Com­pe­ti­tion watch­dog has wary eye on trans­ac­tions

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Louise du Plessis

In some cases merg­ers can harm cus­tomers, com­peti­tors or sup­pli­ers by al­ter­ing the struc­ture of mar­kets and the in­cen­tives for firms to be com­pet­i­tive

Merg­ers and ac­qui­si­tions are im­por­tant for the ef­fi­cient func­tion­ing of the econ­omy be­cause they al­low firms to achieve ef­fi­cien­cies, such as economies of scale or scope, and to di­ver­sify risk across a range of ac­tiv­i­ties.

In prac­tice, most merg­ers are com­pet­i­tively neu­tral and do not elim­i­nate com­pe­ti­tion or harm con­sumers, com­peti­tors or sup­pli­ers.

How­ever, in some cases merg­ers can harm cus­tomers, com­peti­tors or sup­pli­ers by al­ter­ing the struc­ture of mar­kets and the in­cen­tives for firms to be­have com­pet­i­tively. For this rea­son the com­pe­ti­tion au­thor­i­ties an­a­lyse merg­ers and ac­qui­si­tions.

The abil­ity of a merger to harm, or sub­stan­tially pre­vent or lessen com­pe­ti­tion through uni­lat­eral ef­fects takes place when a merger cre­ates or en­hances mar­ket power or fa­cil­i­tates its con­tin­ued ex­er­cise. The pur­pose of merger re­view is to de­ter­mine whether such ef­fects are likely to oc­cur that would re­sult in harm­ful ef­fects on the pub­lic.

The Com­pe­ti­tion Act of 1998 gave the South African com­pe­ti­tion au­thor­i­ties the pow­ers to re­view merg­ers. The com­pe­ti­tion au­thor­i­ties, un­like many of their in­ter­na­tional coun­ter­parts, do not have for­mal, pub­lished merger guide­lines that out­line their gen­eral ap­proach to the anal­y­sis of the com­pet­i­tive ef­fects of merg­ers, ac­qui­si­tions and sim­i­lar cor­po­rate com­bi­na­tions, which use a safe-har­bour mar­ket-share thresh­old of 15% and cer­tain Herfind­ahl Hirschman In­dex (HHI) thresh­olds to fil­ter out merg­ers un­likely to raise com­pet­i­tive con­cerns.

SA’s com­pe­ti­tion au­thor­i­ties have bor­rowed from the hor­i­zon­tal merger guide­lines (the guide­lines) of the US Depart­ment of Jus­tice An­titrust Divi­sion and the Fed­eral Trade Com­mis­sion in adopt­ing the safe­har­bour thresh­olds, par­tic­u­larly in­so­far as the HHI thresh­olds are con­cerned. This is a for­mula whereby the sums of the squares of the in­di­vid­ual per­cent­age mar­ket share fig­ures of the com­peti­tors in the mar­ket are cal­cu­lated. The guide­lines pro­vide that cer­tain merg­ers that would re­sult in mod­er­ately con­cen­trated in­dus­tries with HHI thresh­olds be­tween 1 000 and 1 800 “po­ten­tially raise sig­nif­i­cant com­pet­i­tive con­cerns”.

The South African com­pe­ti­tion au­thor­i­ties have adopted sim­i­lar HHI stan­dards to gauge the ef­fect of a pro­posed trans­ac­tion on con­cen­tra­tion in a par­tic­u­lar mar­ket, and also use a safe-har­bour mar­ket­share thresh­old of 15% to con­sider com­pet­i­tive con­cerns.

Ac­tual prac­tice, how­ever, sug­gests that the South African Com­pe­ti­tion Com­mis­sion, be­ing the in­ves­tiga­tive arm of the com­pe­ti­tion au­thor­i­ties, rarely chal­lenges merg­ers when the com­bined mar­ket shares of the merg­ing par­ties is be­low 35% on the ba­sis of uni­lat­eral ef­fects.

When the com­mis­sion chal­lenged such trans­ac­tions its de­ci­sions or rec­om­men­da­tions have gen­er­ally been re­jected by the Com­pe­ti­tion Tri­bunal.

For ex­am­ple, last year the com­mis­sion rec­om­mended that the tri­bunal pro­hibit the pro­posed merger be­tween Mass­cash and Finro En­ter­prises, two busi­nesses who were in­volved in the whole­sale gro­cery mar­ket in Port El­iz­a­beth. The merged en­tity would have en­joyed a com­bined mar­ket share of be­tween 30% and 40%. The tri­bunal con­cluded that the merger would not lead to a sub­stan­tial preven­tion or less­en­ing of com­pe­ti­tion in the rel­e­vant mar­ket, one of its rea­sons be­ing that post-merger there re­mained sev­eral sig­nif­i­cant com­peti­tors in the rel­e­vant mar­ket, in­clud­ing three large whole­salers ef­fec­tively com­pet­ing with the merged en­tity, each with mar­ket shares ex­ceed­ing 10%, as well as sev­eral smaller com­peti­tors.

As such, it ap­pears that sim­i­lar to the DOJ’s HHI thresh­olds, the South African com­pe­ti­tion au­thor­i­ties’ safe har­bour mar­ket share thresh­old may be con­ser­va­tive and un­duly re­strain the ac­tiv­i­ties of busi­nesses with a com­bined mar­ket share of be­tween 15% and 35% who wish to merge, par­tic­u­larly in terms of the prospects of suc­cess of ap­proval of their merg­ers by the com­pe­ti­tion au­thor­i­ties and the tim­ing of such ap­proval.

Us­ing purely struc­tural tests to as­sess the po­ten­tial com­pet­i­tive ef­fects of merg­ers is, how­ever, not in line with best prac­tice, as com­pet­i­tive dy­nam­ics in mar­kets are in­creas­ingly im­por­tant in de­ter­min­ing the likely ef­fects of merg­ers on com­pe­ti­tion. A mid­dle ground of merger guide­lines with more re­al­is­tic struc­tural thresh­olds com­bined with an as­sess­ment of com­pet­i­tive dy­nam­ics may sig­nif­i­cantly en­hance trans­parency to busi­nesses wish­ing to merge in terms of the likely out­come and tim­ing of their trans­ac­tions.

Louise du Plessis is a se­nior as­so­ciate in the ENS com­pe­ti­tion depart­ment.

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