SPATE OF MERGER PROHIBITIONS THREATENS SA’S LONG-TERM ECONOMIC GROWTH POTENTIAL
Over the past 12 years, the Competition Commission has prohibited 31 mergers – on average two to three a year.
In the past three months, however, the aggregate rate of prohibitions has increased dramatically, with the Commission prohibiting five mergers since December 2011. Interestingly, this coincides with the appointment of Hardin Ratshisusu as the Commission’s acting head of mergers and acquisitions.
In the silicon mining industry, the Commission has prohibited the proposed acquisition of SamQuarz (Pty) Ltd (controlled by Petmin Ltd) by Thaba Cheu (Pty) Ltd (controlled by Silicon Smelter (Pty) Ltd). The Commission justified its decision by citing potential foreclosure of the downstream market if the merged entity were to divert silica rock inputs to its own use in the production of ferrosilicon and silicon metal.
It also raised fears of collusion and anti-competitive information exchange between Silicon Smelter and Silicon and Technical Products (Pty) Ltd, the only other competitor in the downstream production of ferrosilicon.
Public interest concerns that the transaction may have a negative effect on the steel manufacturing and automotive casting sectors also weighed in against the merging parties.
In the proposed large merger of Joint Medical Holdings Limited and Life Healthcare Group (Pty) Ltd, the Commission has recommended a prohibition to the Competition Tribunal.
Joint Medical Holdings owns a number of hospitals in the Durban area, which apparently raises concerns of regional dominance and a decrease in the countervailing power of large medical schemes to establish service provider networks, which may result in a rise in healthcare costs in the region.
The Federation of Unions of South Africa and the Health and Other Service Personnel Trade Union of South Africa have reportedly welcomed the Commission’s recommendation.
The Commission has also prohibited the proposed acquisition of Cellulose Derivatives (Pty) Ltd by Senmin International (Pty) Ltd – a transaction previously prohibited in 2009 owing to foreclosure concerns.
Although the merging parties contended that market conditions have since changed, the Commission found that the same concerns were still evident in that the merged entity would be able to extend its market power in the upstream market to the downstream market, thereby foreclosing its competitors and raising their costs.
In a transaction in the knock-and-drop leaflet distribution market, the Commission had to reconsider the proposed acquisition of Primedia@Home (a printed advertisement distribution business of Primedia (Pty) Ltd) by Paarl Media (Pty) Ltd after the Tribunal set aside the Commission’s original decision to unconditionally approve this merger.
It was concluded that this merger would substantially lessen competition in the market as the merging parties were vigorous competitors. The Commission also raised concerns that the merged entity could foreclose its rivals in printing and distribution.
Most recently, the Commission has prohibited the proposed acquisition of Jobling Investments (Pty) Ltd by Sunset Bay Trading 368 (Pty) Ltd – a transaction that would result in the merged entity obtaining a market share in excess of 70%.
As its products (solid copper extrusions and extruded copper busbar) are mainly produced locally, the Commission raised fears that the merged entity would be able to exercise market power in such a way as to unilaterally increase prices and reduce quantity and quality of output. It would also substantially raise the barriers to entry in the market.
Certain parties to these prohibited mergers have not accepted the correctness of the Commission’s decisions.
The parties to the Joint Medical Holdings merger have indicated their intention to oppose the Commission’s recommendation at the upcoming Tribunal hearing and the parties to the SamQuarz / Thaba Cheu merger have announced that they will be filing a request for consideration of the Commission’s decision with the Tribunal. Until the Tribunal hears these cases, we will not know of its stance on the Commission’s prohibitions.
However, even if the Tribunal decides that the Commission’s concerns were justified, this spate of prohibitions may deter parties that are contemplating merging in the near future.
Applying to the Commission for merger approval is already a costly and time-consuming add-on to any transaction. If parties now face the risk of request for consideration or appeal proceedings as a matter of course in order to obtain clearance, this may have a chilling effect on many time- and cost- sensitive transactions.
International studies have found that merger prohibitions go hand-in-hand with merger deterrence. For example:
A study conducted in the Netherlands in 2005 established that merger enforcement by the Dutch competition authorities (by prohibition or imposition of remedies) led to an aggregate of 7,5 potential mergers being modified or abandoned; and
A 2007 study for the Office of Fair Trading found that for every merger prohibited or modified by the United Kingdom competition authorities, five subsequent mergers were abandoned or altered.
Although the Commission is obliged to step in where potential mergers raise legitimate concerns, if a trend of merger prohibitions is perceived to be emerging, South Africa may become a less attractive prospect for potential investors.
Indeed, it may stifle business and economic growth, which would be harmful to competition as a whole.
Drawing the line between strong competition policies and stringent merger prohibitions that may harm business is evidently a difficult task, which requires an eye for detail, a meticulous balancing of competition and public interest concerns, and consideration of broader economic interests.
Difficult though it may be, the Commission must draw this line without prejudicing the business sector’s long-term sustainability or stifling domestic investment flows.
Jessica Staples is an associate and Magalie Masamba a candidate attorney at corporate law firm Bowman Gilfillan