Competition Bureau statement regarding Thoma Bravo’s acquisition of Aucerna

Ottawa, August 30, 2019 – On August 20, 2019, the Commissioner of Competition announced that he had entered into a Consent Agreement with Thoma Bravo requiring it to divest the MOSAIC Reserves Software business. This followed an application under section 92 of the Competition Act challenging Thoma Bravo’s acquisition of Aucerna. The Commissioner is satisfied that the divestiture of MOSAIC will preserve competition in the supply of reserves valuation and reporting software (reserves software) to Canadian oil and gas producers.

Background

Thoma Bravo is a private equity firm headquartered in San Francisco, California. It focuses on investing in software and technology companies. One of its portfolio companies, Quorum Business Solutions, is a supplier of software to oil and gas companies, and its product portfolio includes the MOSAIC Reserves Software. On February 13, 2019, Thoma Bravo notified the Bureau of its agreement to acquire Aucerna, another supplier of software to oil and gas companies, including the Value Navigator (Val Nav) software.

In its review of the transaction, the Competition Bureau found that MOSAIC and Val Nav competed vigorously and were effectively the only two reserves software used by Canadian oil and gas firms. As such, the merger would have resulted in a monopoly. The Commissioner was concerned that the price and non-price benefits of competition between the merging parties would be lost. Further, given failed attempts by others to enter or expand in the market, there was unlikely to be timely and effective entry or expansion sufficient to constrain the exercise of market power by the merged entity.

Following a three-month review, the Commissioner informed Thoma Bravo that he had significant competition concerns with respect to the transaction. Despite these concerns, Thoma Bravo completed the transaction on May 13, 2019 upon expiration of the statutory waiting period. On June 14, 2019, the Commissioner filed an application under section 92 of the Act alleging that the transaction was likely to substantially lessen competition in the provision of reserves software to medium and large oil and gas producers in Canada. The application also sought an order requiring Thoma Bravo to divest either the MOSAIC or Val Nav business.

The Commissioner and Thoma Bravo entered into an interim Consent Hold Separate Agreement to address the Commissioner’s concerns that irreparable harm would occur pending a hearing of the section 92 application. The Consent Hold Separate Agreement requires Thoma Bravo to hold the MOSAIC business separate and apart from the rest of Thoma Bravo pending a final resolution of the matter. MOSAIC will be operated by an independent hold separate manager appointed by the Commissioner. The Agreement also requires the appointment of an independent monitor to ensure that Thoma Bravo complies with the terms and conditions of the Hold Separate Agreement. The Consent Hold Separate Agreement was registered with the Tribunal on July 24, 2019. The Commissioner and Thoma Bravo subsequently negotiated a resolution to address the Commissioner’s concerns and a Consent Agreement was registered with the Tribunal on August 20, 2019. Pursuant to the Consent Agreement, Thoma Bravo is required to divest the MOSAIC business to a purchaser to be approved by the Commissioner.

Analysis

The Bureau assessed whether the transaction, and the subsequent loss of competition between MOSAIC and Val Nav, was likely to substantially lessen competition in the market for reserves software in Canada.

In its assessment of the transaction, the Bureau relied on information collected from a wide range of market participants, including oil and gas producers, consultants, and software companies as well as documents and data produced by the merging parties in response to the Bureau’s Supplementary Information Request.

Product market

The Bureau determined that the relevant product market is the development, service and supply of reserves software for use by medium and large oil and gas producers in Canada with a complex portfolio of wells that have varying characteristics, including the wells’ product, type, location and age. Accurate and complete information about the value of well reserves is critical for producers to make strategic production decisions, acquire and dispose of assets, take out loans and file annual disclosures in accordance with relevant securities legislation and regulations.

The Bureau’s analysis found that there are no effective substitutes for reserves software for medium and large producers in Canada. General business software (such as Microsoft Excel) as well as internally developed solutions are not viable substitutes to reserves software for most producers with a complex portfolio of wells.

Geographic market

Reserves software is used globally by oil and gas producers. However, due to royalty, tax, and regulatory regimes differing from country to country, reserves software must be tailored to a country’s regime. Canada has unique and complex royalty regimes and reporting requirements for producers. As a result, producers rely on information generated by reserves software and customized for the Canadian market, which include tax, royalty and other payment and regulatory obligations based on formulas and platforms specific to Canada. Therefore, the Bureau determined that the relevant geographic market is Canada.

