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00:00This is a story about keeping up with the Joneses.
00:03The United States has led the world in building huge technology companies
00:07and attracting enormous capital.
00:09Now it's riding the crest of that wave into the revolution that is artificial intelligence,
00:14while Europe looks on with envy, or at least with a strong desire to try to catch up.
00:20Now, at the highest levels, it's trying to do something about it.
00:26Growth has been slowing down for a long time in Europe, but we've ignored it.
00:33Now we cannot ignore it any longer. Now conditions have changed.
00:38We need new tech champions in Europe.
00:40The fact of the matter is 43 of the largest 50 companies in AI are US-based. Europe has won.
00:46The quest for Europe to get into the mega tech game is one of the reasons it's now undertaking
00:51the biggest revision to its merger rules in over 20 years.
00:55And few people know more about the potential impacts for businesses and consumers
01:00than Fiona Scott Morton, a professor at the Yale School of Management
01:04and a former chief economist at the Antitrust Division of the U.S. Department of Justice.
01:09There's been a lot of angst in Europe over growth
01:12and the ability of Europe to stay at the technological frontier.
01:16And we've had a couple of reports, the Letta report and most recently the Draghi report,
01:20that have really hammered on that and pointed out all the issues in Europe
01:26that are holding back Europe from more growth.
01:29Scott Morton says the new guidelines, which were published in April
01:33and are now under review, aim to change that.
01:36I think the complaint has been among some parties in Europe
01:39that the commission is not favorable enough toward the mergers they would like to do.
01:43So this is explicitly laying out how do you come to us with a story
01:48for why your merger is really good, why your merger is going to increase innovation,
01:51something like that, and explicitly laying out what those factors would be
01:55and how you might go about showing them.
01:57It's a big deal.
01:58It's a big deal because it's been 20 years since there was a revision of the guidelines.
02:02And it's a good exercise in showing the direction of where competition law is heading.
02:08Ingrid Vandenbora is the head of Skadden-Arp's European competition practice in Brussels.
02:13It's firms like hers that are navigating the changes on the front lines.
02:18What the guidelines do is they set out also for the difficult deals,
02:22also for those that may not be so easy to get through.
02:25There's a couple of factors that are more developed.
02:28A, the commission is going to look at efficiencies in a much more robust way.
02:32They call it the theory of benefit in the guidelines.
02:35So they're not only looking at what will the harm be to the economy of a transaction potentially,
02:40but also what will the benefits be.
02:42The second element is that they're going to look at markets on a dynamic way.
02:48The key term in the guidelines is dynamic competitive potential of a transaction.
02:53And so it's going to be forward-looking.
02:55One of the examples set out in the guidelines is to say,
02:58we're going to look at non-European companies
03:00and how they may bring product into Europe in the future,
03:03even if they're not doing that today.
03:05We're going to look to constraints that may happen in the future.
03:08Beyond giving companies explicit leeway to argue for efficiencies
03:12or changes in the market to justify their mergers,
03:15the new guidelines specifically address the question of startups
03:18and provide ways for early investors to reap rewards for taking chances.
03:25We all know that that's what startup companies need.
03:27When you invest, you need to know you have an exit route as well,
03:31and that's really what the guidelines are trying to do.
03:32So those are a couple areas where, very concretely,
03:35the guidelines set out some more robust frameworks for companies,
03:39following also in the Draghi report that indicated investment needs confidence,
03:44right, and confidence needs to come with the knowledge
03:46that there is an exit strategy and an exit route that's possible.
03:50So if I invent a drug and I want to sell it to a big pharma company,
03:55what are going to be the rules about which firm can purchase my startup?
04:00And there's various cutoffs according to what market share the startup has
04:05or the acquirer has and how big they are and so on.
04:08So that's very helpful for investors and founders of small companies
04:14that want to plot out their exit strategy, for example.
04:17And for innovation, same thing.
04:20If I'm going to merge with another firm
04:23and I'm going to bring forward an innovation story of benefit
04:26that because we're together, we're going to have more innovation,
04:29I need to understand what the commission wants to hear
04:32to explain that that's going to be the reason why our merger is going to be great.
04:37So I think those are perfectly useful things and should help with growth.
04:40The new guidelines may make some deals easier or at least more certain,
04:45but some think they could fall short in the specifics.
04:48For one thing, in giving more play in the joints,
04:51they may require additional work for companies and their lawyers.
04:55In any set of regulations, and particularly in competition,
04:59there's a balance between certainty and discretion with the regulator.
05:05Where do these proposed regulations come out on that sort of barometer?
05:09Does it give you more certainty and more clarity
05:11or does it increase discretion?
05:12Because in reading through them, there's a lot of discretion.
05:15There are a lot of factors put into the hopper.
05:18Yes, yes.
05:19That's a very important point we've been assessing with our clients as well.
05:24There's a large efficiencies framework.
05:25It's pages and pages.
05:27I mean, this is a piece of prose.
05:28It's almost 100 pages long.
05:30Efficiencies as a core part of that.
05:31So it goes on for some while in this document.
05:34I think what is important is we'll have to see how the commission will assess it
05:38in the first decisions to come under these guidelines, right?
