The final hurdle for a listed company merger or acquisition is regulatory approval.
Before the Industrial and Commercial Bank of China took its 20% stake in Standard Bank (in October 2007) the dealmakers had to crack the nod from the South African Registrar of Banks, the China Banking Regulatory Commission and 95% of Standard Bank shareholders.
Merging entities must also comply with tough legislation as laid out in the Competition Act, No 89 of 1998. The Competition Commission is the statutory body empowered to investigate restrictive business practices and abuse of dominant market positions.
“Competition issues come through in every jurisdiction,” says James Formby, head of corporate finance at RMB. He also observes that regulatory oversight is of particular importance in small markets like South Africa.
In recent years the Competition Commission has been inundated with merger-and-acquisition (M&A) assessments as equity markets soared. But the general slowdown in domestic corporate activity and recent changes to the threshold for merger notification has put paid to this demand.
From April 1 2009 the threshold for a notifiable intermediate merger was hiked to R80-million in respect of the target’s assets or turnover and R560-million in respect of the combined assets or turnover of the acquirer and target.
This was up from R30-million and R200-million previously. The thresholds for large mergers were increased respectively to R190-million (from R100-million) and R6,6-billion (from R3,5-billion).
“This increase in thresholds has, not surprisingly, led to a significant drop-off in merger notifications to the Competition Commission,” says legal firm Deneys Reitz.
Although the commission’s case load will decline in coming months, most analysts expect it will preside over increasingly “difficult” proposals. Businesses will turn to consolidation as a means of survival, leading to an inevitable dilution of competitive forces in the domestic market.
The commission will be hard pressed to balance the repression of anti-competitive mergers with public interest decisions to save jobs. Companies might use this window to structure deals to get around competition issues.
The commission — with backing from government and labour unions — shifted focus in 2008. Although it prohibited the proposed merger between Murray & Roberts’s subsidiary, Much Asphalt, and a smaller regional producer, it made the news more frequently for its no-nonsense stance on price collusion and other anti-competitive behaviour.
The commission undertook extensive investigations into the flour milling, petroleum and gas and steel retail industries last year.
Adcock Ingram, recently unbundled from Tiger Brands, was fined R53,5-million for uncompetitive behaviour.
The regulatory environment has never been a deterrent to domestic M&A activity. Local companies pursue their strategies fully aware of compliance issues, and international acquirers face similar procedures in countries around the globe.
Foreign capital draws the line at the political meddling that played out around the recent Telkom-Vodacom unbundling.
Cosatu sided with the “turncoat” Independent Communications Authority of South Africa (Icasa) in a last-ditch high court application to prevent the sale of 15% of Telkom’s Vodacom stake to UK-based Vodafone.
The challenge for regulators is to make South Africa an inward investment destination and to create a policy framework that encourages such listings.
“We need a policy framework that creates enough liquidity for foreign companies that want to inward list on the local exchange,” says Formby.
The recent JSE Africa board will raise the profile of the continent, but first prize is when junior mining and exploration companies look for listings in South Africa rather than in Toronto and London.