The EU Orders Illumina to Divest Grail

Illumina must unwind its acquisition of Grail, the EU’s European Commission said in an order handed down Thursday.

To be precise, the European Commission (EC) has issued an order requiring Illumina to divest its acquisition of Grail. The key points and developments are as follows:

Before the Announcement:

1. Illumina had acquired Grail in a deal valued at $8 billion.

2. The acquisition raised concerns from regulatory authorities in both Europe and the United States.

3. The EC had previously stated that it would not allow Illumina to keep Grail, citing concerns about Illumina's ability to cut off or disadvantage Grail's rivals in accessing key next-generation sequencing technology.

4. Illumina proceeded with the acquisition before regulatory investigations were concluded.

After the Announcement:

1. The European Commission has ordered Illumina to unwind its acquisition of Grail.

2. The order includes specific principles that Illumina must adhere to. The primary goal is to restore Grail's independence to the same level it enjoyed before the acquisition. This is intended to remove any harm to competition that resulted from Illumina's potential to delay or disadvantage Grail's competitors.

3. The divestment process must ensure that Grail remains as viable and competitive as it was before the acquisition and must be completed within strict deadlines.

4. Illumina has the option to choose the method of divestment, such as a sale or an initial public offering, but the plan must be approved by the EC.

5. Transitional measures will replace interim measures that have been in place since October 2022 to ensure that Illumina and Grail operate separately.

6. If Illumina does not comply with the restorative measures, the EC has the authority to impose penalties of up to 5 percent of average daily revenues, and fines of up to 10 percent of worldwide revenues in case of non-compliance.

7. The financial details, including the amount of cash Illumina needs to provide to Grail, were not disclosed by the EC.

This development represents a significant regulatory decision by the European Commission, which has ordered Illumina to divest its acquisition of Grail. The decision is aimed at restoring competition in the development of early cancer detection tests and ensuring a level playing field in this market. It also underscores the importance of adhering to regulatory processes and approvals before completing significant acquisitions in the healthcare and life sciences sector.

A fly on the wall of Illumina’s executive meetings

There are a number of reasons why the Illumina execs, with the CEO at the time, Francis deSouza, might have considered continuing with the merger with Grail even though the EC and other international regulatory bodies, such as the FTC in the US, had expressed concerns.

One possibility is that they believed that the merger would be ultimately approved, despite the regulatory hurdles. This could be due to a number of factors, such as:

• Confidence in their legal team and their ability to navigate the regulatory process

• A belief that the regulators would ultimately be persuaded of the benefits of the merger

• A belief that the merger was in the best interests of their shareholders and customers

Another possibility is that they believed that the risks of proceeding with the merger were outweighed by the potential benefits. The merger could have given Illumina a significant advantage in the market for early cancer detection tests, which is seen as a major growth opportunity. Illumina may have believed that this advantage would be worth the cost of paying any fines or penalties that might be imposed by regulators.

It is also possible that the Illumina execs underestimated the resolve of the regulators. They may have believed that the regulators would eventually back down, or that they would be able to negotiate a compromise that allowed the merger to go ahead.

Finally, it is possible that the Illumina execs were simply arrogant and believed that they were above the law. They may have felt that they could ignore the regulators without any consequences. Given the fate of Francis deSouza as CEO, as well as Alex Aravanis and other top-tier execs at the time, it now seems like not everybody on the board thought they could get their way.

Has a merger like this been allowed before?

There are some examples of other mergers that could have been challenged in the past, but weren't:

• In 2007-2010, Google acquired DoubleClick, a leading online advertising company, for $3.1 billion. The deal was approved by the US Federal Trade Commission (FTC) althought they previously blocked it, in a decision dating March 2008. Some consider the merger was the right thing to do, however, some argued that the merger gave Google too much control over the online advertising market.

• In 2014, Facebook acquired WhatsApp, a popular messaging app, for $16 billion (12B+4B in cash). Some critics argued that the merger would give Facebook too much control over the social media landscape.

• In 2017-2018, Amazon acquired Whole Foods Market, a leading organic grocery chain, for $13.7 billion. Some critics argued that the merger would give Amazon too much control over the food retail market.

Here are some examples of mergers of large multi-billion dollar companies that were stopped by the regulators:

• In 2016-2017, the EC and the CMA blocked the proposed merger of AT&T and Time Warner. They found that the merger would have reduced competition and innovation in the media and telecommunications markets.

• In 2011, the US Department of Justice (DOJ) blocked the proposed merger of AT&T and T-Mobile US. The DOJ found that the merger would have reduced competition and innovation in the wireless telecommunications market. In 2014, AT&T and T-Mobile US agreed to abandon the merger.

Every merger is different, and regulators will evaluate each case on its own merits. However, the examples above show that regulators are willing to block mergers of large multi-billion dollar companies, even if the companies believe that the mergers are in their best interests.

A case in favour of the merger

Here are some possible considerations that Illumina emphasized for years while the EC and other regulators were considering the suitability of the merger: