COMPETITION AUTHORITY

Innocent Molalapata | Wednesday October 17, 2012 00:00

When assessing a merger, the Competition Authority (CA) applies standard competition tests regardless of whether a merger happens between non-competing businesses that are vertically integrated (vertical merger),  businesses operating in the same market as actual competitors (horizontal merger) or between businesses with no functional link or economic relationship.

For example, a tyre manufacturer acquiring an IT company (conglomerate merger). These competition tests determine whether the merger or acquisition would be likely to prevent or lessen competition and whether the merger would result in the company or enterprise possessing a larger share of the market as compared to its competitors (what economists refer to as market dominance).

Given that Botswana is a developing country faced with increasing high levels of unemployment, the CA in its assessment also considers the public interest concerns or benefits that a merger can bring. Examples of public interest benefits that may arise from a merger would include; employment creation, export promotion and industrial growth amongst others. Therefore, the consideration is basically to guard against approving mergers that can be very harmful to the public in terms of, for example, loss of jobs or rejecting mergers that can create more employment, improve exports and contribute to industrial growth, amongst others.

Rivalry between firms (competition) does not take place in a vacuum, so, for the CA to effectively assess the effects of a merger or acquisition, the first step is to determine the market or markets in which the companies that want to merge are involved in, that is, the relevant market. This relevant market will encompass all the products or services that the companies that want to merge produce or sell, and also the geographic area where the sales and production would take place.  The purpose of determining the relevant market is to establish the extent to which the parties actually compete with each other. Once the relevant market is defined, the CA identifies the number and size of the firms involved in selling or producing the same products as the merging parties. This process gives a picture of the market both before (pre-merger) and after the merger (post-merger).

This also gives the CA an indication of whether an approval of the merger would result in the reduction of competition in that particular market. For instance, the presence of only a few firms in the market will give an indication of limited competition in that particular market. 

Assuming the assessment reveals that the merger is likely to result in a reduction in competition, the CA would then have to determine whether there are any mitigating factors that would prevent the merged entity from behaving in an 'un-competitive' way that would be detrimental of consumers. These factors include, amongst others:

Firstly, establishing the hindrances/barriers a firm faces in trying to enter a market or industry (barriers to entry) - such as government regulation, or financial requirements. If it can be shown that it would be possible for a new entrant to establish itself within a short period of time (1 to 3 years), these barriers would not be regarded as significant and this would normally work in favour of the merger;

Secondly, a merger can result in an effective competitor being removed from the market, for example, if Gel (Pty) Ltd and Ken (Pty) Ltd are very close competitors, and one day Gel (Pty) decides to buy Ken (Pty) Ltd, an effective competitor (Ken) will be lost from the market, thus reducing competition in the market. When an effective competitor such as Ken is lost as a result of a merger, that is something that might work against the approval of the merger; 

Thirdly, the competition authorities are ultimately concerned with the potential impact of a merger on competition in domestic markets. If imports constitute a permanent and significant part of supply in the domestic market, they would be considered in the assessment to establish whether they constrain the ability of domestic suppliers from increasing price. Accordingly, if it can be shown that it is easy to import, and that imports are in fact a significant and permanent part of domestic market, a merger may be approved even if the parties to the merger are the only local producers of a product;

Fourthly, the negotiating power and strength of customers to limit the ability of a merged company from raising prices or supplying low quality goods is also one of the factors considered during the assessment. If the analysis reveals that customers have strong bargaining power in their dealings with their suppliers, this may support an approval of the merger; and

Last but not least, a vast presence of goods that are similar in nature e.g. coffee and tea (something referred to as substitutable products in economics) will afford customers an opportunity to switch among such products and therefore that could be contribute positively towards the approval of a merger.

Nevertheless, no specific weight is given to the factors upon which the CA relies on when it considers whether there are any mitigating factors that could constrain the merged firm from behaving in an un-competitive way. In other words, when evaluating a merger, the factors are all taken into consideration, and a delicate balancing act is performed, the outcome of which is determined, for the most part, by the specific facts of each case. 

In addition, over and above the above-mentioned factors, the CA may also consider any factor that  has a bearing on public interest. In other words, if the CA finds the public interest to outweigh the competition effects described above, that would be taken into consideration when making a determination on a merger. 

Innocent Molalapata is the Manager: Mergers and Monopolies at the Competition Authority.For feedback please contact gideon.nkala@competitionauthority.co.bw