duration of Transactions Going Forward
In line with the Biden administration’s recent Executive Order on competition issues, the U.S. antitrust agencies have expressed their intent to conduct a joint review of existing merger guidelines. This follows the earlier formation of a working group between the FTC, DOJ, European Commission, U.K. Competition and Markets Authority, Canadian Competition Bureau, and Offices of State Attorneys General to “identify concrete and actionable steps to review and update the analysis of pharmaceutical mergers,” to which Dechert’s antitrust/competition practice recently submitted public comments highlighting the already robust merger enforcement and suggesting areas of improvement.
While these changes are expected to increase the number of significant U.S. merger investigations, it is difficult to predict the precise impact of any changes to existing guidelines on the average duration of investigations going forward. As described earlier, some recent examples—including three of the seven investigations concluded during the last quarter—show that the agencies have made progress in concluding some recent transactions on a surprisingly expedited duration of less than seven months. At the same time, DAMITT data generally has shown lengthening review periods over the last decade, even after agency statements and policy changes aimed at shortening the process. Without clear commitments to reduce review times, parties to significant investigations should anticipate that the duration of those investigations may extend longer than the 12.1-month average for H1 2021 looking forward.
In Q2 2021, the number of concluded significant U.S. merger investigations increased, while remaining just below the historical average for second quarters over the last decade. At the same time, the average duration of investigations declined to 12 months. As a result, parties to the average “significant” deal in the U.S. should plan on approximately 12 months for the agencies to investigate their transaction. Parties should also plan for another 7-9 months if they want to preserve their right to litigate an adverse agency decision.
By contrast, transactions likely to proceed to Phase II investigations in the EU should allow for 18 months from announcement to clearance under the current circumstances. If the investigation is likely to be resolved in Phase I with remedies, parties to the average investigation should plan on nine months from announcement to a decision.
Though often grabbing less attention, traditional industries continue to be the focus of most significant merger investigation activity on both sides of the Atlantic. Healthcare and pharmaceuticals transactions led to the most activity in the U.S., while transactions involving the industrial products and services and financial services industries also saw increased investigation activity. Industrial products and services, financial services, and chemicals similarly saw the most significant merger investigation activity in the EU. Despite the headlines devoted to Big Tech, the data demonstrate that antitrust and competition agencies in the U.S. and EU continue to keep a close eye on merger activity across a wide range of traditional industries in addition to Big Tech.