UK competition watchdog risks undermining business dynamism

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The writer is a director in the competition practice at Frontier Economics.

The UK government wants to promote growth. The UK Competition and Markets Authority exists to promote competition. There was a time when these two objectives seemed perfectly compatible. But the agency’s recent ban on a merger between Microsoft and Activision Blizzard prompted the latter to complain that the UK was “clearly closed for business”.

The decision is all the more remarkable given that the EU has now allowed the merger. In particular, the two authorities did not differ greatly in their market analysis (both were concerned about possible anti-competitive effects of cloud gaming), but the EU believed that the commitments made by the merging parties fully addressed these concerns and, accordingly, In fact, they represented a “significant improvement” from the current situation. The CMA simply said no. Given the global nature of the market in which the parties operate, it is now difficult to see how the merger can take place.

Independent competition authorities are free to disagree, and some degree of skepticism about “commitments” is healthy. But in this case, it is an indication of a steady change in the behavior of the CMA, which should be a wake-up call to the government.

Take a look at the log. From its creation in late 2013 to late 2017, the CMA blocked just 30 percent of mergers at the Phase 2 “detailed review” stage. But from 2018 to today, it has vetoed 57 percent. Its updated guidelines (issued in 2021) seem to confirm skepticism that mergers have beneficial effects, noting that “the [evidential] difficulty involved in accepting prospectively that a merger is likely to generate efficiencies.

Of course, merger-hungry managers may tend to overestimate potential efficiencies. But if you take the view that profits are highly unlikely, then even the slightest anti-competitive concern could warrant a veto.

There have been two other warning signs that the CMA is moving in a different direction. The agency has been extending its scope to mergers that would have only a limited connection to the UK, in the sense that one of the merging parties may not have current UK sales. And it has narrowed the scope for mergers to be cleared subject to “behavioral remedies,” leaving only “structural remedies” (which often means a straight block) if you have concerns, as in the case of Microsoft.

History can, of course, prove the CMA right. But is the authority underestimating the consequences of such a change in business behavior? If entrepreneurs think they will have a hard time selling businesses to existing companies, they may be more nervous about starting them in the UK. That doesn’t seem to sit well with the government’s aim to make Britain a hotbed of new businesses. Meanwhile, larger companies may try to avoid acquiring others in the UK to avoid CMA oversight.

The CMA should not ignore the fact that melting efficiencies can take many forms. The two companies may have complementary assets that can be used to develop new or improved projects.

The alternative to a merger, a set of contracts between the two companies, will not always produce the right incentives. Nor can they guarantee the application of one company’s superior technology or business model to the other’s assets.

By inference, the CMA’s preference seems to be for companies to develop their own new products or business models, but it makes no more sense to see this as a certainty than to believe every golden scenario presented by two parties wanting to merge.

Finally, there are two merger challenges that are built into the process itself. The CMA has been working for months in search of possible anticompetitive effects; only at the end does it analyze possible efficiencies or remedies. And the appeals process operates with the lightest touch: the standard of judicial review applied by the Competition Appeals Tribunal effectively looks only at process, not substance, meaning it’s virtually impossible for the merger parties to annul. the CMA’s conclusions, even when the reasoning may be shaky.

These changes in the CMA’s attitude towards mergers have come without any real oversight. Ten years after the creation of the new competition regulator, it is time for an independent review. At the very least, this would allow the government to decide whether it is satisfied with the agency’s current direction or finds it incompatible with part of its drive to spur entrepreneurial dynamism.