DAMITT Q1 2022: Significant Merger Investigations Face Steeper Hurdles to Settlement
- Five of six significant investigations concluded in Q1 2022 ended in a complaint or an abandoned transaction, continuing a pronounced trend towards fewer merger settlements.
- The average duration of significant investigations concluded in Q1 2022 edged above 12 months, which does not include the time required to defend against litigation in the event of a complaint.
- The number of significant investigations concluded in Q1 2022 was relatively low given the flood of HSR filings recorded over the last year, but slightly above the historical average observed for first quarters over the last decade.
- Half of the significant investigations concluded in Q1 2022 were either blocked or abandoned, confirming that mergers going into Phase II face increasing challenges.
- The EU Commission picked up the pace and concluded six significant investigations in Q1 2022, above the DAMITT 2011-2021 quarterly average. Five of the six decisions followed a Phase II investigation, the highest number in a single quarter since 2011.
- The average duration of Phase II investigations slightly decreased in Q1 2022 to reach 18.8 months, which may be a sign of post-Covid normalization.
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.
Few U.S. Settlements as the Duration of Significant Merger Investigations Ticks Up
In our DAMITT 2021 Report, we warned that parties to transactions subject to significant merger investigations were more likely to see the FTC or DOJ sue to block their deal or push them to abandon it prior to being sued. The data continue to bear that out. The FTC only approved one consent decree in Q1 2022, and the DOJ did not approve any. The remaining five significant investigations concluded by the FTC and DOJ either received complaints or were abandoned.
The data line up with public statements from the DOJ Assistant Attorney General Jonathan Kanter that investigations resolved with merger remedies should be the “exception, not the rule.” While skepticism of behavioral remedies is not new and was trumpeted by the last administration, these remarks raise broader concerns with settlements as a whole, including traditional structural remedies like divestitures.
The average duration of investigations also ticked up to 12.6 months in Q1 2022. Of note, the median was just slightly higher than the average at 12.7 months, indicating that the increase in the average duration was not being influenced by any extreme outliers. To the contrary, the sole investigation that ended in a consent decree over this period was resolved in just over 8 months. The remaining matters – which all concluded with a complaint or an abandoned transaction – had significantly longer review periods. It is important to note that this duration only measures the time between the deal announcement and the issuance of a complaint or the announcement of abandoned transaction. Parties that received a complaint will need additional time to defend their transactions in litigation.
This increase in the average duration is consistent with recent public comments by the FTC Director of the Bureau of Competition that “we need to change the existing mindset that merger review is a customer service, provided by competition agencies to merging parties to help them close their transactions on their deal timeline.” This focus on slowing down merger reviews is a marked contrast with the Trump administration, when the DOJ Assistant Attorney General made public comments in September 2018 recognizing “widespread agreement that significant merger reviews are taking longer to complete” and calling for significant reforms aiming to “resolve most investigations within six months of filing.” In May 2019, the FTC Director of the Bureau of Competition then stated that the FTC had “launched a project to better track the duration of merger review, and identify causes of any delays in the process.” How times have changed.
This new focus on slowing down merger reviews is also a significant departure from the statutory framework, which defines review periods in terms of 30-day periods and not months or years. At the same time, it is unclear whether either agency specifically envisions substantially longer durations for the average significant investigation. In any event, the data do not yet show a substantial increase in durations between administrations.
In addition, there is reason to believe that the agencies are not always focused on slowing down the clock. On April 6, 2022, for example, the DOJ Principal Deputy Assistant Attorney General stated publicly that DOJ may seek “faster access to courts” in some cases, explaining that “[t]here are some problems you can see from outer space” before noting that, in those cases, the DOJ does not have “to wait one or two years” for parties to comply with a second request before filing a complaint.
Only six significant investigations concluded in Q1 2022, which is slightly above the average observed for first quarters over the last decade but seems relatively low given the surge and tidal wave of HSR filings observed for more than a year now. This small number of concluded investigations could be a sign that the agencies have limited resources for conducting additional significant investigations without larger budgets, but it also could be an indication that more transactions have become ensnared in prolonged investigations for the reasons described above.
With Six Significant Merger Investigations, Slightly Shorter Durations, and a New Prohibition, EU Commission Activity Rebounds
The EU Commission picked up the pace in Q1 2022 and concluded six significant merger investigations, nearly half as many as during all of 2021. With one exception, all these transactions were notified at the height of the pandemic, so this increase in activity may signal that the EU Commission is clearing out the pandemic backlog and ready to look forward to more recent transactions.
Out of the six significant investigations, five were concluded following a Phase II investigation. This is the highest number of Phase II investigations concluded in one quarter since DAMITT started tracking in 2011. Q1 2022 also saw the EU Commission prohibiting the first deal since the EU General Court annulled its decision to block the Hutchison Whampoa/02 UK Telfonica transaction in 2020. This new prohibition is particularly notable after some commentators had flagged the chilling effect of that Court decision on EU Commission enforcement.
