SIYABULELA MAKUNGA | Considerations of the merger review process

Over the last couple of weeks, I have written about different aspects of our merger review processes, including the turnaround times and monitoring the impact of conditions imposed on mergers and acquisitions. But what exactly does our team consider and analyse during merger reviews?

It is in the interest of full disclosure and transparency that I make an attempt to provide a holistic view of what legislative considerations are made when assessing and deciding mergers. 

The Competition Commission is mandated by the Competition Act 89 of 1998 (as amended) to evaluate mergers based on several competition and public interest factors. Merger analysis is dependent on the facts of a specific case but these factors provide a guideline which is used by our analysts (with legal and economic backgrounds) to assess the strength of competition in the relevant market(s) and eventually determine whether the merger will result in any change in the competitive landscape that could substantially prevent or lessen competition in the relevant market(s). The necessary information is sourced from the merging parties and relevant data from the impacted markets, associations, competitors and employee structures, where needed.

The competition factors provide a comprehensive overview of the market(s) in which the merging parties are active and include, but are not limited to the actual and potential level of competition presented by imports in that particular market; and the level of concentration in the relevant markets.

Researching the market concentration ranges from assessing the market shares and the sum of the squared market shares of merging parties and that of their competitors in the relevant market(s) as well as the history of collusion in the market. Fostering a more inclusive economy means our analysts also examine the barriers that limit the entry of new businesses into the relevant market(s) including regulatory and tariff barriers and ensuring that market prices remain affordable to consumers.

In addition, further market characteristics are considered during the merger review process. These characteristics consist of, among others, product differentiation, growth and innovation.

Our analysts also assess whether the merger is likely to result in the removal of an effective competitor in that market thus creating job losses, increasing market concentration, and decreasing consumer choice. The power the merged entity would hold in the market is also considered and consists of gaining a deeper understanding of the bargaining strength that the merged entity would have with suppliers, as an example.

The factors prescribed by the Competition Act outline that our analysts should also examine the nature and extent of vertical integration in the market. Vertical integration means we need to examine the supply chain of the merging parties and the ownership thereof.

For example, we review which parts of the supply chain the merging parties own and the impact the proposed merger would have on the supply chain. A final competition factor the analysts take into account is whether the business or part of a business of a party to the merger or proposed merger has failed or is likely to fail.

When determining whether a merger can or cannot be justified on public interest factors, the commission must consider the effect that the merger will have on:

• A particular industrial sector or region;
• Employment;
• The ability of small and medium businesses, or firms controlled or owned by historically disadvantaged persons (HDPs), to effectively enter into, participate in or expand within the market;
• The ability of national industries to compete in international markets; and
• The promotion of a greater spread of ownership, in particular, to increase the levels of ownership by HDPs and workers in firms in the market.

Along every step of the merger review process, our analysts engage with the merging parties keeping them abreast of the steps in the process to ensure it remains fair and transparent. If a merger results in a negative effect on a particular public interest or competition factor, the commission will require remedies that specifically address the negative effect identified.

After a thorough review of the competition and public interest concerns, our analysts make a recommendation on the approval, approval with conditions, or the prohibition of the proposed merger. Every merger review and its associated recommendation is then further discussed with the commission’s senior leadership before a final decision or recommendation is made.

In the event that the minister and any other third party elect to exercise legislative rights and participate in a particular merger; the commission takes into consideration all submissions received before making a final decision. In their general nature, submissions usually address issues such as economic efficiency, participation, and protection and/or creation of jobs. 

After this final step, the merging parties receive a notification from the commission confirming and detailing its decision.

Any business or legal stakeholder requiring more information about our merger analysis process is encouraged to contact us at ccsa@compcom.co.za

Makunga is spokesperson for the Competition Commission of SA