Merger transactions subject to official scrutiny
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.