Geopolitics and efficiencies brought to the fore: a new dawn for merger control in Europe

Today, the European Commission (Commission) has published its long-awaited draft of the revised EU merger guidelines (the Guidelines). This is the first revision of the Guidelines in over 20 years and signals a significant change in how the Commission plans to assess the pro- and anti-competitive effects of mergers going forward. While a consultation and formal adoption are still outstanding, the Commission has already started applying some of the concepts set out in the draft Guidelines. In this blog post, we highlight the key changes and what they mean for M&A.

New opportunities – with some potential new risks 

As a result of both domestic political demands (e.g. the Draghi report) and global geopolitical developments, the Commission has been under pressure to show it can simultaneously be a rigorous antitrust enforcer while facilitating Europe’s competitiveness and industrial ambitions. The draft Guidelines reflect this new dynamic, noting that “the global geo-political and trade context has changed” and that “[i]ndustrial scale and global competitiveness have become increasingly important”. 

This significant change in tone results in growth, competitiveness and resilience featuring prominently in the new draft Guidelines, which reframe merger control as a tool that “supports the EU's broader policy objectives, including the competitiveness and resilience of the internal market” and acknowledge that the ”assessment of mergers should […] give adequate weight to scale, innovation, investment and resilience as pro-competitive factors that can benefit from a degree of consolidation”.

Scale-enhancing mergers — in particular those that combine activities across Member States, enable companies to compete in global markets, or secure access to critical inputs — are poised to be viewed more positively, provided sufficient competition remains post-merger. The Commission signals a genuine openness to transactions that strengthen European industry. However, this is not a blank cheque — the underlying legal test remains unchanged.

Resilience also features throughout the draft Guidelines not merely as a policy aspiration but as a live parameter of competition, relevant to the assessment of market power, barriers to switching, and the weight given to alternative sources of supply. This is a material shift: for the first time, the robustness of supply chains and the security of critical inputs are embedded in the competitive assessment itself, not merely acknowledged as background context.

At the same time, the draft Guidelines are far from a strictly deregulatory exercise. Beyond recognising a broader set of pro-growth interests, they also codify new and more interventionist theories of harm. Novel standalone theories — including entrenchment of a dominant position, loss of innovation competition (codifying concerns about so-called “killer acquisitions”), dynamic foreclosure, and labour market effects — materially expand the Commission’s analytical toolkit. Several of these theories reflect approaches already tested in recent cases but are now formalised in guidance for the first time.

The net effect is a framework that places materially more weight on innovation, scale, resilience and supply chain security alongside traditional price and choice analysis, while simultaneously equipping the Commission with a broader — and in several respects novel — toolkit to challenge transactions that it considers harmful to competition.

Below we discuss what has arguably been the most hotly debated aspect of the draft Guidelines and one of the most significant changes compared to the Commission’s prior policy stance: efficiencies. 

Efficiencies: the door is unlocked, but not thrown open

It has always been open to merging parties to demonstrate that their merger creates efficiencies that can be set off against any potential anti-competitive effects.  However, in practice, while the Commission has expanded its approach to “theories of harm” over time, it has been very reluctant to accept the efficiency arguments, applying evidential thresholds that many argued were impossible to meet in practice. The revised draft Guidelines retain the former analytical framework used to consider “efficiencies” arguments – for parties to be able to use these arguments, the efficiencies must be verifiable, merger-specific and to the benefit of consumers. They now, however, offer greater clarity and broaden the role that efficiency arguments play in merger assessment by wrapping them up in a new structured “theory of benefit” framework. In practice, this appears to expand merger parties’ opportunities to successfully deploy these arguments.  

The draft Guidelines new approach broadens the scope of potential efficiencies that the Commission will consider relevant beyond its former narrow focus only on price or quality effects. Instead, they now distinguish between direct efficiencies (which typically derive from immediate cost savings and quality improvements) and dynamic efficiencies. The latter focuses on the increased ability or incentive to innovate or invest over a longer time horizon. The Commission is thereby giving significant weight to forward-looking factors, including innovation, investment, sustainability and resilience. By recognising these as pro-competitive factors, the draft Guidelines widen the scope for parties to demonstrate that their deal will bring about benefits and aligns more closely with the EU’s goals on global competitiveness and industrial transformation. 

