The acquisition by Deloitte ehf. of the assets and business of Ernst & Young ehf.

The Competition Authority has investigated and taken a position on the acquisition by Deloitte ehf. („Deloitte“) of certain assets and operations of Ernst & Young ehf. („EYÍ“). The merger was first duly notified on 25. August 2023, and the statutory deadlines began to run the next day, but the notification was later withdrawn due to new information provided by the merging parties regarding the transaction's conditions, and the same transaction was notified again. A new merger notification was received on 30 October 2023, as detailed below. This decision describes the merger and the grounds for the Competition Authority's decision to take no action in respect of the merger.

The merging parties were in detailed pre-notification discussions with the Competition Authority from February 2023. During these, the Competition Authority, among other things, obtained views and information from regulators. Following the merger parties' initial notification, the investigation in the first phase involved gathering detailed information and feedback from customers and competitors.

The merger partners are fundamentally audit firms but also provide their clients with a wide range of advisory services, such as tax advisory, corporate advisory, information technology advisory and sustainability advisory, alongside traditional bookkeeping and accounting services. This is a horizontal merger of competitors.

In the Competition Authority's view, it was largely possible to adopt the merging parties' perspective regarding the definition of markets. The Competition Authority notes, however, that any services provided by the merging parties, which is not considered part of auditing, can constitute a distinct market, particularly from the client's perspective, rather than grouping different services together into a single consulting or services market. The investigation also specifically focused on whether there is, on the one hand, a market for the audit of larger companies and, on the other hand, a market for the audit of small and medium-sized enterprises. In light of the outcome of this case, however, the Competition Authority does not consider it necessary to take a position on the final market definitions.

At the outset of the Phase I investigation, the Competition Authority had reason to believe that the merger of the parties would potentially significantly distort competition, at least in the market for the audit of large companies. The available evidence suggested that such a market existed in Iceland and, if so, there appeared to be only four competitors in that market, namely PwC in Iceland („PwC“), KPMG Iceland („KPMG“) together with its merger partners (hereinafter collectively referred to as the „Big Four“).

With new information in the case from the merger parties, particularly EYÍ, regarding the extent to which the Competition Authority activated further delays in the case on 28. September 2023, when the Competition Authority invoked further delays in the case and moved the merger case to a second phase, the fundamental assumptions of the investigation changed, mainly due to the merger parties' new and amended description of the competitive conditions in the relevant markets, particularly with regard to the competitive position and operations of EYÍ.

The new information from the merging parties consisted mainly of the fact that EYI had been notified by its EY partners in the Nordic countries („EYN“) in October 2022 that the firm would no longer be permitted to operate in its current form in Iceland within the EY partnership on the basis of previous exemptions from the detailed rules and procedures of the international EY partnership. EYÍ would therefore need to make significant investments and undertake substantial work to obtain full membership of the partnership, or cease operating under the EY brand in Iceland. The merging parties had not disclosed the above to the Competition Authority during preliminary discussions, in the merger notification, or during the investigation of the case, until the merger was referred for further investigation, as previously stated.

In light of the above, and as the initial merger filing no longer reflected the merger parties' assessment and correct provision of information regarding the companies' position or the relevant market, the previous notification was withdrawn, and a new, sufficient notification was submitted to the Competition Authority on 30 October 2023.

In the opinion of the Competition Authority, the above-mentioned new information, supported by internal and contemporaneous documents from the merging parties and information from EYN, to the effect that the Authority's assessment of the merger's effects changed, particularly due to the altered future position of EYI if the merger did not proceed (the so-called counterfactual assessment). The Competition Authority's investigation into the relevant market for the audit of larger companies revealed that larger companies, among other things, require the reputation, experience and international connections of audit firms. The use of trademarks by auditors in Iceland belonging to well-known foreign audit firms, and their participation in international cooperation, therefore have a significant impact on their competitive position in Iceland.

The aforementioned changes and the investigation by the Competition Authority revealed that EYI's use of the EY trademark and its participation in the eponymous foreign partnership would most likely have come to an end had the merger not occurred, alongside other and probable contractions in the company's operations. This would most likely have meant that the surviving company would not have been sufficiently robust to compete fully, particularly for the audit of larger companies, with a consequent reduction in market strength, but would likely have continued to provide audit services to medium-sized and smaller companies.

With the above changes and new estimates, the Competition Authority's investigation revealed that the merger parties' possible post-merger market share in the market for audits of larger companies would likely be lower than previously assumed in the investigation. Other competition concerns, particularly related to the reduction in competitors, concentration and specific competitive effects due to the swap rules regarding units related to the public interest pursuant to Act no. 94/2019 on auditors and auditing, were also considered to be less significant in light of the new information on EY's competitive position. In other likely markets for the transaction, no significant adverse effects of the merger were identified.

It was therefore the assessment of the Competition Authority that the available data and information that had been obtained, and that the merger parties provided both information from earlier stages and new information in the second phase of the investigation, indicated that the competitive conditions and the effects attributable to the merger were not such as to warrant intervention in the matter. However, it is established that the merged entity's position is strong post-merger, the market for audits of larger companies is considerably concentrated, and there are barriers to entry. This suggests that any further concentration in this market could be a cause for detailed scrutiny by the competition authorities, as was the case in this merger matter.