The European Union (EU) is currently conducting a review of its rules around mergers and acquisitions.
As ever, this is the sort of thing which is closely watched by corporate law firms (and one cannot walk very far in central Brussels without coming across a legal office). Latham & Watkins, one such firm, has provided a very useful summary of the draft changes under consideration.
The broad push, as they see it, is to emphasise “how mergers can increase EU firms’ scale, competitiveness, and resilience”.
Launching the Draft Guidelines, Commission President Ursula von der Leyen stated they should “better support companies to thrive, scale and innovate” to meet “the realities of the fiercely competitive global economy”. The Draft Guidelines reflect this shift, acknowledging that “the global geo-political and trade context has changed” and that “industrial scale and global competitiveness have become increasingly important.”
In an era of more intensive global economic competition and more uncertain geopolitics, the European Commission is looking to tweak merger policy to allow for the growth of what might be termed ‘European National Champions’. The authorities, though, are keen to note that they are aware of the potential trade-offs involved here.
As the Competition Commissioner wrote recently in an opinion piece for the Economist:
The draft guidelines are not about loosening the rules, let alone writing blank cheques. They do, however, seek to incorporate into the analysis the internal and external realities in which EU firms operate, such as when their research-and-development budgets are dwarfed by state support enjoyed by global rivals, or when supply-chain vulnerabilities could be leveraged geopolitically by a third country. They are also designed to provide clarity to companies on how they can support their claims about the positive long-term effects of a merger on investment, innovation, and economic resilience to shocks, from cyber-attacks to pandemics.
There are many and varied reasons why Europe has not produced a Microsoft, an Alphabet, or a Meta, but one of those reasons may perhaps be that such a dominant firm would likely have fallen foul of the EU’s generally tougher approach to enforcing competition policy. The EU’s current public consultation is essentially about this issue. The Commission is thinking that in the new global environment, perhaps the EU should be loosening its approach and allowing the creation of mega-sized European firms to compete with the American and Chinese giants?
The Clark Center’s European Experts Panel was asked about this recently and is rather divided.
To start with, the panel was asked whether “the EU’s rules on corporate mergers have been a substantial constraint on productivity growth in Europe”?
Here, 22% of respondents (weighted by confidence) agreed, 36% expressed uncertainty, 39% disagreed, and 4% strongly disagreed. That is far from a decisive result, but rather leaning towards disagreement with a high level of uncertainty. As Pol Antras of Harvard argued, “A contributor, but other regulations matter a lot, probably more”.
Interestingly, if the panel leans towards believing that merger rules have not been a substantial constraint on European productivity, they were more evenly split on the proposed reforms to merger rules.
They were asked whether “loosening the EU’s rules on corporate mergers would provide a substantial boost to the emergence of European champions able to compete effectively in the global economy”? Almost half of respondents (47%, again weighted by confidence) expressed uncertainty, 29% either agreed or strongly agreed, and 24% either disagreed or strongly disagreed. In other words, the panel was quite evenly split with notable levels of uncertainty.
Jan Pieter Krahnen of the Goethe Institute at Frankfurt, who agreed, argued that “Loosening merger rules will help building Europe-wide enterprises, particularly in industries relying on economies to scale in production, like banking, biotech and pharmaceutical”. On the other hand, Christian Leuz of Chicago Booth, who was uncertain, noted that “Loosening likely boost emergence of larger firms. However, unclear whether these firms would compete more effective globally. Evidence that these larger firms likely increase markups, implying EU consumers would pay the price. More active mkt for corp assets could be positive”.
Leaving the merger rules to one side, there was a broader agreement on the final question posed to the panel. The panel was asked whether “in terms of promoting stronger European economic growth, looser merger rules would be substantially less effective than completing the single market, including the creation of a ‘28th regime’ of corporate rules”?
The results were just about as close to unanimous as they ever are. As ever weighted by confidence, 39% of respondents strongly agreed, and 51% agreed. The balance of 10% was uncertain with no disagreement.
This should not be a surprise. The idea of a 28th regime (a European Union-wide set of corporate rules that companies in the 27 member states would be able to choose over national rules) received strong support from the panel last year.
Meanwhile, economists have long called for the EU to go further in completing the single market – especially in service markets.
Taken together, the answers suggest that the panel is at best uncertain on the prospects of a reform of European merger rules helping to drive European productivity and innovation higher, but convinced that measures designed to complete the single market would yield a strong return. If European policymakers are serious about boosting growth, that is where they should be concentrating their effort.
