In any given year, about 10 percent of large mergers and acquisitions (transactions greater than €1 billion) are canceled—a significant number when you consider that about 460 such deals are announced annually.
A key factor for many of these deals is regulatory or antitrust oversight. Through standard M&A review processes, antitrust agencies can block or require remedies for those transactions that concentrate market power in a way that negatively affects competition. Consider that the number of transactions subject to antitrust review in the United States doubled between 2010 and 2020 to nearly 2,000 deals a year. By the end of 2021, in just 12 months, that number had doubled again to 4,130 filings.
Our own research shows that of 346 large M&A deals announced between 2013 and 2020, 47 of them (or about 14 percent) were canceled for antitrust or regulatory reasons (exhibit).
Such cancellations may affect both the reputation and share price of the parties involved. Companies could incur one-off costs such as advisory and termination fees. Senior managers in these businesses may be perceived as having wasted precious time and resources pursuing a strategic path that turned out to be a dead end.
But cancellation is not inevitable. According to our research, among megadeals that were completed between 2015 and 2020 (transactions greater than €18 billion), about 35 percent were approved with regulatory conditions or required remedies. In this article, we review examples of remedies and requirements that executives are likely to face from antitrust regulatory authorities worldwide. We also outline three potential actions business leaders can consider—adhering to regulators’ time frames and protocols, identifying multiple potential buyers, and focusing on integration issues early—to help inform M&A transactions.
Remedies and requirements
Most countries have their own regulations, agencies, and associated review processes to help ensure that public and private organizations are competing on as level a playing field as possible. For instance, European competition law is promulgated by key articles of the Treaty on the Functioning of the European Union. The Sherman Act, the Federal Trade Commission Act, and the Clayton Act are three antitrust laws in the United States. Antitrust law in the United Kingdom is sourced primarily in the Competition Act 1998 and the Enterprise Act 2002.
Regardless of the ruling body, antitrust and regulatory authorities may hand down two types of remedies in the case of large deals: structural and behavioral. Structural remedies involve a company making a permanent change, like a divestiture, that would alter the shape of a market—such as Sprint being required to divest its entire prepaid business to complete its merger with T-Mobile.
Behavioral remedies involve getting a commitment from merging parties to act (or not act) in ways that will have a material effect on competition—such as a company agreeing to certain rules for how and when the data it acquires from another may be shared with competitors.
About 85 percent of merger remedies handed down in the United States and 70 percent of the remedies in Europe are structural—likely because they allow for direct intervention and do not require long-term monitoring and reporting.
But regulators may use behavioral remedies when structural changes are not feasible, and they could sometimes apply both types of measures in combination. Alstom’s acquisition of another train manufacturer, Bombardier Transportation, for instance, was subject to the European Commission’s requirements for both structural remedies (the disposal of some assets, including manufacturing sites and high-speed and mainline train platforms) and behavioral remedies (supplying onboard signaling units to competitors).
Our focus in this article is on structural remedies, but regardless of the type of remedy, any actions taken to comply with it need to be approved and completed before the original deal can move forward (see sidebar, “Three requirements in structural remedies”). Multiple reviews and data requests from regulators will likely be required—which can affect companies’ desire to move quickly. But how companies approach the compliance process could affect the trajectory of the original deal, as well as the timing of any integration plans and expected synergies from the deal.
Considerations in remedy separations
There are several key outcomes that business leaders consider in every separation and divestiture—a seamless cutover of systems on day one, for instance, continued business momentum, and elimination of stranded costs. The extra scrutiny of remedy separations could make these baseline goals more challenging to achieve. The following factors may help companies find the balance between speed and compliance in remedy separations.
Strictly adhere to the perimeter set by the regulator. Companies must follow regulators’ standardized approach to separation rather than flexibly adapt their approach, as they might do in a strategic separation. Any perceived move away from the agreed-upon scope may require another round of approvals; any effort to save time may only draw out the process. It may be helpful for companies to assign a “deal trustee” who can monitor actions taken to comply with regulators’ requirements and help coordinate the overall review process. For instance, as part of its approval of the merger between two industrial gas companies, Linde and Praxair, the Federal Trade Commission required that a divesture trustee report in writing to the commission every 60 days on the progress of the remedies.
Identify multiple potential buyers. When prioritizing potential buyers for the asset to be divested, companies should act diligently and apply the same criteria as the regulator does—that is, a potential buyer could make the divested business a viable competitive force in the market, independent from the merging parties. Companies may want to consider the time it could take for regulatory review and potentially build a list of three to five feasible buyers in order to prepare for possible delays. Note that regulators may prefer “peer level” buyers that have the financial and market strength to grow the asset in a way that is at least equal to if not more aggressive than the parent company’s approach. Regulators may be less supportive of a smaller buyer that could face challenges in scaling the asset and truly competing in the market.
Ensure that the remedy separation is integrated with the overall deal. The value to be delivered from the remedy separation will likely be much smaller than that to be gained from the overall deal. So companies may want to ensure that actions taken for the remedy separation are considered against the original deal. Some companies managing remedy separations have established a dedicated separation management office (SMO) to work alongside the overall integration management office (IMO). The SMO is empowered to make important decisions to speed up processes and sustain momentum. But the SMO coordinates with the IMO to determine exactly how the company will capture value from the underlying deal. Companies may want to make robust governance a priority. For instance, they could appoint a “carve-out” leader, who has the support of senior executives, to manage the remedy separation. This executive, working with members of the SMO and the IMO, could establish a road map that links work streams and milestones in the remedy separation process to those associated with the integration of the underlying deal.
A common issue in many remedy separations, for instance, is mistimed provision of back-office processes or systems to the buyer through a transition service agreement (TSA). If enterprise resource planning (ERP) or other systems, for instance, are cut off too soon, the divested business may be left at a disadvantage. Conversely, if service agreements remain in place too long—to maintain ERP connections for an agreed-upon period, for example—they may run afoul of regulators’ requirements for clean separations.
The carve-out leader’s road map could help ensure that timelines are synced and that TSAs are managed effectively. Companies may apply TSAs only as needed to address potential long-term disentanglement issues. Business leaders may focus on creating a stand-alone business from day one—implementing a functional operating model, for instance, and paying close attention to talent selection and back-office functions.
While executing remedy separations may at first appear challenging, there is a formula for managing such transactions—and it comes, in part, directly from regulators. It is vital to adhere to the perimeter set by regulators (to avoid delays to the approval), move fast in identifying potential buyers (applying the same criteria as the regulator does for buyer approval), and ensure a close integration between the remedy separation process and the overall transaction and integration process. In this way, business leaders may execute M&A effectively.