Merger trans­ac­tions sub­ject to of­fi­cial scru­tiny

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

Merger anal­y­sis in South Africa as­sisted by the US guide­lines

MERG­ERS and ac­qui­si­tions are im­por­tant for the ef­fi­cient func­tion­ing of the econ­omy be­cause these 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 in a com­pet­i­tive man­ner. Com­pe­ti­tion au­thor­i­ties thus an­a­lyse merg­ers and ac­qui­si­tions to as­sess whether these are likely to sub­stan­tially pre­vent or lessen com­pe­ti­tion in the af­fected mar­ket(s) which oc­curs when a merger cre­ates or en­hances mar­ket power or fa­cil­i­tates its con­tin­ued ex­er­cise.

A merger re­view de­ter­mines whether such ef­fects are likely to oc­cur that would re­sult in harm­ful ef­fects on the pub­lic, such as higher prices, slower in­no­va­tion, lower qual­ity, and re­duced prod­uct va­ri­ety.

SA’s com­pe­ti­tion au­thor­i­ties have bor­rowed from the Hor­i­zon­tal Merger Guide­lines of the US Depart­ment of Jus­tice An­titrust Di­vi­sion and the Fed­eral Trade Com­mis­sion (the “agen­cies”) in their ap­proach to merger anal­y­sis in par­tic­u­lar in adopt­ing the Herfind­ahlHirschman In­dex (HHI) thresh­olds. The guide­lines use the HHI as a tool with which to cal­cu­late con­cen­tra­tion in a par­tic­u­lar mar­ket. 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. In a per­fect mo­nop­oly mar­ket (that is, one com­peti­tor) a re­sult of ten thou­sand will be ob­tained. This re­sult will re­duce as the num­ber of com­peti­tors in­crease and their re­spec­tive mar­ket shares di­min­ish. Un­til re­cently, 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”.

On Au­gust 19, the agen­cies is­sued re­vised guide­lines. The pre­vi­ous guide­lines had re­mained un­changed since 1992, aside from the ad­di­tion of a sec­tion on the anal­y­sis of ef­fi­cien­cies in merger re­view in 1997. Some of the main changes to the guide­lines since they were last re­vised in 1997 in­clude the fol­low­ing:

Down­play­ing the im­por­tance of mar­ket def­i­ni­tion in hor­i­zon­tal merger anal­y­sis. This change is likely a re­ac­tion to re­cent de­ci­sions by sev­eral fed­eral courts re­ject­ing the mar­ket def­i­ni­tions pro­posed by the agen­cies, in­clud­ing those in the Whole Foods/Wild Oats and Or­a­cle/Peo­pleSoft merger chal­lenges.

The guide­lines now ex­plic­itly set out em­pir­i­cal and the­o­ret­i­cal tools and ev­i­dence that can be used to as­sess the com­pet­i­tive ef­fects of a trans­ac­tion in­clud­ing, for ex­am­ple, merger sim­u­la­tion mod­els, eco­nomic tests of “up­ward pric­ing pres­sure” the use of “nat­u­ral ex­per­i­ments” and “crit­i­cal loss anal­y­sis”.

Pow­er­ful buy­ers may con­strain the abil­ity of the merg­ing par­ties to prof­itably in­crease prices, but that the pres­ence of a pow­er­ful buyer alone will not lead the agen­cies to pre­sume an ab­sence of ad­verse com­pet­i­tive ef­fects.

The merg­ers of com­pet­ing buy­ers can po­ten­tially lead to a re­duc­tion in com­pe­ti­tion be­cause of “monop­sony power”.

The guide­lines also ad­dress par­tial ac­qui­si­tions, or trans­ac­tions in which a buyer ac­quires a mi­nor­ity in­ter­est in a com­pet­ing firm.

The “safe har­bour” pro­vi­sion is elim­i­nated. It was con­tained in the 1992 guide­lines, which pro­vided that harm­ful uni­lat­eral ef­fects of a hor­i­zon­tal merger would not arise so long as the merged firm had a mar­ket share of be­low 35%.

The HHI thresh­olds have been re­vised up­ward. The agen­cies will con­sider mar­kets “un­con­cen­trated” if, af­ter the merger, they have a HHI be­low 1 500 (an in­crease from 1 000). A mar­ket will be con­sid­ered “highly con­cen­trated” at a HHI of 2 500 or greater (an in­crease from 1 800). A merger pro­duc­ing (i) an in­crease of more than 200 points and (ii) a post-merger HHI ex­ceed­ing 2 500 “will be pre­sumed to be likely to en­hance mar­ket power”.

While the South African com­pe­ti­tion au­thor­i­ties have bor­rowed from the 1992 guide­lines in their ap­proach, they also work closely with their in­ter­na­tional coun­ter­parts in var­i­ous fo­rums such as the In­ter­na­tional Com­pe­ti­tion Net­work and it is there­fore likely that they will align their ap­proach with that of the re­vised guide­lines. How­ever, it re­mains to be seen whether they will also adopt some of the more de­bated pro­vi­sions of the re­vised guide­lines, such as the in­creases in HHI stan­dards, the elim­i­na­tion of the safe har­bour thresh­olds, the down­play the im­por­tance of mar­ket def­i­ni­tion in hor­i­zon­tal merger anal­y­sis and/or more em­pha­sis on em­pir­i­cal tools to mea­sure and pre­dict an­ti­com­pet­i­tive ef­fects.

Ac­tual prac­tice sug­gests that the South African Com­pe­ti­tion Com­mis­sion, be­ing the au­thor­i­ties’ in­ves­tiga­tive arm, rarely chal­lenges merg­ers where the com­bined mar­ket shares of the merg­ing par­ties are be­low 35% on the ba­sis of uni­lat­eral ef­fects, il­lus­trat­ing that, in ac­tual prac­tice, the com­mis­sion is al­ready lean­ing to­wards ap­ply­ing higher HHI thresh­olds. How­ever, in line with the re­vised pro­vi­sions of the guide­lines, us­ing purely struc­tural tests to as­sess the po­ten­tial com­pet­i­tive ef­fects of merg­ers is, 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 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 an econ­o­mist in the com­pe­ti­tion law depart­ment at ENS.

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