- Following consultation, the Competition and Markets Authority (CMA) has now published revised merger assessment guidelines (MAGs), expanding its guidance on when rivalry-enhancing efficiencies may prevent a finding of a substantial lessening of competition (SLC).
- The revised guidance substantially expands on how efficiencies can be identified (including recognising dynamic efficiencies such as innovation), the evidence that the CMA expects to see, and how efficiencies claims will be evaluated.
- The opportunity is real, but evidence and timing are critical: merging parties should be prepared to engage with the CMA on efficiencies claims early in the process and support their claims with a strong evidence bank, including "ordinary-course" evidence and bespoke analysis where it reliably strengthens the case.
The CMA has recently published revised MAGs as part of its broader push to improve the pace, predictability, proportionality, and process (the "4Ps") across the merger control regime. The key development is the introduction of substantially expanded guidance on how the CMA will assess rivalry-enhancing efficiencies – and what the parties will need to do and show if they want those efficiencies to form part of the CMA's assessment of their transaction.
For businesses navigating UK merger control, understanding how to engage with the CMA on rivalry-enhancing efficiencies has become an increasingly important part of deal planning and merger clearance strategy.
What are rivalry-enhancing efficiencies?
Rivalry-enhancing efficiencies are cost savings, quality improvements or innovation gains generated by a merger that may make the merged business a stronger competitor – and which the CMA may weigh against any anticompetitive effects that it has identified. Under the statutory test and framework for assessing efficiencies (which remains unchanged in the revised MAGs), rivalry enhancing efficiencies must:
- enhance rivalry in the market in which the SLC may otherwise arise;
- be timely, likely and sufficient to prevent an SLC;
- be merger-specific; and
- benefit customers in the UK.
On merger-specificity, the revised MAGs make clear that the question is not merely whether the efficiencies could theoretically be achieved another way. The CMA will ask whether alternative means to achieve the efficiencies are feasible and commercially rational and would deliver the same scale of benefits, and will consider the relative costs and risks of these alternatives.
Why might they arise?
The CMA has expanded on potential situations giving rise to rivalry-enhancing efficiencies. Most notably, they expressly recognise the potential for dynamic efficiencies: efficiencies that increase the ability or incentive of the parties to innovate and invest in ways that benefit customers. The guidance also confirms that efficiencies may arise across both price and non-price parameters of competition, such as improvements to product quality.
Although efficiencies must still be timely enough to prevent an SLC, the guidelines now recognise that different types of efficiencies may crystallise over different timeframes. For example, certain dynamic efficiencies such as increased R&D productivity may not be fully realised for several years.
This flexibility is helpful, particularly for innovation-heavy sectors. But parties should assume that more uncertain or future gains will carry less weight in the overall competitive assessment than efficiencies that are closer, clearer and better supported by the evidence.
How can parties demonstrate they exist?
Merging parties will need verifiable evidence to support efficiency claims. The nature of this evidence will vary by transaction, but the revised MAGs point to familiar categories of "ordinary-course" evidence, such as operational and financial data, synergies analysis and integration plans, and internal strategy documents.
The CMA now also recognises that bespoke analysis may have a role to play, particularly where ordinary-course, internal documents do not address every element of the efficiencies framework. Bespoke evidence is purpose-built analysis commissioned specifically for the merger review and may include analysis of the parties' incentives to innovate or to pass benefits on to customers.
Some consultation responses pushed for bespoke analysis to play a greater role, but the CMA declined to go further. The final guidance is clear: bespoke evidence can be helpful to supplement other evidence, but ordinary-course materials are likely to carry the greatest weight.
When should parties present their evidence?
Historically, rivalry-enhancing efficiencies have been considered only if the CMA identified that a merger gives rise to anticompetitive effects. In the revised MAGs, the CMA confirms that it will now assess the strength of efficiencies claims when considering the impact of the merger on competition.
Consistent with the CMA's focus on process, parties are therefore encouraged to engage with the CMA early in the merger review process, ideally during pre-notification. This gives the CMA time to properly consider the parties' submissions and gather further information where needed.
This also allows the evidence to be considered in the round as part of the competitive effects assessment, rather than as a defence or mitigation tool.
Importantly, the CMA has confirmed that making an efficiencies claim does not imply an acceptance of an SLC. Parties should not be deterred from presenting well-evidenced efficiency arguments at an early stage. To the contrary, timing matters: if evidence is provided too late, the CMA may give it less weight.
Where next?
Although the statutory framework is unchanged, the revised MAGs reflect that the CMA's willingness to engage with efficiencies arguments has expanded significantly. Practically, however, the guidance is clear that efficiencies claims will be assessed on a case-by-case basis, and the evidentiary bar is high.
Parties should prepare convincing submissions supported by "ordinary-course" evidence (and possibly bespoke evidence) and engage early to make the most of the opportunity. If there are doubts as to the likelihood and timeliness of the claimed efficiencies, it is also worth giving serious thought to potential remedies to secure efficiency commitments.
The revised MAGs were preceded by updates to the CMA's guidelines on merger jurisdiction and procedure, and the merger remedies guidance. If you have any questions on how any of these changes may affect your transaction, please contact Chanelle Cattin or another member of Mishcon's Competition team.