Regulators, politicians, and the media are becoming increasingly skeptical regarding the merits of cross-border mergers and acquisition (M&A). Governments are willing to use an expanding policy toolbox to intervene in the transaction process. Mega trends – such as the growing dominance of Big Tech, the protection of “strategically relevant” industries, and the importance of meeting climate commitments – have changed the way regulatory authorities assess transactions. These trends will accelerate in the future, as the geopolitical environment becomes more uncertain, and politics becomes more supportive of greater government intervention in the economy.1
Transaction sponsors need to treat M&A as if it were a political campaign and address the positions of a wide range of third-party stakeholders – customers, suppliers, and relevant regulatory bodies –to gain consent for deals. To obtain approval for a merger in Europe, investors, the merging parties, and other stakeholders must learn to navigate a dynamic regulatory landscape in which early and proactive dialogue is essential. This means developing a transaction narrative that addresses political and regulatory concerns.
1. Establishing a fair competitive market with an increasingly dynamic tech industry
Policy-makers have responded to the increasing number of transactions in the tech sector by changing policy and guidance to tighten merger control in the technology industry. In the US, for example, the Federal Trade Commission (FTC) is investigating Facebook’s long-completed acquisitions of Instagram and WhatsApp and has warned that it may scrutinize other transactions even after they have been consummated. Following a year of scrutiny by the UK’s Competition and Markets Authority (CMA), the European Commission (EC), and a lawsuit by the FTC, US fabless chip designer Nvidia recently announced the end of its attempt to acquire Arm, a British semiconductor and software design company, from SoftBank Group.
In addition, in December 2021, the EU and the US launched the Joint Technology Competition Policy Dialogue, a forum aimed at restraining the “growing power” of tech businesses as well as some of its most powerful leaders. European Union (EU) and US regulators reaffirmed “their mutual interest in cooperating on competition policy and enforcement overall and especially in technology sectors”, in order “to ensure and promote fair competition”.2
The trend of increased tech sector scrutiny will have important implications for transaction agreements. The highly debated EU proposal on the Digital Markets Act (DMA)3 will introduce obligations to inform the European Commission (EC) of any intended acquisition by those businesses assigned “gatekeeper” status. This is designed to allow the EU enforcer to review “killer acquisitions”4 that are potentially distortive to competition and to restrict “gatekeepers” from making acquisitions in areas relevant to the DMA.
2. ESG and European Green Deal increasingly important in M&A deals
The launch of the European Green Deal has established ESG standards as a tool to assess transactions. The EC deemed the current merger control rules as “broadly fit for purpose” in 2021. But we expect that it will put an increased focus on a merger’s contribution to the attainment of the EC’s 2030 Climate Target Plan and the Paris Agreement goals, in partnership with national authorities.
The current merger control framework in the EU and the UK does not specifically address sustainability. That said, it has become increasingly clear that the protection of innovation in clean and sustainable technologies has become a key priority for competition enforcers.5 Companies and investors will need to explain how environmental and sustainable externalities can act as “efficiencies” that may counteract the negative effects that a merger has on competition. Undoubtedly, this approach raises a number of questions that will have to be addressed during merger talks. Will the merger lead to a more innovative and sustainable product offering? Is there sufficient competition within emerging sustainable products? Is the transaction characterized as a killer acquisition?
The recently proposed European Directive on “Corporate Sustainability Due Diligence,6” designed to address human rights and environmental issues across global value chains, is expected to grant a greater role to ESG metrics in the valuation of acquisition targets and the communication of the strategic benefits of mergers. Parties will have to act early and be decisive in answering questions and communicate a green deal rationale early on in the process in order to gain regulatory approval.
3. Maintaining European competitiveness and ‘protecting’ sectors seen as relevant to national security
Chinese investments in Europe slowed down during the COVID-19 pandemic. But the skepticism of European and national authorities towards Chinese-backed deals continues to increase. Europe views Chinese investments, often state supported, with growing suspicion, and many national authorities have implemented investment-screening criteria to prohibit China and others from acquiring strategically important companies. The Russian invasion of Ukraine has raised concerns about the merits of foreign deals in an increasing number of sectors such as defense and energy.
The proposed EC Regulation to address distortions caused by foreign subsidies in the single market 7 did not refer to China specifically, but the underlying message was clear. Merger parties will have to be aware of EU and national industrial policy and take European strategic ambitions into account when entering merger talks. Initiatives of this kind signal that the EC is broadening its toolbox to prevent unfair competition and limit the options of state-funded foreign direct investments that could harm national competitiveness and growth. In the UK, the National Security and Investment Act 2021 provides a significant expansion of the powers available to the British government. The full scope and reach of the legislation have yet to be fully tested.
In this heightened regulatory environment, there is an increasing need for M&A counterparties to receive counsel from third-party advisors. Legal advisors will help provide the necessary jurisdictive principles to follow, while communications advisors will help the parties demonstrate the synergies deriving from a merger in a broader context, beyond the traditional competition enforcement.
Parties may want to consider engaging with regulators and governments when their deal is expected to impact the European geopolitical agenda. This is particularly the case in the technology, pharmaceutical, and energy sectors. Sellers and target companies need to put in place a thoughtful communication and public affairs strategy for obtaining antitrust approval that is calibrated to the current regulatory and political developments to unblock high-stake deals not only in Europe but on a global scale.
1 European Commission, Industrial Policy for the 21st Century: Lessons from the Past, available here.
2 EU-U.S. Joint Technology Competition Policy Dialogue Inaugural Joint Statement between the European Commission, the United States Department of Justice Antitrust Division and the United States Federal Trade Commission, available here .
3 The proposal for a Regulation on the Digital Markets Act aims to introduce new rules for platforms that act as 'gatekeepers' in the digital sector and ensures that markets impacted by them remain fair and competitive, available here .
4 The term “killer acquisitions” is used for cases where the acquiring firm’s strategy is to prevent the target firm from innovating and competing in the market.
5 Executive Vice-President Vestager’s keynote speech at the 25th IBA Competition Conference, delivered by Inge Bernaerts, Director, DG Competition, available here.
6 European Commission, Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive, available here.
7 European Commission, Proposal for a Regulation of the European Parliament and of the Council on foreign subsidies distorting the internal market, available here.