Conclusion
When assessing code-share markets, a strict enforcement of antitrust restrictions towards parallel alliances should be guarded against. Although some theoretical models predict higher prices from co-operation among rivals on the same routes, empirical evidence has demonstrated the beneficial effects of code-sharing on connecting flights (new entry creation, consolidation and improvement of services and yields from economies of scale and scope). It has failed to provide conclusive evidence supporting the hypothesis that parallel alliances result in higher fares12.
5. Foreign Direct Investment (FDI) in Mergers and Acquisitions
Competition policy and its contribution to the economy in terms of FDIs
The South African competition policy has a major role to play in the development of the South African economy. Apart from looking at the effect that a merger will have on a particular market or sector, the Act also considers certain public interest issues to be of importance. These include employment, development of SMMEs, international competitiveness, black economic empowerment and foreign direct investment (FDI). By guarding against anticompetitive behaviour and ensuring that barriers to entry are minimised, the Competition Act no 89 of 1998 induces foreign companies to penetrate and invest in the country's economy. This is evident from the number of foreign companies that have entered the country's markets in terms of mergers and acquisitions. Though competition policy seems to be contributing to the development of the country's economy, as mentioned above, it is important to note certain complicating factors associated with the FDI data as captured in the Commission's database. Certain deals or mergers might be incorrectly captured as involving FDI, for at least three reasons:
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First, where the acquisition is by a local subsidiary of a foreign parent, the transaction is not always recorded as FDI, whereas strictly speaking it probably should be. There may be no immediate inflow of forex if the local subsidiary does the acquiring, but that overlooks the fact that the implication of the acquisition is that those funds are not available as remittances to the foreign parent.
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Second, some transactions have complex payment arrangements: the acquiring firm may agree to assume the target firm's obligations, in return for its shares. In some cases, these obligations and other such arrangements might not have been explicitly valued and included as FDI.
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Third, some transactions relate to acquiring a firm's worldwide interests, and the stated purchase price as captured relates to the value of the whole group, of which the SA subsidiary might only be a small part.
The table and pie graph below show the number of mergers involving foreign companies in various sectors of the economy. It is clear that the manufacturing sector has had the most transactions involving FDI.
Mergers & Acquisitions cases with Foreign Direct Investment
(April 2000-December 2002)
Merger Cases and Foreign Direct Investments (FDIs)
(April 2000- December 2002)
From a sample of 769 cases filed with the Commission between April 2000 and December 2002, 109 (14%) involved foreign companies buying assets or investing in the country. 55 (50.5%) of the total cases were within the Manufacturing Sector; 14 (12,8%) were within the Wholesale Sector; 10 (9,2%) in Retail Trade; 6 (5,5%) within Financial Services; 4 (3,7%) in Transport, and Mining accounted for 4 (3,7%). Business Activities filed 10 cases, accounting for 9,2% of the total cases and the Information Technology sector filed 2 cases, contributing 1,8% of the total number of cases filed. Other sectors, encompassing Telecommunications, Electricity, Gas and Water, Construction and Real Estate accounted for 3,7% of the total FDI cases handled by the Commission.
The above statistics reflect the relevance and contribution of competition policy in evaluating the effect of FDI in mergers in the South African economy. By ensuring that markets are less concentrated and not dominated by a few large firms, the policy provides an incentive for foreign companies to invest, which ultimately benefits the country. With FDI supported by numerous grants and incentives directed by the dti, the government hopes to benefit the South African economy by attracting the right type of FDI.
6. Merger Cases
Commission recommends unconditional approval for Tiger Brands-Enterprise Foods merger
The Commission has referred a large merger between Tiger Brands Ltd. and Enterprise Foods (Pty) Ltd. to the Competition Tribunal, recommending that the proposed merger be approved unconditionally.
Tiger Brands already holds a 50% shareholding in Enterprise Foods (Pty) Ltd. The transaction will allow Tiger Brands to acquire the remaining issued ordinary share capital of Enterprise Foods from Foodcorp (Pty) Ltd. Foodcorp told the Commission that it is seeking to exit its non-core business ventures.
