A New Zealand-founded fintech company has been ordered by a UK regulator to offload a recent acquisition within 12 weeks - and a veteran competition lawyer says the ruling illustrates the perils of not seeking clearance before a deal goes ahead.
FNZ - today registered in the Cayman Islands - was founded by Martin Durham in Wellington in 2004.
It was initially backed by investment bank First NZ Capital, from which it borrows its initials, and which became its first customer.
It was pitched as offering "a fully outsourced, wealth management platform service, via the internet, combining the software-as-a-service model with trade processing and asset custody."
FNZ expanded into the UK in 2005 and Australia in 2010.
By 2012, it had more than £20 billion in assets under administration.
According to a Reuters report, Canadian pension fund CDPQ teamed with Al Gore's Generation Investment Management to buy a majority stake in 2018 in a deal that valued FNZ at £1.6b. Today, it has around 1600 staff.
Durham, who still serves as its CEO, is now based in London.
FNZ bought Australian firm GBST in mid-2019 in what the AFR called a A$269m ($274m) deal.
Both firms make software platforms that help financial institutions administer wealth-management services.
In November last year, the UK's equivalent to our Commerce Commission - the Competition and Markets Authority (CMA) began a post-deal investigation.
In its final report, released on Friday NZT, the regulator said FNZ sell GBST, because it had found the merger of what it called "two of the leading suppliers ... could lead to a reduction in the quality of service and higher prices".
Martin Coleman, chairman of the CMA inquiry group carrying out the investigation, said: "We have found that FNZ and GBST are two of the leading suppliers of retail investment platform solutions, and that they compete with each other closely and face few other suppliers of similar standing. The merger has substantially reduced competition in this sector.
"This matters to the millions of UK consumers who hold pensions or other investments. This is because competition plays a key role in driving price and quality. Without healthy competition, costs could go up and service quality could get worse."
Coleman added, "FNZ chose to complete its acquisition of GBST without first seeking merger clearance in the UK, which it is perfectly entitled to do. This came with the risk that the CMA could call the case in for investigation and that, if competition concerns were found, FNZ could be required to sell off all of the business it had just acquired."
Through a spokesman, Durham declined comment. His company is still digesting the CMA's full report, which runs to more than 300 pages.
But in a submission to the CMA, dated August 25, 2020, FNZ says, "The CMA's approach to market definition remains vague, artificial and overly narrow" and that "even within a narrow 'Retail' market, FNZ and GBST are not close competitors and there are many other strong, credible competitors."
Referencing UK wealth management software firm JHC - bought by FNZ last year - it notes, "GBST and JHC are plainly not close competitors – GBST is focused on pensions, while JHC does not have this functionality."
Auckland based-competition lawyer Andy Matthews says our Commerce Commission, and its peers around the world, have become more assertive in investigating mergers and acquisitions in the past few years. More than half of the ComCom's M&A investigations since 2008 have occurred since 2018, for example, by Matthews' count.
But the shift to the front-foot is taking place against a different legal backdrop in different territories.
Australia and the US, for example, have compulsory notification, while New Zealand and the UK have voluntary clearance regimes.
You don't have to seek clearance for a deal. And even if the regulator recommends against it, you could still push ahead regardless.
There was nothing, for example, to stop Sky TV and Vodafone NZ simply merging their operations, then taking their chances in the courts.
But that's not a path listed companies prefer to go down, Matthews says. Investors want certainty, either way, and could take fright at a deal that could be unwound, or face sanctions, after the fact.
More, he notes that, while not always ultimately accommodating in its recommendation the Commerce Commission can take an open, "fireside chat" approach if two companies voluntarily seek clearance for a deal. Binding undertakings can be proposed that might (or in the case of Stuff-NZME, might not) clear the way for deal.
But if they plough ahead without involving the regulator, and the ComCom subsequently opens an investigation, "it's a very different type of conversation", Matthews says, "both in tone, and levels of legal transparency."
"Size doesn't matter - even small deals get investigated," he adds. "[It's] at best unsettling and expensive."
And in recent years, there have been very real consequences. The CMA has obviously just ordered FNZ to have a shotgun divorce.
Here, the ComCom has fewer teeth in terms of arbitrary action, but it still recently worked through the courts to see Wilson Parking pay $500,000 towards the regulator's costs and ordered to offload three carpark buildings over anti-competitive behaviour.
The ComCom's action related to Wilson's purchase of the Capital car park in 2016.
"Anti-competitive acquisitions are a priority area for the Commission and this is a reminder to businesses that if there is any doubt about the competition effects of a merger, they should seek clearance from us before completing the deal," Commerce Commission chairman chairwoman Anna Rawlings said when the settlement was announced on October 21.
Matthews says First Gas's 2017 deal to buy the Bay of Plenty gas distribution assets of GasNet was another example of a company being bitten by a post-deal investigation. After the ComCom went to the High Court, alleging anti-competitive conduct, FirstGas had to pay a $3.4m penalty, imposed in 2019. (The ComCom did not seek a divestment order.)