Some people argue that competition authorities in developing countries should not regulate mergers, as this diverts resources that will be better used to chase down cartels. Others argue that we should turn a blind eye to mergers that lead to domination of domestic markets, because increased scale will better equip industry to penetrate international markets.
On the first point, merger regulation should be viewed as a pre-emptive strike directed at promoting a market structure hostile to anti-competitive behaviour. It encourages ambitious firms to grow by producing superior products — not by swallowing their competitors.
Moreover, penetration of world markets is encouraged by robust domestic competition. Why should a firm that can extract a monopoly rent from a dominated domestic market bother with the rigours of international competition? There is also no reason why domestic consumers should have to subsidise exports.
In any case, most mergers happen in sectors where considerations of international competitiveness are irrelevant. Had we approved the proposed merger between the JD Group and Ellerines, low-income consumers would doubtless now be paying more for furniture.
The Competition Act requires the commission to be notified of all mergers above a specified turnover and asset-based threshold. This covers horizontal, vertical and conglomerate mergers, and includes foreign mergers that affect the South African market.
The commission investigates the transaction and, with those below a second threshold, approves it, with or without conditions, or prohibits it. These decisions may be appealed to the tribunal. With mergers above the second threshold — “large mergers” — the commission makes a recommendation to the tribunal that, after a public hearing, decides the fate of the transaction. This decision may be appealed to the Competition Appeal Court.
A merger can only go ahead with competition authority authorisation. Failure to notify, or unauthorised implementation, may incur tough penalties.
The inquiry involves a number of steps. First, the tribunal must decide whether the merger is likely to lead to a substantial lessening of competition. If it is, the tribunal must determine whether efficiency benefits from the merger outweigh the anti-competitive effects. Finally, it must evaluate the merger’s effect on specified elements of public interest.
The competition assessment starts by determining the relevant market, a precursor to establishing market share. This involves asking whether, in the event of a post-merger price rise, customers would switch to alternative products or whether they would simply stump up the higher price.
If, given a small but significant price rise, consumers go for an alternative product, those products are included in the relevant market and the merged entity’s market share will fall accordingly. This is highly contested terrain. Is there a separate market for cola-based soft drinks, or is it part of a wider carbonated soft drink market? Or of an even wider beverages market that includes fruit juices?
The authorities must then answer further questions. Will a credible threat of new entry constrain the merged entity? What about import competition? Is this a dynamic market, with innovators that can respond to post-merger monopoly profits by developing new substitute products? If the second- and third-largest firms in a market merge, does this increase the likelihood of post-merger cooperation with the largest firm?
In contrast with most other legal enquiries, the assessment is predictive — the evidence must enable the authorities to decide likely future conduct and outcomes.
Finally, the authorities must examine the merger’s impact on public interest, including employment and empowerment. Many competition regimes include a public interest test, although responsibility for this is usually placed in the hands of a competent minister.
The authorities tend to take a cautious approach to the public interest test, arguing that their powers are ancillary to legislation and institutions designed to promote public interest.
But in a number of instances — particularly related to jobs — conditions have been imposed on approved mergers requiring the maintenance of specified employment levels.
The regulation of mergers does not allow for capricious decision-making. Most mergers are, from a competition perspective, perfectly inoffensive. But there can be little gainsaying the importance of merger regulation in the competition law framework.
South African circumstances underline the importance of merger regulation. As diversified South African conglomerates try, in the post-sanctions era, to focus their businesses, they have discovered that those willing to pay the highest price for their non-core assets are — surprise, surprise — their largest competitors. Clear examples are Anglo’s attempts to sell AE&CI to Sasol and Rembrandt’s attempt to sell its sugar interests to Tongaat Hulett.
If the competition authorities had not kept an eye on mergers, there is no doubt that our industry would be even more concentrated than it is now.
David Lewis chairs the Competition Tribunal