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Deloitte‘s acquisition of Ernst & Young‘s assets and operations

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  • Case number: 45/2023
  • Date: 22/12/2023
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  • Summary

    The ICA has investigated and taken a position on the acquisition e of Deloitte ehf. ("Deloitte") on certain assets and operations of Ernst & Young ehf. ("EYÍ"). The merger was first adequately notified on August 25, 2023, and the statutory deadlines began to run the following day, but the notification was later withdrawn due to new information provided by the merging parties about the terms of the merger and the same transaction was re-announced. A new merger notice was received on October 30, 2023, as detailed below. This decision explains the merger and the grounds for the ICA‘s decision not to intervene.

    The merging parties had detailed pre-notification talks with ICA from February 2023. During these talsk, ICA obtained, among other things, views and information from supervisory bodies. After the merger party's previous announcement, during the first phase of the investigation, detailed information and comments were obtained from customers and competitors.

    The merging parties are essential audit firms, but they also provide their clients with a variety of advice services, such as tax and corporate, IT and ESG advice, as well as traditional accounting and financial reporting services. This is a horizontal merger of competitors.

    In the opinion of ICA, it was possible to mostly accept the views of the merging parties regarding the definition of markets. However, ICA points out that any kind of service provided by merging parties, which is not considered part of an audit, can form a special market, especially from the customer's point of view, rather than defining different service elements into one market. The investigation specifically considered that there is a market for audits of larger companies on the one hand and a market for audits of small and medium-sized companies on the other hand. However, in light of the outcome of the case, ICA did not consider it necessary to take a position on the final definitions of markets.

    At the beginning of the investigation in the first phase, ICA considered that there was reason to believe that the merger of the parties would possibly distort competition at least in the market for auditing of large companies in a significant way. The available data indicated that such a market existed in Iceland, and if so, there appeared to be only four competitors in that market, namely PwC Iceland ("PwC"), KPMG Iceland ("KPMG") together with the merging parties (here after the "Big4").

    With new information in the case from the merging parties, in particular EYÍ, around the time that the Competition Authority activated phase II of the case on September 28, 2023, the assumptions of the investigation changed mainly due to the merging parties' new and changed description of the competitive situation in the markets of the case, especially in terms of the competitive position and operation of EYÍ.

    The new information from the merging parties consisted mainly of the fact that EYÍ had been informed by its EY partners in the Nordic countries ("EYN") in October 2022 that the company would no longer be allowed to operate in its current form in Iceland within the EY partnership based on previous exemptions from detailed rules and processes of the international EY partnership. EYÍ would therefore have to make significant investments and hours in order to gain full membership in the partnership or stop working under the EY brand in Iceland. The parties to the merger had not reported this in pre-notification talks, in the merger notification, or during the investigation of the case before the merger case was moved to phase II investigation, as previously stated.

    Due to the above, and since the original merger notification no longer reflected the merger party's assessment and correct disclosure of the position of the companies or the market in question, the previous notification was withdrawn, and a new satisfactory notification was delivered to the Competition Authority on 30 October 2023.

    In the opinion of ICA, the aforementioned new information, which was supported by internal and contemporary data from the parties to the merger and information from EYN, led to the fact that the authority's assessment of the effects of the merger changed, mainly due to the changed future position of EYÍ if the merger did not take place (so-called counterfactual assessment). ICA's investigation into the likely market for audits of larger companies revealed that larger companies do, amongst other things, require for the reputation, experience and international connection of audit firms. The use of the brands of well-known international auditing firms in Iceland and their participation in international cooperation therefore have significant significance for their competitive position in Iceland.

    The aforementioned change and the investigation by ICA revealed that EYÍ's use of the EY brand and their participation in the international partnership of the same name would most likely have come to an end had the merger not occurred, along with other probable declines in the company's operations. The above would most likely have resulted in the remaining company not being sufficiently able to fully compete for audits of larger companies, in particular with a corresponding reduction in market power, but possibly continuing to work on audits of medium-sized and smaller companies.

    With the above-mentioned changes and a new assessment, the investigation by ICA revealed that the possible market share of the merging parties after the merger in the market for audits of larger companies would probably be lower than had previously been assumed in the investigation. Other competitive issues, in particular related to the reduction of competitors, consolidation and specific competitive effects due to rules relating to public interest entities according to law no. 94/2019 on auditors and auditing, were also considered less relevant - taking into account the new information on EYÍ's competitive position. In other likely markets of the case, the merger was not seen to have significant adverse effects.

    It was the opinion of ICA that data and information that had been obtained, that merging parties provided both in the earlier stages and new information in the second phase of the investigation, indicated that the competitive situation and the effects that could be attributed to the merger were not a basis for intervention in the case. Notwithstanding, the current position of the merging parties is strong after the merger, the market for audits of larger companies is considerably concentrated and barriers to entry exist. This gives an indication that possible further consolidation in this market may be the occasion for a detailed investigation by ICA, as was the case in this merger case.