Crowdcube and Seedrs today announced that they have terminated their proposed merger (Crowdcube and Seedrs abandon merger during CMA investigation). It remains to be seen what the consequence of the failure to merge will be for each company.
Background
The merger was announced on 5 October 2020, subject to clearance from the UK's Competition & Markets Authority (CMA). The CMA launched its merger inquiry on 22 October 2020, utilising a fast track procedure to shorten Phase 1 of the inquiry and move to the Phase 2 of the investigation on 12 November 2020. The dedicated page for the inquiry can be found here.
CMA Findings
On 24 March 2021 the CMA published their provisional findings, in which it was stated that the proposed merger "may be expected to result in a substantial lessening of competition (SLC) within the supply of equity crowdfunding (ECF) platforms to SMEs and investors in the UK." (notice of provisional findings), with attendant risk of a lack of choice and increased costs. Although the findings are provisional the parties have elected to terminate the merger.
Since their formation, both platforms have become leaders in helping emerging companies secure crowdfunding and follow-on funding rounds. The CMA found that their offerings were near-identical and between them they accounted for 500 equity raises in 2020, of which almost half were at the seed level. Of those raises, Seedrs accounted for between 50-60% and Crowdcube accounted for 40-50%. The provisional finding was that the merged entity would have a combined share in the supply of equity crowdfunding platforms of 90-100%. At that level, the findings are not surprising.
Where a concentration is likely to occur, the CMA typically prefers structural remedies such as the divestment of assets or businesses. The CMA's initial view is that a partial divestiture is not feasible and therefore the only "remedy" to the risk of a substantial lessening of competition is to prohibit the merger altogether ( notice of possible remedies).
What's next for Crowdcube and Seedrs
Following the abandoning of the merger the CMA has cancelled its investigation and that is the end of the matter.
During the inquiry, the companies made submissions that in the absence of the merger "one or both firms might exit and/or re-orientate its business strategy", and both companies reported that they were struggling to achieve profitability. Whilst the CMA accepted the financial situation of both companies, it was not persuaded by those arguments, instead concluding that both companies would continue as competitors. Time will tell who is right.
Originally Published by Duane Morris, March 2021
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