The EU Commission’s prohibition should not be taken on its own as a sign of the sort of broader skepticism of merger remedies that is evident in the U.S. To the contrary, EU Commission Executive Vice President Margrethe Vestager specifically called out the fact that the parties in that case “did not submit any formal remedies to offset the negative effects of the acquisition.” Vestager added that “most of the time, solutions are found to ensure competition is preserved and prohibitions are extremely rare.”
To that end, the EU Commission cleared the Cargotec / Konecranes transaction with remedies in Q1 2022, even as the UK Competition and Markets Authority found those remedies insufficient and blocked the same transaction. The EU Commission’s decision also is notable given that the U.S. DOJ had threatened to file a complaint against the same transaction. Because of positive market feedback on the proposed remedies, however, Vestager has publicly stated that the EU Commission had little discretion to block the merger. Nevertheless, Vestager warned against reading too much into this divergence between jurisdictions, noting that the different outcome on remedies “should be the exception to the rule” for investigations across jurisdictions.
Turning to duration, despite a 19.7-month record high duration of Phase II investigations on a rolling 12-month (RTM) basis, the average length of Phase II cases decreased to 18.8 months in Q1 2022. This is even more remarkable considering that this average included the lengthy Phase II review of the Hyundai Heavy Industries Holdings/Daewoo Shipbuilding & Marine Engineering transaction, which was ultimately abandoned almost 36 months after announcement. This was the third longest Phase II investigation since 2011. Excluding this deal, the average duration of Phase II investigations would have declined to 14.5 months, which is more in line with 2019-2020 average durations. Again, this may be a sign of a post-pandemic return to normal.
Looking back at more than ten years of DAMITT data, 67 percent of Phase II investigations that lasted for more than 20 months from announcement were ultimately blocked or abandoned. This proportion jumps to 89 percent when looking only at the last five years. This may be a result of longstop end dates in transaction agreements but could also be interpreted as a warning sign for companies.
Turning to Phase I remedy cases, only one Phase I remedy case was concluded after a relatively short 8.6-month Phase I investigation. As such the “average” duration for this type of investigation in Q1 2022 is based solely on that matter. A review of the duration of Phase I Remedy cases concluded over the rolling 12-month period ending in Q1 2022, however, shows that average duration remains close to ten months, just slightly below the 2021 average.
Looking forward, the number of EU merger filings remains on track with the historic quarterly average, which should lead to a near pre-pandemic number of significant investigations concluding in 2022. However, the appeal against the EU Commission’s jurisdiction to review the first Article 22 referral case is still pending and so the future of the EU Commission’s “tool against killer acquisitions” remains uncertain. A decision is expected in the coming months and could also affect the efficacy of the upcoming Digital Markets Act.
The Proportion of Significant Investigations Resulting in a Blocked or Abandoned Transaction Continues to Climb
In Q1 2022, more than 83 percent of significant U.S. merger investigations resulted in a complaint or an abandoned transaction and more than 50 percent of significant EU merger investigations were blocked or resulted in an abandoned transaction. As previously noted in the DAMITT 2021 report, this is part of a broader trend. Measured over the rolling 12-month period ending Q1 2022, 41 percent of significant U.S. merger investigations ended in either a complaint or an abandoned transaction and 36 percent of significant EU merger investigations resulted in a prohibited or abandoned deal. These dramatic upswings demonstrate that, despite some potential divergence in the U.S. and EU approaches towards merger remedies in principle, it remains increasingly difficult to get transactions cleared on both sides of the Atlantic. Nearly half of significant investigations are unable to reach a settlement.
At the same time, the proportion of total notified transactions that receive significant investigations (the “intervention rate”) remains relatively low. To account for the duration of significant investigations, which can start in one calendar year and conclude in the next, DAMITT estimates the proportion of notified transactions that receive significant investigations each year by dividing the total number of significant investigations concluded each year by (i) the prior year’s number of total merger filings in the US, and (ii) the number of deals formally notified to the EU Commission in the same year. This difference is explained by the different lengths of the period between formal notification and conclusion of the average significant investigation in each jurisdiction. These figures show that the intervention rate is at DAMITT record lows in both jurisdictions.
Parties to transactions subject to significant merger investigations continue to face a higher likelihood of seeing their deal blocked or abandoned. To ensure the ability to defend their deals through a potential investigation, parties to the average “significant” deal in the U.S. should plan on at least 13 months for the agencies to investigate their transaction and may want to add on additional time to address the continuing uncertainty at the agencies. Parties should also plan for another 7-9 months if they want to preserve their right to litigate an adverse agency decision. In the EU, parties to transactions likely to proceed to Phase II investigations should allow for at least 19 months from announcement to clearance and should not rely on the statutory deadlines provided for in the EU Merger Regulation, even after the deal has been formally notified. If the investigation is likely to be resolved in Phase I with remedies, parties should plan for around ten months from announcement to a decision.