The Commission found that there was no relevant product market overlap between the parties. The Tiger Brands Group is involved in a diverse range of businesses and branded consumer products. Enterprise Foods (Pty) Ltd. manufactures chilled processed meat and canned meat products. However, the Commission was of the view that the change from joint to sole control does strengthen the vertical integration (up or down the supply chain) between Tiger Brands, Enterprise and SPAR, which is a subsidiary of Tiger Brands.
Nevertheless, the Commission believes that this will not give rise to customer and competitor foreclosure - the kind of anti-competitive behaviour that may result from vertical mergers, which can limit consumer choice or competitors' ability to distribute products or services and will therefore not negatively affect the competitive landscape.
There were also no significant public interest issues.
Commission recommends unconditional approval of Kulungile Metals and Abkins Steel merger
The Commission has referred a large merger between Kulungile Metals (Pty) Ltd. (Kulungile) and Abkins Steel Corporation (Pty) Ltd. (ASC) and Abkins Steel Services (Pty) Ltd. (Steel Services) to the Competition Tribunal, recommending that the proposed merger be approved unconditionally. Kulungile proposes to acquire the steel merchandising businesses of the target firms.
Kulungile consists of two divisions namely Baldwins Steel, which trades in carbon steel products and Stalcor, which trades in stainless steel and aluminium products. ASC and Steel Services on the other hand only deal in carbon steel products.
The proposed transaction was initially filed as an intermediate merger because the ABSA Group jointly controls both the ultimate parent companies of the target, and the acquiring firms. The merger was subsequently re-filed as a large merger, necessitating referral to the Tribunal.
The Commission had identified a product overlap in five markets. Whereas the identified markets are concentrated, the change in concentration levels are not substantial and customers and competitors of the primary acquiring firm have indicated that they have no objection to the proposed transaction. Furthermore, no significant public interest concerns arise from the merger.
The Commission believes the proposed transaction will not substantially prevent or lessen competition in any of the identified markets, and have recommended to the Tribunal that the transaction be unconditionally approved.
The parties' rationale for the proposed transaction is that the growth prospects of the target firms are dependent on their stock availability. The transaction is aimed at increasing the stock breadth and depth of Kulungile to provide clients with a desired "one-stop shopping" facility. Kulungile believes this will enable it to compete more effectively with its main competitors.
Unconditional merger approval recommended for Daun-Kolosus transaction
The Commission has referred the large merger between Daun Et Cie AG and Kolosus Holdings Ltd., recommending approval with no conditions.
The merging parties are active in the animal hide and skins industries. The majority of hides in the country are directed to the automotive industry (leather car seats). Both parties are major players in the procurement and sale of processed leather ("wet-blues") used in the manufacturing of car seats.
Daun will be acquiring control of Kolosus. While the structure of the industry did not, in the end, raise significant competition concerns from this acquisition, the transaction did require that horizontal, vertical and public interest issues be assessed.
The merged entity will become the dominant player in the procurement of rawhides and the sale of automotive wet-blues. However, local demand for wet-blues exceeds supply by a wide margin because of the Motor Industry Development Programme established by the Department of Trade and Industry to reward manufacturers for using local content. As a result of the local demand, suppliers set prices at import parity levels. Therefore, the Commission believes the merger would not cause the parties to obtain market power they don't already have. (Import parity pricing reflects a price level that cannot be increased without causing buyers to import rather than procure locally.)
The Commission concluded that because the majority of skins bought in South Africa are exported, the merger would not harm the consumer.
The Commission and the Competition Tribunal have considered various mergers that raised issues of vertical integration. The possible concerns raised by vertical mergers include:
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Raising rival costs by means of either input or customer foreclosure;
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Ability to promote co-ordinated conduct between competitors;
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Ability of a vertically integrated firm to evade price regulation.