Competitive analysis

Prior to the transaction, MOSAIC and Val Nav were one another’s closest competitors for the development, service and supply of reserves software in Canada. They competed vigorously on price, features, software updates, and customer service and closely monitored developments and the pace of change between one another with respect to their reserves software products in Canada. This rivalry led to investments by both in developing innovative solutions to enhance the quality and capability of each of their products through software updates and releases. MOSAIC and Val Nav regularly assessed the relative strengths and weaknesses of each other’s reserves software packages and regularly targeted one another’s customers by offering better pricing, service and features.

The Bureau found that no other software imposes a credible constraint on MOSAIC and Val Nav. Reserves software supplied in other countries, such as the United States, are absent or do not actively compete in Canada with the full functionality of MOSAIC and Val Nav. Reserves software that have a strong presence in foreign jurisdictions, such as Schlumberger’s Merak PEEP and Halliburton’s ARIES software, are not sufficiently adapted for use in Canada and do not effectively compete for new Canadian customers. Furthermore, the Bureau identified examples of failed entry into the relevant market from reserves software providers in other jurisdictions, indicating that the barriers to expanding into Canada are likely substantial.

The Bureau concluded that the transaction would likely reduce the incentive of MOSAIC and Val Nav to enhance and maintain their reserves software in Canada. In addition to the loss in dynamic competition, the removal of the rivalry between MOSAIC and Val Nav would likely have resulted in higher prices and lower quality of service.

Barriers to entry

The Bureau’s investigation determined that barriers to entry and expansion into the relevant market are high. These barriers include sunk costs, such as the lengthy timeframe and significant capital that must be invested to develop the software application and integrate the Canadian-specific tax and royalty information.

Furthermore, the size of the reserves software market in Canada is relatively modest. This limits the opportunities for entrants to recoup the sunk costs associated with the development and commercialization of a reserves software. The market is also mature and characterized by customer stickiness,Footnote 1 which further limits the ability of an entrant to recoup the costs of entry or expansion.

These factors are supported by instances of failed entry into Canada in the recent past. The Bureau’s investigation determined that the failed entrants faced significant difficulty in adapting their existing products to Canada’s regulatory requirements despite substantial investment. In addition, the incumbency of Val Nav and MOSAIC as well as the stickiness of customers meant that failed entrants were unable to establish a sufficient customer base to justify further investment into the product.

Based on the above, the Bureau concluded that neither new entrants, nor expansion of an existing reserves software into Canada would be timely, likely, or sufficient to prevent Thoma Bravo from exercising its enhanced market power post-transaction.

Remedy

As noted above, the Commissioner filed an application with the Tribunal under section 92 of the Act on June 14, 2019. To remedy the likely substantial lessening of competition, the Commissioner sought the divestiture of either the Val Nav or MOSAIC business.

Pursuant to a Consent Agreement registered with the Tribunal on August 20, 2019, Thoma Bravo has agreed to divest the MOSAIC business to an independent purchaser to be approved by the Commissioner. The MOSAIC business will include all assets, property and contracts primarily owned or used by the business.

The Consent Agreement requires that the Hold Separate Agreement registered with the Tribunal on July 24, 2019 remains in place until the MOSAIC business is divested in accordance with the terms of the Consent Agreement.

The Commissioner is satisfied that the divestiture of the MOSAIC business will preserve competition in the supply of reserves software to Canadian oil and gas producers.

This publication is not a legal document. The Bureau’s findings, as reflected in this Position Statement, are not findings of fact or law that have been tested before a tribunal or court. Further, the contents of this Position Statement do not indicate findings of unlawful conduct by any party.

However, in an effort to further enhance its communication and transparency with stakeholders, the Bureau may publicly communicate the results of certain investigations, inquiries and merger reviews by way of a Position Statement. In the case of a merger review, Position Statements briefly describe the Bureau's analysis of a particular proposed transaction and summarize its main findings. The Bureau also publishes Position Statements summarizing the results of certain investigations, inquiries and reviews conducted under the Competition Act. Readers should exercise caution in interpreting the Bureau’s assessment. Enforcement decisions are made on a case‑by‑case basis and the conclusions discussed in the Position Statement are specific to the present matter and are not binding on the Commissioner of Competition.


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