MergerFest 2020: Alternative Counterfactuals in Merger Enforcement: Key Takeaways


In May 2020, Cornerstone Research hosted an expert panel that addressed topics related to alternative counterfactuals in merger enforcement, from potential competition to the failing firm defence.

At a Cornerstone Research webinar held in May 2020, expert speakers from private practice and academia addressed alternative counterfactuals in merger enforcement, covering topics that ranged from potential competition to the failing firm defence.

Failing firm defence
COVID-19 impact
The failing firm defence is expected to increase, but according to the European Commission (EC) and Competition & Markets Authority (CMA), standards for accepting failing firm arguments will remain high. The CMA has indicated that it will not treat completed mergers or acquisitions differently from proposed transactions.

Recent ‘refresher’ to the CMA Merger Assessment Guidelines (2010)
In an updated document, the CMA adopts a broader, more holistic approach to the third limb of the failing firm defence, ‘looking at the overall market structure and taking all relevant parameters of competition into account’. This revision allows a focus on assets rather than sales, and provides guidance on the CMA’s current approach to failing firm cases (even though it does not appear to be formal guidance in terms of the Enterprise Act 2002).

Industry changes
Are industry changes (such as those related to competitive pressures or sales) likely to be temporary or permanent? In non-financial markets, dominant firms may do better than upstarts. Some firms will be more likely to receive state aid, depending on their jurisdiction and/or industry.

Potential competition and uncertainty
The CMA guidelines describe that the CMA will only adopt sufficiently probable counterfactuals. However, predicting potential competition and the likelihood of future entry is challenging for competition authorities (e.g., projecting a start-up tech firm’s success).

Less certain counterfactuals
The law and economics communities are debating whether agencies should accept much less certain non-standard counterfactuals in potential competition cases, particularly for transactions that may affect future competition in digital markets.

Complements or substitutes
Today’s complementors in the tech sector can be tomorrow’s competitors. Initially, a firm may grow by supporting a dominant firm’s product, but once it establishes itself in the market, it may seek to challenge the dominant firm.

Types of evidence
The CMA considers a range of evidence, including internal documents and data, external documents, and market evidence (especially on valuations), as well as evidence of the acquirer’s ability and incentives to enter or expand and the entrant’s ability to grow and succeed, absent the acquisition. The CMA may also want to emphasise evidence from investors (e.g., prospectus documents prepared for potential shareholders and investors).

Dynamic counterfactuals
More dynamic elements are entering the CMA’s assessment than in the past. For example, in PayPal/iZettle, the CMA compared the merger scenario not to pre-existing conditions, but to a more competitive future market (with an improved offer by PayPal). When the CMA considers such a dynamic counterfactual, it seems reasonable and may prove important to also take the rest of the market into account, such as expected developments and how the other competitors may react following the merger.


Competition authorities demand a high level of proof from parties before accepting a failing firm counterfactual. In potential competition cases, the evidence will help reduce uncertainty but is unlikely to remove it.

Documentary evidence
Documents require careful assessment, and should be weighted according to source, quality and magnitude. The CMA considers independent evidence to be more useful.

Internal documents
Some internal documents carry more weight than others. In Illumina/PacBio, the CMA emphasised valuation documents on expected future market developments over customer documents that discussed concerns about PacBio’s continued existence. Internal documents must be considered in the appropriate context, as companies may have an incentive to reassure suppliers and customers about the firm’s viability.

Ability and incentives
Any large platform acquirer has the potential to be a material entrant in almost any market. The CMA should examine both the acquirer’s existing capabilities and its ability and incentive to develop capabilities in the required areas, absent the transaction.

Complementary assets
Do an entrant’s current assets complement the acquired firm’s assets? For example, the incentive to exit in Aer Lingus/CityJet arose because CityJet did not have the necessary complementary assets.

The views expressed herein do not necessarily represent the views of Cornerstone Research.

Event Speaker

  • Washington

Greg Eastman

Senior Vice President

Nathan Miller

McDonough School of Business and Department of Economics,
Georgetown University

Additional Event Speakers

Tim Cowen
Chair, Antitrust Practice
Preiskel & Co.

Caroline Thomas
Norton Rose Fulbright LLP