Interviews

Poundland acquisition of 99p Stores shows importance of Competition Markets Authority

6 min read

20 April 2015

Established as a way of determining whether particular mergers and acquisitions might have a detrimental effect on a specific sector, we look at the finer details of the Competition Markets Authority.

Earlier this month it was revealed that discount retailer Poundland’s £55m acquisition of fellow bargain chain 99p Stores was in danger of being put back on the shelf as a result of a full blown inquiry by the Competition and Markets Authority.

The watchdog expressed concerns over the potential for fewer promotions or a decline in product quality in stores in certain parts of the UK if the acquisition went ahead.

Poundland could offer to sell stores to alleviate competition concerns but the company appears reluctant to do so. It may instead decide to scrap its plans altogether and walk away from the purchase.

This episode is a vital reminder to growing businesses about the complexities which surround acquisition and mergers particularly over the issue of competition and consumer protection.

So what do companies need to know if they want their expansion plans to stay on track?

Why do we need a CMA?

Some mergers and acquisitions can harm competition in a particular sector or region, leading to higher prices and reduced quality and choice for consumers or reduced innovation. Mergers are reviewed to ensure they do not lead to bad outcomes for consumers or lessen competition.

The CMA, an independent public authority, is the primary body for reviewing mergers but the government may step in if the merger affects issues such as national security.

The CMA has the jurisdiction to examine a merger, including acquisitions and joint ventures, where “two or more enterprises cease to be distinct” and either the UK turnover of the acquired company exceeds £70m or the two firms supply at least 25 per cent of the same goods or services supplied in the UK.

Does the CMA have the power to examine every merger in the UK?

Businesses don’t have to tell the CMA of a merger, but gaining approval before going ahead with the deal gives each legal and operational certainty that it can proceed.

It can also save businesses money. If you go ahead with the merger or acquisition without notifying the CMA, then if it does believe there are competition issues and launches an investigation it can impose restrictions to prevent the integration of the two businesses. It can also order the disposal of the business if the merger is not approved – that’s a lot of money, time and resources washed down the drain.

Businesses can formally notify a merger to the CMA by completing something called a merger notice, but they can’t do this until the merger has been made public.

In fact the CMA “strongly advises” companies to approach it to discuss a merger on a confidential basis before any party completes a notice and the deal goes public.

This can help to reduce the amount of information that the CMA needs from the business.

The CMA can also launch its own investigation. It keeps merger activity under review and can investigate mergers that have not been notified to it. Where the CMA learns of a merger that it thinks might harm competition, the CMA can open an investigation.

Read more about the Competition and Markets Authority:

How long does a merger review take and what does it involve?

The CMA has a statutory deadline of 40 working days in which to complete the initial stage of its merger review process. In this period it determines whether it believes that the merger results in a realistic prospect of a substantial lessening of competition.

In essence this occurs when “rivalry is substantially less intense” after the merger than would otherwise have been the case, resulting in a worse outcome for customers

If this is the case, the CMA has a duty to launch an in-depth assessment, although merging parties may offer to modify aspects of the transaction to remedy – such as closing stores.

The assessment is limited to 24 weeks, and if a lessening of competition is expected the CMA then decides upon the required remedies. This could include prohibiting the merger or requiring the sale of parts of the business.

This may all sound very daunting for a business focused on growth and seeking to enter new markets or sectors through merger or acquisition. But businesses need to keep a healthy perspective.

Even on the CMA’s own website it stresses that mergers are an important part of a vibrant economy and can often enhance competition, innovation and give the consumer more choice, better price and quality of product.

But it can’t just be a free-for-all. A watchdog keeping an eagle-eye on the merger and acquisitions scene and ensuring that the consumer does not lose out is a sign of a well governed business climate.

Businesses need to adapt and work with the CMA to produce the best result for their futures and the consumers.

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