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High-profile transactions in the firing line of European regulators | White & Case limited liability company

Posted on by darion

Policymakers are learning to navigate a tighter regulatory environment as UK and EU authorities take an increasingly interventionist stance

Global dealmaking slowed in 2023 as the market battled headwinds on several fronts. At a decade-low annual value, nearly $3.2 trillion in deals were announced last year. Meanwhile, volume fell to its lowest annual level since 2018, with a total of 36,640 deals announced.

This year also started calmly. The total number of 8,017 transactions announced in the first quarter is the lowest quarterly result since 2020.

Volume of M&A activity in the period Q1 2020 – Q1 2024
Target location: Global Bidder’s location: Global Sectors: All sectors

View data

As of July 1, 2023, Mergermarket’s core data supporting the M&A Explorer has been consolidated with Dealogic data to provide an even more complete picture of the M&A market. M&A Explorer commentary published before July 1, 2023 may refer to data that does not reflect this consolidation.

For more information on transaction inclusion criteria, click here.

There are many factors contributing to the current slowdown in dealmaking, including high interest rates, tighter financing conditions and macroeconomic and geopolitical uncertainty. Regulatory obstacles are also a growing problem for transactions, as increased scrutiny delays, prolongs, and in some cases even blocks potentially industry-defining transactions.

Regulators around the world appear to be taking an increasingly interventionist stance. According to management consultancy Bain & Company, announced transactions worth at least $361 billion were challenged by regulators around the world in 2022 and 2023, with $255 billion ultimately finalized after remediation.

While regulatory interventions are nothing new to M&A and private equity professionals, a surge in activity among UK and EU competition authorities is keeping policymakers on their toes. This downward pressure could hamper a potential trading recovery.

Offers under the microscope

EU and UK competition authorities are currently reviewing several high-profile deals and the outcome will set the boundaries for future mergers and acquisitions in the relevant sectors.

EU antitrust authorities have blocked US biotechnology company Illumina’s purchase of cancer screening startup Grail on the grounds that it stifles innovation and limits consumer choice. The EU claimed jurisdiction over the deal even though the target entity had no presence there and the deal was not covered by merger control rules in the bloc or its member states.

Despite significant doubts about its jurisdiction in the case, the European Commission imposed a record fine of €432 million on Illumina in July 2023 after the company closed the deal without approval from EU regulators. The penalty – equal to ten percent of Illumina’s revenues – is the highest the Commission could impose for this type of infringement.

EU regulators then ordered Illumina to sell the $8 billion company in October, with the deal expected to close this quarter. The consequences of the transactions have led to increased scrutiny by European regulators for transactions that have a relatively small purpose but have significant potential for market disruption – an aspect they have been accused of overlooking in the past. Deals involving technology groups buying smaller rivals have become a key area of ​​concern for both British and EU antitrust regulators as they look to protect market competition.

Across the English Channel, the UK’s Competition and Markets Authority (CMA) blocked Microsoft’s $75 billion purchase of gaming giant Activision Blizzard in April 2023, even though the European Commission accepted the parties’ commitments and approved the deal. The deal was finally approved by the CMA in October, after Microsoft made some adjustments to its concessions.

Planned £600m sale of Telegraph Media Group, publishers Telegraph newspaper i Spectator magazine to a UAE-backed consortium has also faced significant concerns from the British government, which is trying to push through new laws banning foreign governments from owning national newspapers. The proposed sale has been fiercely opposed by senior government officials, who say the planned takeover “revealed a loophole in the law.” The CMA is currently reviewing the transaction.

Both EU and UK regulators have moved to block US design software company Adobe’s proposal to acquire smaller rival Figma for $20 billion due to concerns over innovation and competition. The transaction was terminated in December 2023.

Finally, the EU Foreign Subsidies Regulation adds another layer of complexity for transactions involving large EU targets. Investors from outside the EU must be prepared for a significant degree of uncertainty and often lengthy review processes as the Commission has not yet developed established practice in this area.

Regulators are expanding their powers

EU and UK regulators are increasingly focusing on deal assessment – a trend that could put more potential deals at risk.

Antitrust authorities are also finding new arguments to oppose transactions, as evidenced by the Commission’s activation of Art. 22 of the European Merger Regulation to challenge Illumina’s purchase of Grail. The rarely used powers allow the authority to investigate deals by large companies taking over smaller rivals, even if they fall below the revenue threshold for EU mergers.

Following an appeal by Illumina, the Commission’s decision is under review by the Court of Justice of the European Union. The outcome, expected by the end of the year, could reshape the EU’s antitrust landscape.

In the UK, the Brexit vote empowered the CMA to take a more interventionist approach to large-scale global mergers. The newly established Digital Markets Unit gives it greater influence over the outcome of technology mergers, even if the parties to the deal have limited links to the UK.

The CMA’s move to initially block Microsoft’s purchase of Activision Blizzard was an unprecedented divergence from Brussels and a clear signal of the regulator’s newfound autonomy and direction.

Outlook: getting offers without hesitation

With so much at stake, many transactors will be keen to ensure compliance with the more stringent regulations under which they operate.

Those who succeed will be the best prepared and will need to demonstrate due diligence to ensure a solid justification for the transaction. Extended transaction times are becoming the norm, and you can expect twists and turns along the way. Decision makers who take this into account in their initial planning will be less likely to encounter problems later on.

Transaction terms can be designed to reduce the risk of delays. For example, break fees can provide an additional incentive for both parties to complete the transaction.

Factors such as competition concerns, ESG compliance and a growing sense of protectionism are making deals – particularly in sensitive industries such as technology and life sciences – more important. Intense regulatory scrutiny shows no sign of abating, at least in the near term, and boards must learn to adapt their strategies to ensure deals close.

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