Another notable addition to the draft Guidelines is the “innovation-shield”. The Commission states that in the case of an acquisition of a small innovative company or R&D project “with a dynamic competitive potential” it will in principle “not find an SIEC [i.e. anti-competitive effect] in relation to any theory of harm” in certain scenarios. The draft Guidelines set out several scenarios to which the innovation shield can apply. For example, where the combined market share of the Parties remains below 40% and at least three other firms with similar competitive potential remain on the market. Even if these thresholds are exceeded, the Commission suggests that the acquisition may not be problematic in the case of a target with a start-up R&D project if the acquirer is “not the largest firm in the relevant market” or a designated “gatekeeper” under the DMA. 

All of this is good news for the prospects of successfully arguing an efficiencies defence. Firms now have a playbook to demonstrate the benefits of their deal in a way that should be taken more seriously by the Commission than in the past and be considered earlier in the process. However, despite the increased openness, the burden of proof remains high: (a) the Commission retains significant discretion in weighing any efficiency arguments; (b) any efficiencies must align with EU policy objectives; and (c) benefits must substantially accrue to the same consumers harmed by the merger. The underlying legal tests have not changed — what has changed is the framework (and some hope: the mindset) within which those tests are applied, and the range of arguments and evidence with which the Commission is willing to engage.

Navigating the theory of benefit framework will therefore require a strategic and proactive approach. The evidence must be accurate, reliable and consistent. In practice, to make these claims successfully, parties will need to have given early thought to the evidence they will need to bring forward early-on in the deal planning process. These efficiencies need to be presented to the Commission early in the review process to maximise the chances of success. As the Commission emphasised in its recent clearance of a JV between Airbus and Air France, “engaging ... early on” allowed it “to assess and provide guidance on the plausibility of the efficiency claims”. 

A broader — and more demanding — scrutiny toolkit

The positive story on efficiencies and competitiveness is real, but it sits alongside a materially expanded set of theories of harm. 

Beyond the familiar headline theories— loss of direct competition, foreclosure, coordinated effects — the new draft Guidelines codify standalone theories for loss of investment competition, loss of innovation competition, and a new theory of entrenchment of a dominant position.

The draft Guidelines also introduce explicit treatment of labour market monopsony effects — in an entirely new development, a merger between employers may be assessed for its impact on workers’ wages and employment alternatives, not just on downstream consumers. And for the first time, non-controlling minority shareholdings potentially as low as 5% and common institutional ownership are treated as potential standalone competition concerns, with implications for any transaction involving financial sponsors or institutional investors with broad portfolio holdings across a sector.

These are not peripheral additions. They represent a material expansion of the Commission’s analytical armoury, and they will require parties to think more broadly about how they frame — and evidence — their competitive analysis from the outset. The practical evidential burden for parties in responding to these theories remains high, particularly for some of the newer, less articulated theories of harm which are untested in practice.

We will be examining these new theories of harm and the Commission’s reworked market power framework in more detail in a follow-up blog post.

What this means for your deals

The draft Guidelines offer a new perspective on EU merger control. A genuine discussion can now be had with the Commission around broader commercial, strategic and geopolitical considerations that impact deal rationales, and efficiencies will no longer be looked at in an artificially narrow manner that requires prior acceptance of a competition issue.

The priority items for businesses looking to benefit from this new approach should be to identify efficiencies early, corroborate them thoroughly with robust evidence that will withstand scrutiny from the Commission, customers and other market participants, and consider early and pro-active outreach to the Commission showing the deal will positively affect traditional parameters of competition (price, output, choice, quality) and/or the EU’s broader policy objectives (innovation, investment, resilience, sustainability). This will maximise the prospect of a credible “theory of benefit” and materially enhance clearance prospects. 

Wondering what the Guidelines mean for your transactions? We’d be delighted to discuss the implications with you - please reach out to your usual Freshfields contact to do so.