In this transaction, vertical integration relates mainly to input foreclosure (or the ability to put competitors out of business) in the automotive tanning market. Because imports are an alternative to local wet-blues, however, the risk of input foreclosure is negated.
The merger will most likely lead to some retrenchments, however it is the Commission's view that those job losses (approximately 150) envisaged by the parties are not unreasonable. The Commission decided that the proposed loss of employment does not justify prohibiting the transaction. However, some of the affected trade unions (SAFATU and SACTWU) have signalled that they would like to address the Competition Tribunal more fully on this point during the Tribunal hearing.
Imposition of penalties shows how breaches of Competition Act have consequences
Imposition of penalties shows how breaches of Competition Act have consequences.
The Commission welcomed the Competition Tribunal's rulings in finding both Dorbyl and Edcon guilty of contravening the compulsory Competition Act merger notification requirements.
The Commission hopes that the guilty verdicts send a message to businesses that breaches of the Act will not be tolerated. The Commission sought to impose administrative penalties on Edcon and Dorbyl because they proceeded to implement mergers without the prior approval of the Commission as required by the Act. The maximum penalty allowed by the Act is 10% of a firm's turnover.
In the Edcon matter, the Tribunal agreed with the Commission's submission that the acquisition of RAG's debtor's book was the acquisition of an asset, giving Edcon control of part of that business, and therefore amounting to a merger about which the Commission should have been notified. However, the Tribunal found that Edcon's failure to notify was a procedural rather than substantive violation of the Act, and set the penalty at R250 000. Edcon could have been fined up to R85 552 610.
In the Dorbyl merger matter, the Tribunal issued a symbolic penalty to the amount of R1.00 because while Dorbyl was in breach of the law, their non-compliance was the result of a bona fide mistake. When Dorbyl realised that they had made a mistake they requested an advisory opinion on the notification from the Commission's Compliance Division and they subsequently notified the Commission of the merger, which was later approved.
The Commission was however not satisfied with the low fines. In its view, the Tribunal's decisions leave the door open for firms to weigh up the financial benefits of implementing transactions prior to notification as it appears that late filing with the Commission will not attract adequate penalties.
In terms of the Competition Act, the Commission cannot appeal the Tribunal's decisions, but it has vowed to continue vigorously prosecuting parties that implement merger transactions without notifying.
Coca-Cola / Appletiser merger approved unconditionally
The Commission evaluated the acquisition by The Coca-Cola Company of the Just Juice trademarks, intellectual property rights and formulae from SABMiller Finance B.V. as well as the Valpré trademarks, intellectual property rights and formulae from Appletiser South Africa (Proprietary) Limited.
The Commission received a number of complaints from industry participants.
The complaints were:
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That The Coca-Cola Company would acquire market power in the bottled water market;
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That the acquisition would increase barriers to entry and limit expansion opportunities for other players;
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That the transaction would have portfolio effects that would enable The Coca Cola Company to unduly strengthen its position in the so-called "new age" beverage market and;
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That the transaction would increase the ability of industry participants to co-ordinate activity in the bottled water market.
The Commission found that the transaction would not substantially prevent or lessen competition in the bottled water or fruit juice markets in South Africa. The Coca-Cola Company will, post merger, not be able to act independently from its customers and competitors in the bottled water and fruit juice markets. The Commission is of the view that the bottled water market is characterised by low barriers to entry. Either new entry into the market or the expansion of the activities of present players will counter any move by The Coca-Cola Company to increase prices above competitive levels. Furthermore, The Coca-Cola Company is a relatively small player in the fruit juice market where it faces significant competition from other players.
With respect to The Coca-Cola Company's distribution network, and the competitive advantage that it derives from it, the Commission is of the view that an efficient system accompanied by low barriers to entry in the relevant market is to the advantage of consumers in South Africa. The transaction will also not affect the distribution channels of the acquired products as, post merger, the status quo will be maintained. Furthermore, the transaction does not raise significant public interest concerns.
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