University spin-out merger decision: lessons to be learned


Before it disappeared into the wide blue yonder, the OFT published its merger decision in the acquisition by IP Group plc (IPG) of Fusion IP plc (Fusion). There aren’t all that many UK merger decisions in which IP rights are the central assets of the merging parties, so this one particularly caught our attention. The deal involved the purchase by IPG of all of the shares in Fusion – prior to the deal, IPG held a 20.1% stake in Fusion. Both entities provided equity finance and associated services to spin out companies from higher education institutions (HEIs). The OFT noted that they play a key role in investing in early stage technology which is still unproven and therefore cannot attract “general” investors.

The arguments on market definition are particularly interesting. The parties tried to make the case that the relevant market was the equity investment market for small private technology companies – an obvious move, to broaden the scope of the market and therefore reduce their market shares. The OFT didn’t buy this – although other types of equity investors might sometimes be interested in the same investment opportunities, generally they aren’t keen on such early stage companies. Nor do they offer advisory services or support for the development of the spin-off, which both the parties did. Moreover investment in “small private technology companies” wasn’t considered to be specific enough – the OFT considered that the provision of finance and services to HEI spin-outs specifically was more appropriate. In fact the OFT considered an even narrower market definition, looking at each technology sector in which a spin-out might operate as potentially constituting a separate relevant market (although in the end it didn’t find it necessary to reach a conclusion on this point).

On the substance of the case, the OFT looked at competition for agreements with HEIs and competition for developing spin-off outside HEI agreements. It concluded that the parties weren’t close competitors for either – primarily because IPG was a much bigger outfit than Fusion. HEIs thought the deal was a good thing, as IPG would be able to raise more capital to invest and from larger institutional investors, given its increased size.

So the key lesson for us from the decision is not to forget that the regulators can dice and splice a market in many ways when deciding on the correct market definition – even in ways that may seem too narrow to make much business sense. Businesses considering notification to the CMA going forward will be wise to remember that the market definition may end up much narrower than they anticipate, which may make their shares look very high. If this is going to be problematic, it is better to prepare in advance, so that when the CMA sets the exam questions, the merging parties stand a good chance of getting an A grade.