Upcoming M&A Surge and the Rise of AI

A record backlog of merger and acquisition deals is likely to flood the market by the time a new Commission is in place following the European elections held before the summer.

Dealmaking has been held up by high borrowing costs, Covid-induced market uncertainty and the spectre of military conflict on the edges of Europe. Indeed, after flattening out the trough and peak of the Covid lockdown, the number of deals last year was at its lowest point in almost a decade¹.

If, as expected, interest rates start falling and with the newly strengthened pro-business majority at the helm of the European institutions, economic activity should accelerate across the bloc.

Other factors will also drive a new merger boom. The rise of AI and increasingly tech-savvy and demanding customers could make strategic M&A imperative for companies.In times of major technological shifts, M&A is often more effective than organic growth as it allows for rapid adaptation to a new business environment. Billions of dollars are being poured into new AI ventures looking for an exit, while existing companies scour the landscape for potential acquisitions.

However, this renewed corporate enthusiasm could be tempered by antitrust regulators who have expanded their regulatory toolboxes in a bid to rein in what they judge to be potentially anticompetitive deals. Getting these through is going to require more regulatory planning and preparation than ever before.

Ursula von der Leyen, in remarks at her confirmation hearing for a second term as European Commission President in July, noted the difficulties regulators face in fast changing markets, calling for “a new approach” to the way innovation and resilience as assessed to support growing companies while maintaining vigilance over the ability of companies to dominate markets.

Killer Acquisitions

Over the past 20-plus years, regulators have become increasingly frustrated by their inability to prevent the formation of anticompetitive monopolies and oligopolies, as well as by their inability to do anything about them once they have been formed.

AI could be the next frontier in this debate. As a nascent industry, AI is filled with startups that promise to drive future innovation, yet often lack significant revenue. However, antitrust regulators on both sides of the pond are increasingly concerned that some of the partnerships and investments between major firms and these emerging players, especially in Generative AI, could be used by the major firms to “undermine or co-opt competitive threats”².

The existing toolkit has failed to deal with those smaller killer acquisitions where large companies went on acquisition sprees, sweeping up start-ups who posed real or potential challenges to their business models. The failure, generally due to the notification thresholds that required companies to notify regulators of their acquisitions, is particularly problematic for larger regulators such as the European Commission, but also for the Department of Justice and the Federal Trade Commission (FTC) in the United States.

The second major challenge regulators faced is the dynamic changes in markets and business models brought about by information technology, data and the proliferation of algorithms driving pricing and market insight. Traditional and not-so-traditional theories of harm around subjects such as increased market share, leveraging market power, abuse of dominance and self-preferencing haven’t proven sufficient to assuage regulators’ concerns.

Going After Smaller Deals, including in AI

Regulators on both sides of the Atlantic are addressing their ability to go after smaller deals that previously may have escaped attention but have ultimately led to accretive or creeping market dominance. Ricardo Woolery, an attorney advisor to U.S. FTC Commissioner Rebecca Slaughter, recently argued³ new U.S. merger guidelines provide “a more robust analytical framework” to interpret a part of antitrust law that has received relatively little analytical attention — the ban on mergers that “tend to create a monopoly.” Woolery pointed to enforcement against serial acquisitions in the healthcare market as an example of the new analytical thinking. It’s no longer necessary for a merger to create a monopoly, they could just “tend to” create one.

The U.S. Department of Justice has also set out its intent. Jonathan Kanter, Assistant Attorney General of the Antitrust Division, said his team is “laser focused” on breaking up monopoly chokepoints across the economy and preventing new ones before they arise⁴.

Kanter assured businesses thinking of mergers that the regulator “must unwind and prevent these threats across the physical and digital economy” and use every available lever to combat concentrated power and prevent future occurrences.

The EU is on the Same Path: Revenue Does Not Matter

Across the Atlantic, the European Commission has been just as busy – possibly more so. Two major changes have taken place in the past couple of years that will have a profound impact on the ability of companies to complete deals.

The first concerns a hitherto little noticed Article 22 in the European Union Merger Regulation. Originally designed to assist smaller Member States who didn’t have the ability – or sometimes for internal political reasons the desire – to vet a transaction, by allowing them to refer the review to a higher authority, namely Brussels.

EU officials, under the leadership of DG COMP Director General Olivier Guersent, saw the opportunity to repurpose the regulation through updating guidance on its implementation. Consequently, this allowed any deal potentially impacting cross-border commerce in the EU to be escalated to the pan-European regulator. Deals that were too small and slipped under the thresholds for DG COMP review could now, by asserting these untested powers, be effectively pushed (or pulled) upwards.

The result was immediate and the consequences profound. Deals that previously were invisible to regulators suddenly came under detailed antitrust review. Illumina, a U.S. gene sequencing company, was forced to divest cancer diagnostic test maker Grail after it fell afoul of both European and U.S. regulators. EU officials used the novel interpretation of Article 22 to get authority over the deal, which did not trigger any national filing requirements given that Grail had not yet been generating any revenues.

Legal challenges to various aspects of the regulators’ actions were immediate, and the Court of Justice in Luxembourg overturned the Commission’s decisions on September 3, 2024, agreeing with Advocate General Nicholas Emiliou who argued the Commission and National Authorities overstepped their jurisdiction. That won’t lead to any less uncertainty, and indeed may even lead to more. DG Competition officials have said privately that if the case was overturned, the regulator will simply give itself that authority by either tweaking existing rules or working with national authorities to bring in new ones. Their view of the importance of the tool has been strongly reinforced by activity in the AI industry.

The Ecosystems Conundrum

European regulators have also sharpened another tool to allow them to block or impose conditions on deals that were previously unlikely to fall foul of the rules by redefining what exactly is a market.

The idea of an “ecosystem” was until recently confined to nature but has quickly been adopted by regulators struggling with dynamic markets, particularly in high-tech industries where the concept of increased market share in terms of value and volume of sales or purchases isn’t relevant. One case in particular, Booking.com’s purchase of Etraveli, was blocked on the basis of this theory and is currently being appealed. Since the veto last September, the theory has been picked by regulators around the world.

Application of the theory itself has raised whole new levels of risk for acquirers, a fact recognised by practitioners. Marcus Smith, president of the UK Competition Appeal Tribunal, warned⁵ that ecosystem theories of harm have unleashed a “whole world of problems” for regulators as they grapple with higher levels of uncertainty in their merger decisions, raising questions over levels of predictability and are akin to looking into a “crystal ball".

A More Robust Regulatory Environment

When merger and acquisition activity returns, as it surely will, new and unprecedented levels of regulatory risk will accompany it. Companies and their advisors who may previously have been comfortable with getting a deal through will now have to start planning and preparing for all possible outcomes. The prospect of AI-driven merger activity could presage a more robust regulatory environment that might upend decades of established practice.

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Robert McLeod was the co-founder and chairman of MLex Market Insight, a news organisation established in 2005 and now part of LexisNexis that provides in-depth coverage of regulatory risk and its impact on businesses. As a principal at McLeod Consult, he advises companies on strategic engagement and communications around regulatory challenges.