Strategy & Corporate Finance Practice

Fix them first:

Executing regulation-
driven separations
A better understanding of the remedies that antitrust regulators may
hand down in a large merger or acquisition could help executives
improve their management of such deals.

by Roerich Bansal, Gerd Finck, Fabian Hofmann, and Steve Miller

© Lydia Whitmore/Getty Images

March 2022
 In any given year, about 10 percent of large mergers
and acquisitions (transactions greater than
€1 billion) are canceled—a significant number when
you consider that about 460 such deals are
announced annually.1
A key factor for many of these deals is regulatory
or antitrust oversight. Through standard M&A
review processes, antitrust agencies can block or
require remedies for those transactions that
concentrate market power in a way that negatively
affects competition. Consider that the number of
transactions subject to antitrust review in the
United States doubled between 2010 and 2020 to
nearly 2,000 deals a year. By the end of 2021, in
just 12 months, that number had doubled again to
4,130 filings.2
Our own research shows that of 346 large M&A
deals announced between 2013 and 2020,
47 of them (or about 14 percent) were canceled
for antitrust or regulatory reasons (exhibit).

Exhibit
Regulatory factors can impede mergers and acquisitions.
Regulatory factors can impede mergers and acquisitions.

Main reasons why M&A By number of By value of

transactions fail to failed deals failed deals
close,1 % (n = 349)

Other 15
21
2

3 Investor activism 12
3 Market headwinds
5 Organic growth focus 5
6 Better opportunity available
7
7 Post due diligence 3

14 Regulatory/antitrust 21

40 Price disagreement 36

1
Sample consists of all public M&A transactions between 2013 and 2020 with a value >€1 billion, of which 10% failed to close. Figures may not sum
to 100%, because of rounding.
Source: S&P Capital IQ

1
Dariush Bahreini, Roerich Bansal, Gerd Finck, and Marjan Firouzgar, “Done deal? Why many large transactions fail to cross the finish line,”
McKinsey, August 5, 2019; numbers updated to include 2019 and 2020 data.
2
DAMITT 2021 report: Merger investigation activity sinks more deals, Dechert, January 31, 2022.

2 Fix them first: Executing regulation-driven separations

 Such cancellations may affect both the reputation
and share price of the parties involved. Companies
could incur one-off costs such as advisory
and termination fees. Senior managers in these
businesses may be perceived as having wasted
precious time and resources pursuing a strategic
path that turned out to be a dead end.
But cancellation is not inevitable. According to our
research, among megadeals that were completed
between 2015 and 2020 (transactions greater than
€18 billion), about 35 percent were approved with
regulatory conditions or required remedies. In this
article, we review examples of remedies and
requirements that executives are likely to face from
antitrust regulatory authorities worldwide. We also
outline three potential actions business leaders can
consider—adhering to regulators’ time frames
and protocols, identifying multiple potential buyers,
and focusing on integration issues early—to help
inform M&A transactions.
Remedies and requirements
Most countries have their own regulations, agencies,
and associated review processes to help ensure
that public and private organizations are competing
on as level a playing field as possible. For instance,
European competition law is promulgated by
key articles of the Treaty on the Functioning of the
European Union. The Sherman Act, the Federal
Trade Commission Act, and the Clayton Act are three
antitrust laws in the United States. Antitrust law in
the United Kingdom is sourced primarily in the
Competition Act 1998 and the Enterprise Act 2002.
Regardless of the ruling body, antitrust and
regulatory authorities may hand down two types of
remedies in the case of large deals: structural and
behavioral. Structural remedies involve a company
3
“ T-Mobile (TMUS) divests Sprint’s prepaid business to Dish,” Yahoo News, July 2, 2020.
4
The FTC’s merger remedies 2006-2012: A report of the Bureaus of Competition and Economics, Federal Trade Commission, January 2017; “EU
merger remedies,” Thomson Reuters Practical Law, accessed January 2021.
5
“Mergers: Commission clears Alstom’s acquisition of Bombardier, subject to conditions,” European Commission press release, July 31, 2020.
Fix them first: Executing regulation-driven separations
making a permanent change, like a divestiture, that
would alter the shape of a market—such as Sprint
being required to divest its entire prepaid business
to complete its merger with T-Mobile.3 Behavioral
remedies involve getting a commitment from
merging parties to act (or not act) in ways that will
have a material effect on competition—such as
a company agreeing to certain rules for how and
when the data it acquires from another may be
shared with competitors.
About 85 percent of merger remedies handed down
in the United States and 70 percent of the remedies
in Europe are structural—likely because they allow
for direct intervention and do not require long-term
monitoring and reporting.4 But regulators may
use behavioral remedies when structural changes
are not feasible, and they could sometimes apply
both types of measures in combination. Alstom’s
acquisition of another train manufacturer, Bombardier
Transportation, for instance, was subject to
the European Commission’s requirements for both
structural remedies (the disposal of some assets,
including manufacturing sites and high-speed and
mainline train platforms) and behavioral remedies
(supplying onboard signaling units to competitors).5
Our focus in this article is on structural remedies,
but regardless of the type of remedy, any actions
taken to comply with it need to be approved
and completed before the original deal can move
forward (see sidebar, “Three requirements in
structural remedies”). Multiple reviews and data
requests from regulators will likely be required—
which can affect companies’ desire to move quickly.
But how companies approach the compliance
process could affect the trajectory of the original
deal, as well as the timing of any integration plans
and expected synergies from the deal.
3
Three requirements in structural remedies

