Deeper dive: cause of deal abandonment and the counterfactual absent a UK (Phase 2) merger review

This post is a deeper dive on one aspect of the Phase 2 deal mortality meter post, which should be read first for context.

As a rule of thumb, Platypus argues it is reasonable to assume that for most such deals, the (predicted outcome of a) UK Phase 2 process is a material if not dominant or sole cause of abandonment.

This inference can be drawn for deals that are abandoned on or around the opening of Phase 2 absent any publicly-available material that, coincidentally, some other CP such as shareholder approval was not satisfied at the same time.

Another causation issue for abandonment is regulatory opposition in other jurisdictions, and perhaps a major jurisdiction such as the US for US-centric deals. This is more an issue for late-stage Phase 2 abandonments and calls for a deeper dive.

Platypus has analysed all 7 CMA era cases featuring a late-stage abandonment as follows, six of which have occurred since February 2019:

Publicly-available information implies that CMA opposition was the primary or a dominant cause of deal abandonment

• Clariant / Kilfrost (2016) – abandoned after PFs. The CMA’s Notice of Possible Remedies (NPR) is geared towards prohibition as the only effective remedy (NPR paras. 9-10). The conditions precedent (CPs) of Austrian and Spanish clearance had been satisfied (CMA PFs, para. 3.9).
• Experian / Clearscore (2019) – abandoned after PFs. The CMA’s NPR notes that “at this stage, the CMA’s view is that the only effective remedy is prohibition” (para. 12). No merger filings were made outside the UK (P1 decision, para. 15).
• TopCashback / Quidco (2019) – abandoned around 2 months into Phase 2 (after the Issues Statement). The transaction appears UK-centric and MLex reporting of 21 March 2019 quotes the parties indicating that CMA Phase 2 process was the cause of abandonment.
• Thermo Fisher / Roper (2019) – abandoned after PFs. Thermo’s 10 June 2019 press release makes clear that “Both companies have agreed to withdraw from the proposed transaction due to challenges in obtaining regulatory approval in the United Kingdom.” CMA clearance was a CP and the CMA’s NPR identifies global prohibition as effective, notes no UK-only divestitures are possible for its horizontal concern, and is very sceptical of behavioural remedies to solve its vertical concerns. No concerns were raised by other merger reviews (US FTC and Austria; see P1 decision para. 21).
• Prosafe / Floatel (2020) – abandoned after PFs. Clearance by the CMA and Norway were CPs (P1 decision, para. 10). At the time of the PFs the merger had been prohibited by Norway and was under appeal (PFs para. 12). In the NPR, the CMA’s view was that “the only structural remedy identified as being likely to be effective is prohibition” (para. 10). The merger was abandoned on 13 February 2020, two weeks after PFs (30 January) and before the Norwegian appeal judgment was given. The decision not to wait a few weeks for the Norwegian appeal judgment (due early March 2020; PFs para. 12) implies that CMA opposition was the dominant cause.
• Taboola / Outbrain (2020) – abandoned around ten weeks in to Phase 2. The deal was publicly abandoned for commercial reasons but the deal had been cleared by Germany (November 2019) and the US DOJ (July 2020). MLex reports a source saying the UK and Israeli ongoing reviews made the deal “untenable” (9 September 20). Consequently, at least the prolonged UK review period post-DOJ clearance - if not substantive CMA concerns and Phase 2 end-game risk - arguably implies that the UK process was a dominant cause of deal abandonment on 10 September, almost 11 months after announcement on 3 October 2019.

Publicly-available information implies that opposition by the CMA was a material cause of deal abandonment

• Illumina / Pacific Biosciences (2020) – abandoned on 2 January 2020, some time after PFs. The CMA’s NPR of 24 October 2019 notes that “at this stage, the only structural remedy that CMA has identified as being likely to be effective would be prohibition” (para. 12). The US FTC, with whom the CMA “cooperated closely”, was also opposed to the transaction and filed an administrative complaint to block the deal on 17 December 2019. The next day, Illumina extended the long stop date of the deal from 31 December 2019 and was consequently due to make cash payments to PacBio of $6 million by 2 January as well as further payments (including $22 million by 3 February) (Illumina 8-K of 18 December 2019). The Illumina press release of 2 January 2020 reads in part: “Considering the lengthy regulatory approval process the transaction has already been subject to and continued uncertainty of the ultimate outcome, the parties decided that terminating the agreement is in the best interest of their respective shareholders and employees …,Illumina will pay Pacific Biosciences a termination fee of $98 million.” It is reasonable from public sources to assume that CMA opposition (open to challenge only on judicial review principles, not the merits) materially contributed to deal abandonment (rather than this being due solely to the FTC complaint (which would have been subject to a trial on the merits).

From the above review of public material, Platypus’ best assessment is that CMA opposition appears principally to be the primary or a dominant cause of deal abandonment, even for US-to-US and non-UK centric deals such as Thermo Fisher/Roper and Taboola/Outbrain, neither of which faced challenge from the US authorities. The exception is Illumina/PacBio which did face formal FTC opposition, and where it is best assumed that the CMA materially contributed to such an outcome even if, for sake of argument, US opposition were assumed to be the dominant cause.

Accordingly, there appears to be no good reason known to Platypus to treat any relevant deal abandonments in the period as unconnected with the CMA process. As such, they can appropriately be grouped with deal prohibitions and unwind outcomes in the composite statistic of UK Phase 2 deal mortality.