05:42And to see how they will set out this framework and implement it in practice.
05:47Because I would think initially it may lend itself to a bit of discretion.
05:50And although the new guidelines would recognize the need for scale in some sectors
05:55to achieve the sort of innovation that Europe seeks,
05:57with that scale may also come greater scrutiny.
06:01The thing that really does come through in the enforcement of mergers is when you need
06:07to be that big to participate in an industry successfully,
06:11we know there will not be hundreds of competitors.
06:14We know right up front there's going to be one, two, three, four.
06:18Not that many.
06:19So we regulate with that in mind, with this oligopoly, as it's called, kind of theory in mind.
06:25And you wouldn't want, for example, Coke to merge with Pepsi.
06:29That would leave us with too few drinks choices.
06:32It's going to have the same kind of impact on mergers that have similarly few competitors.
06:39So if we only have three big clouds, then both conduct and mergers become scrutinized in a way that they
06:47would not if it was restaurants.
06:49The guidelines we've seen so far are only a proposed version, with the commission now pouring over a raft of
06:56comments.
06:56But those who know suspect that the finished product won't be all that different from what we've seen,
07:01and then it will be out before the year is over.
07:05So the consultation period ended end of last month.
07:08You know, summers tend to be a quiet period.
07:11I don't know if we'll be much more ahead of Q4.
07:14What we've been told is Q4 of this year.
07:17And so we may have to wait until then.
07:20As you advise clients considering possible deals, does the proposal of these new guidelines affect timing?
07:28I mean, do you have companies saying, we better get it done now because we know what the old guidelines
07:32were.
07:33We're not sure what it's going to be.
07:34Or on the other side, do they say, you know what, maybe we could wait a little while because it
07:37may be a little bit easier to get it through.
07:39Yeah, and we've had questions like that.
07:41Or sometimes companies say, well, we'll just not look at these drafts yet because we only want to be dealing
07:47with the final product once it's there.
07:49And then we'll assess it.
07:50It's kind of similar.
07:51We've said repeatedly, this is already how the commission is analyzing mergers today.
07:56We don't think it's going to materially change whether you notify a transaction, say, next week versus in November.
08:04There may be one or two decisions that will come out that will reflect efficiency assessments.
08:09That would be something to wait for.
08:11I think the private bar among practitioners, no one wants to be the guinea pig on a first efficiencies full
08:17-out assessment
08:17because it's more discretionary how that will come out and how exactly the commission will now be applying this very
08:23robust framework.
08:25Whatever the strengths or weaknesses in the new proposed guidelines,
08:28it will take some time to see how much they truly change what mergers make it through the European process.
08:34I don't think these guidelines will be a sea change.
08:38I think there'll be a clarification.
08:40I think they're going to cause firms to think more carefully in a good way about is their merger going
08:46to enhance something like resilience,
08:49innovation, help the environment in one of the ways that's credited in the guidelines,
08:54do something useful and be able to come with an affirmative story of that usefulness.
08:59That would be, of course, great.
09:02And that might encourage some beneficial mergers.
09:06But I don't think we're going to see a big change.
09:09If we go back through history, I think it's fair to say there's been something of a dialogue back and
09:13forth
09:13between Europe regulators and U.S. regulators when it comes to competition and a trust.
09:18One learns from the other.
09:20One gets ahead of the other.
09:21Sometimes one is proud of being ahead of the other.
09:23Will these regulations, as drafted, have much influence in other parts of the world, including the United States?
09:28Well, they definitely will have influence in other parts of the world
09:30because most of the world follows Europe on competition law, not the United States.
09:36We're not that good at it, it turns out.
09:39But the thing about the United States is we redid our merger guidelines in 2023.
09:44So really, there's some learning from those 2023 guidelines that you can see in the European revision
09:50and then some things that they're doing that go beyond what the United States did in 2023.
09:57I would say there's more on innovation.
09:59There's more on these little small firms being acquired.
10:02There's more on the theory of benefit.
10:03There's a bit less on labor and monopsony because in Europe, labor regulations are so strong,
10:09you don't have as big a monopsony problem.
10:12When the dust settles, the most important question will be whether the new guidelines are fit for purpose.
10:18The purpose of keeping up with, or at least not falling further behind, the U.S.
10:24Or whether the thing holding the development of European tech champions back has had little to do with competition policy,
10:31but turns much more on deeper integration of the European Union itself.
10:36The argument that they're putting forward is that that merger will make a bigger firm and therefore make some kind
10:43of European champion.
10:45That's actually not typically how we've seen the champions in other parts of the world emerge.
10:50If you think about Google or Microsoft or IBM back in the day, they didn't come from a merger.
10:55They came from very fast growth of an innovative firm.
11:00And so a lot of what the Draghi Report talks about is not, in fact, mergers,
11:03but is about the barriers to the single market being really effective.
11:07If you start up a company in the Netherlands, how quickly can you sell across all 27 member states, 500
11:14million people?
11:15If you could do that as fast as can happen in the United States, because we have free commerce between
11:21our states,
11:21you could grow really fast.
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