Anticipated acquisition by Xchanging Holdings Limited of Total Objects Limited ME/6468-14 The CMA’s decision on reference under section 33(1) of the Enterprise Act 2002 given on 9 December 2014. Full text of the decision published on 20 January 2015. Please note that [] indicates figures or text which have been deleted or replaced in ranges at the request of the parties for reasons of commercial confidentiality. Contents Page SUMMARY ................................................................................................................. 1 Decision ................................................................................................................ 3 ASSESSMENT ........................................................................................................... 3 Parties ................................................................................................................... 3 Transaction ........................................................................................................... 3 Jurisdiction ............................................................................................................ 4 Frame of reference ............................................................................................... 4 Product frame of reference .............................................................................. 5 Geographic frame of reference ...................................................................... 15 Counterfactual..................................................................................................... 16 Competitive assessment ..................................................................................... 17 Unilateral horizontal effects ........................................................................... 17 Non-horizontal effects .................................................................................... 36 Third party views ................................................................................................. 42 Conclusion on the realistic prospect of an SLC .................................................. 42 Exceptions to the duty to refer ............................................................................ 42 De minimis ..................................................................................................... 42 Decision .............................................................................................................. 46 SUMMARY 1. Xchanging plc (Xchanging) is active in the supply of specialist insurance software to the insurance market and, in particular, to carriers (insurers and 1 reinsurers) 1, brokers and Lloyd’s of London (Lloyd’s) registered managing agencies (MAs).2 2. Total Objects Limited (TOL) is active in the supply of software and technology services to the insurance market and in particular to brokers, carriers, managing general agents (MGAs) and MAs. 3. Xchanging entered into an agreement to acquire TOL for £21 million on 3 July 2014, which is subject to regulatory clearance (the Merger). Xchanging has also acquired certain companies of the Agencyport Software Group (Agencyport), which is also active in the supply of software and services to the insurance market. The Competition and Markets Authority (CMA) is also investigating this transaction. The CMA considers this to be a parallel transaction for the purposes of its assessment. 4. The CMA considers that the Parties are enterprises that as a result of the Merger would cease to be distinct and that the share of supply test is met under Section 23 of the Enterprise Act (the Act). The CMA therefore believes that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation. 5. The Parties overlap in the supply of a number of insurance software products and, in particular, the supply of standalone outward reinsurance (ORI) software with ‘excess of loss’ (or ‘non-proportional’) capability for carriers with requirements for Lloyd’s-specific functionality including MAs (Lloyd’s Carriers) and/or for carriers with requirements for London Companies-specific functionality (London Companies Carriers). 6. The Parties also overlap in the supply of broker software for brokers and binder management solutions for insurance market participants. The Parties and Agencyport overlap in the supply of core software to MGAs. However, the CMA does not consider that the Merger gives rise to a realistic prospect of a substantial lessening of competition (SLC) in respect of these overlaps. The Parties and/or Agencyport also supply a number of other software products including policy administration system (PAS) software, business intelligence and data warehousing software and exposure modelling software. 1 Carriers are companies selling insurance or reinsurance (which is the insurance of the risk borne by insurers) and insurance/reinsurance is sold through a range of sales channels including through brokers, MGAs and directly by carriers. Lloyd’s is a specialist insurance market based in London where its members join together to form syndicates in order to insure and share risk. MAs manage one or more syndicates and handle the day to day management of the insurance business (they are equivalent to carriers outside the Lloyd’s market). Insurance brokers act as an intermediary between customers and insurance companies, finding and arranging suitable insurance policies for their customer/s. 2 MAs are companies providing managing agency services to Lloyd’s registered syndicates and act effectively as carriers in the Lloyd’s market. 2 7. In relation to the supply of non-proportional ORI software for Lloyd’s Carriers, the CMA found that the Merger resulted in a reduction of main suppliers from three to two. In addition, Xchanging is developing a new product Xuber Ceding and future competition between Xchanging and TOL would be lost. 8. On the evidence available to it, the CMA found that the Merger gives rise to a realistic prospect of an SLC as a result of horizontal unilateral effects in relation to the supply of non-proportional ORI software for Lloyd’s Carriers. 9. The CMA did not receive sufficient evidence to suggest that entry or expansion would be timely or sufficient to mitigate its competition concerns. The total market size in the supply of non-proportional ORI software for Lloyd’s Carriers is approximately [less than £3 million]. Taking account of the size of the market and likely impact of the SLC and the public costs of a second phase investigation, the CMA therefore considers that, while its duty to refer is met, it is appropriate to exercise its discretion to apply the ‘de minimis exception’ in this case. Decision 10. The Merger will therefore not be referred under section 33(1) of the Act. ASSESSMENT Parties 11. Xchanging Holdings Limited is a wholly owned subsidiary of Xchanging, which provides business processing, technology and procurement services internationally. Xchanging and its subsidiaries operate in the insurance market providing a suite of specialist insurance software to the insurance market. Xchanging generated worldwide of turnover of £685.9 million and UK turnover of £430.5 million in its financial year ended 31 December 2013. 12. TOL is a supplier of software and services to the insurance market. TOL’s turnover for the year ended 31 December 2013 was approximately [] generated in the UK. Transaction 13. Xchanging entered into an agreement to acquire the entire issued share capital of TOL on 3 July 2014 (the Merger as defined at paragraph 3). The Merger is anticipated and its completion is subject to regulatory clearance by the CMA at the end of a first phase investigation. 3 Jurisdiction 14. The CMA considers that, as a result of the Merger, two or more enterprises would cease to be distinct under section 23(1) of the Act. 15. The Parties overlap in the supply of standalone ORI software, with a combined share of supply to MAs in the UK of approximately [30–40]% (with an increment of [10–20]%).3 16. The Parties submitted that this was not a reasonable basis upon which to calculate shares of supply and that standalone ORI software should be calculated by reference to both UK carriers and MAs (of which they submit there is a combined total of 260). The CMA does not agree. It considers that the supply of ORI software to MAs is a reasonable description of goods or services for the purposes of the share of supply test under section 23 of the Act.4 This is supported by evidence from third parties which indicated that there are different, more complex requirements in providing software for ORI in the Lloyd’s market (see paragraphs 35 et seq for more detail). The CMA therefore considers that the share of supply test in section 23 of the Act is met. 17. The CMA therefore believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation. 18. The initial period for consideration of the Merger under section 34ZA(3) of the Act started on 15 October and the statutory 40 working day deadline for a decision is therefore 9 December 2014. Frame of reference 19. The purpose of market definition is to provide a framework for the CMA’s analysis of the competitive effects of the merger. Market definition is a useful tool, but not an end in itself, and identifying the relevant market involves an element of judgement. The boundaries