In the case of structural remedies, regulators generally have three specific requirements for divestiture:

— First, the asset to be divested should be
a viable, preferably stand-alone
business; regulators expect the seller
to transfer the necessary support
functions and processes.
— Second, the asset to be divested should
be marketable, with enough potential
buyers available; the seller cannot draw
the deal perimeter in a way that
preserves valuable assets for itself and
makes divestiture more difficult.
— And, finally, the asset to be divested
should be sustainable; any potential
buyer should be able to compete
effectively in the market through the
divested business over the long
term. A seller cannot structure the
business in a manner that makes
it more likely to fail.

Considerations in remedy separations Identify multiple potential buyers. When prioritizing

There are several key outcomes that business
leaders consider in every separation and
divestiture—a seamless cutover of systems on day
one, for instance, continued business momentum,
and elimination of stranded costs. The extra
scrutiny of remedy separations could make these
baseline goals more challenging to achieve.
The following factors may help companies find the
balance between speed and compliance in
remedy separations.
Strictly adhere to the perimeter set by the regulator.
Companies must follow regulators’ standardized
approach to separation rather than flexibly
adapt their approach, as they might do in a strategic
separation. Any perceived move away from the
agreed-upon scope may require another round of
approvals; any effort to save time may only draw
out the process. It may be helpful for companies to
assign a “deal trustee” who can monitor actions
taken to comply with regulators’ requirements and
help coordinate the overall review process. For
instance, as part of its approval of the merger
between two industrial gas companies, Linde and
Praxair, the Federal Trade Commission required that
a divesture trustee report in writing to the
commission every 60 days on the progress of
the remedies.
potential buyers for the asset to be divested,
companies should act diligently and apply the same
criteria as the regulator does—that is, a potential
buyer could make the divested business a viable
competitive force in the market, independent from
the merging parties. Companies may want to
consider the time it could take for regulatory review
and potentially build a list of three to five feasible
buyers in order to prepare for possible delays. Note
that regulators may prefer “peer level” buyers that
have the financial and market strength to grow
the asset in a way that is at least equal to if not more
aggressive than the parent company’s approach.
Regulators may be less supportive of a smaller buyer
that could face challenges in scaling the asset and
truly competing in the market.
Ensure that the remedy separation is integrated
with the overall deal. The value to be delivered from
the remedy separation will likely be much smaller
than that to be gained from the overall deal. So
companies may want to ensure that actions taken
for the remedy separation are considered against
the original deal. Some companies managing
remedy separations have established a dedicated
separation management office (SMO) to work
alongside the overall integration management office
(IMO). The SMO is empowered to make important

4 Fix them first: Executing regulation-driven separations

decisions to speed up processes and sustain
momentum. But the SMO coordinates with the IMO
to determine exactly how the company will capture
value from the underlying deal. Companies may want
to make robust governance a priority. For instance,
they could appoint a “carve-out” leader, who has the
support of senior executives, to manage the remedy
separation. This executive, working with members
of the SMO and the IMO, could establish a road map
that links work streams and milestones in the
remedy separation process to those associated with
the integration of the underlying deal.
A common issue in many remedy separations,
for instance, is mistimed provision of back-office
processes or systems to the buyer through a
transition service agreement (TSA). If enterprise
resource planning (ERP) or other systems, for
instance, are cut off too soon, the divested business
may be left at a disadvantage. Conversely, if
service agreements remain in place too long—to
maintain ERP connections for an agreed-upon
period, for example—they may run afoul of
regulators’ requirements for clean separations.
Roerich Bansal is a capabilities and insights expert in McKinsey’s Gurugram office, Gerd Finck is a senior knowledge
expert in the Düsseldorf office, Fabian Hofmann is an associate partner in the Berlin office, and Steve Miller is a partner in
the Houston office.
Designed by McKinsey Global Publishing
Copyright © 2022 McKinsey & Company. All rights reserved.
Fix them first: Executing regulation-driven separations
The carve-out leader’s road map could help ensure
that timelines are synced and that TSAs are
managed effectively. Companies may apply TSAs
only as needed to address potential long-term
disentanglement issues. Business leaders may
focus on creating a stand-alone business from day
one—implementing a functional operating
model, for instance, and paying close attention to
talent selection and back-office functions.
While executing remedy separations may at first
appear challenging, there is a formula for managing
such transactions—and it comes, in part, directly
from regulators. It is vital to adhere to the perimeter
set by regulators (to avoid delays to the approval),
move fast in identifying potential buyers (applying
the same criteria as the regulator does for buyer
approval), and ensure a close integration between
the remedy separation process and the overall
transaction and integration process. In this way,
business leaders may execute M&A effectively.
5