Anticipated acquisition by MacDonald, Dettwiler and Associates Limited of Quest End Computer Services Limited, Quest Systems Development Limited and Cywood Management Limited

Affected market: Property valuation network connectivity and workflow and administration software as a composite product

No. ME/2756/06

Please note that the full text of the decision can be downloaded by using the link on the right.  What follows are extracts regarding the parties, the transaction, jurisdiction, third party views, assessment, undertakings in lieu and decision.

The OFT's decision on reference under section 33(1) given on 14 February 2007. Full text of decision published 7 March 2007.

Please note that the square brackets indicate figures or text which have been deleted or replaced with a range at the request of the parties for reasons of commercial confidentiality.

PARTIES

MacDonald Dettwiler and Associates Limited (MDA) is a publicly traded Canadian company listed on the Toronto Stock Exchange. It is the ultimate holding company of a UK registered private limited company of the same name, (which this decision refers to as MDA UK) which acts as a holding company for a number of operating companies including xit2 Limited, its wholly owned subsidiary. 

xit2 Limited (xit2) designs, builds and operates three business to business web based applications to enable parties involved in UK property transactions to optimize the management of outsourced non-core processes, via a proprietary software platform. These are: The Valuation Exchange (VEx); The Repossession Exchange; and The Conveyancing Portal. In addition, xit2 provides professional software design and development services to third parties in the financial services industry to improve and automate their business processes, particularly in the areas of case management and tracking.

Quest Associates (Quest) is the trading name of three separate UK registered private limited companies which work together to provide Quest's Property Valuation processing system. These companies are: Quest End Computer Services Limited (Quest End), Quest Systems Development Limited (Quest Systems) and Cywood Management Limited (Cywood). Quest End provides an electronic network, which connects banks, building societies, mortgage brokers, and packagers, panel managers and valuers for the delivery of valuations on properties which are the subject of loan applications. Quest Systems provides specialist property valuation software development services and is contracted exclusively to Quest End. Cywood is a management services company which provides development, management and director services to Quest Systems and through Quest Systems to Quest End.

TRANSACTION

MDA UK proposes to acquire the whole of the issued share capital of Quest End, Quest Systems and Cywood. The parties made an informal submission to the OFT on 20 November 2006. The OFT's administrative deadline was 5 February 2007.

JURISDICTION

The OFT is satisfied that two or more enterprises will cease to be distinct. Quest will cease to be distinct from MDA as a result of the proposed acquisition of the entire issued share capital of Quest End, Quest Systems and Cywood. The OFT believes that the parties' combined share of supply of property valuation network services in the UK exceeds 25 per cent and that therefore, the share of supply test in section 23 of the Enterprise Act 2002 (the Act) is met.

THIRD PARTY VIEWS

Most of the third party mortgage lenders and panel manager/ surveyor firms who commented were concerned about the merger. Some third parties thought that this merger may give rise to efficiency gains by creating incentives to make the parties' systems interoperable. However the OFT has not been able to clarify or quantify these.

ASSESSMENT

The OFT considers that the appropriate frame of reference for the assessment of this transaction is the supply of property valuation network connectivity and workflow and administration software as a composite product. However the OFT believes that the competitive constraint, if any, on the parties provided by self-supply by lenders, panel manager networks and AVMs is at best weak.

The evidence the OFT has found shows that network externalities are important in this sector; that the parties are the only two suppliers in the market recognised by third parties and that they are regarded as each others' closest competitors.  Furthermore the OFT considers that barriers to entry are high and most third parties did not consider they would have enough buyer power on their own to prevent a price increase/reduction in service quality by the merged entity. Although two users considered that they might be able to sponsor entry 'in conjunction with other potential end users' it is not clear to the OFT how this would work or whether it would be sufficiently timely to constrain the merged entity.

As mentioned above, the business strategy of both parties has been based upon the ability to encourage lenders to switch from self supply to an external property valuation network. They have only been able to do so to the extent that such an external network can be seen to provide efficiencies in terms of costs, quality and speed of delivery. Therefore on the basis of the evidence before it, the OFT considers that for lenders switching away from self-supply, the parties are closest competitors. Moreover, on the basis of the evidence, the OFT believes that going forward xit2 would only have been able to continue to expand by persuading lenders to transfer in whole or in part their property valuation business from Quest to xit2. Such competition or rivalry would be lost as a result of the merger.

Consequently, the OFT believes that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.

UNDERTAKINGS IN LIEU   

Where the duty to make a reference under section 33(1) of the Act applies, pursuant to section 73(2) of the Act the OFT may, instead of making such a reference, and for the purpose of remedying, mitigating or preventing the substantial lessening of competition concerned or any adverse effect which has or may have resulted from it or may be expected to result from it, accept from such of the parties concerned undertakings as it considers appropriate.

The OFT has therefore considered whether there might be undertakings in lieu of reference which would address the competition concerns outlined above. The OFT's Mergers Substantive Assessment Guidance states that, 'undertakings in lieu of reference are appropriate only where the competition concerns raised by the merger and the remedies proposed to address them are clear cut, and those remedies are capable of ready implementation.' (paragraph 8.3).

The parties offered the following undertakings in lieu of reference to the Competition Commission in order to address potential concerns regarding barriers to entry and the potential for increased prices:

i. [ ]

ii. [ ]

iii. [ ]

iv. [ ]

Although (i) above may deliver some efficiency benefits, the OFT does not consider that it resolves the competition concerns raised by this transaction and may actually raise barriers to entry. We understand from the parties that [ ]. On that basis, the OFT does not believe that (ii) above offers anything additional. (iii) above seeks to limit prices to increases in RPI, however, it may be the case that prices would fall absent the merger, particularly if the parties faced more head-to-head competition. This does not, either, resolve the service or quality concerns. Nor does the OFT consider that (iv) above would be capable of replicating the network externalities which third parties value.

The OFT therefore does not consider that the parties have offered undertakings that would resolve the competition concerns raised by this merger. Accordingly, the OFT has decided not to exercise its discretion under section 73(2) of the Act to consider whether to accept undertakings in lieu of a reference.

DECISION

This merger will therefore be referred to the Competition Commission under section 33(1) of the Act.

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