Mergers and acquisitions are important for the efficient functioning of the economy because these allow firms to achieve efficiencies, such as economies of scale or scope, and to diversify risk across a range of activities. In practice, most mergers are competitively neutral and do not eliminate competition or harm consumers, competitors or suppliers.
However, in some cases mergers can harm customers, competitors or suppliers by altering the structure of markets and the incentives for firms to behave in a competitive manner. For this reason, the competition authorities analyse mergers and acquisitions to assess whether these are likely to substantially prevent or lessen competition in the affected market(s).
The ability of a merger to harm, or substantially prevent or lessen competition through unilateral effects occurs when a merger creates or enhances market power or facilitates its continued exercise. The purpose of merger review is to determine whether such effects are likely to occur that would result in harmful effects on the public. Those harmful effects can take many forms, including higher prices, slower innovation, lower quality, and reduced product variety. In some cases, a transaction's effects may take the form of reduced incentives to innovate, to cut prices, or to expand consumer choice through product variety.
Further to unilateral effects that may arise from mergers, in certain cases the impact on market structure may increase the opportunity for co-ordinated behaviour between competitors in a market and may raise the risks of the associated anti-competitive effects. Mergers that create or facilitate the exercise of unilateral or coordinated market power tend to harm competition and are generally blocked by the antitrust or competition authorities in the relevant jurisdictions.
South Africa’s competition authorities have borrowed from the Horizontal Merger Guidelines (the “Guidelines”) of the US Department of Justice Antitrust Division (“DOJ”) and the Federal Trade Commission (“FTC”) (the “Agencies”) in their approach to merger analysis in particular in adopting the Herfindahl-Hirschman Index (“HHI”) thresholds. The Guidelines uses the HHI as a tool with which to calculate concentration in a particular market. This is a formula whereby the sums of the squares of the individual percentage market share figures of the competitors in the market are calculated. In a perfect monopoly market (i.e. one competitor) a result of ten thousand will be obtained. This result will reduce as the number of competitors increase and their respective market shares diminish. Until recently, the Guidelines provide that certain mergers that would result in moderately concentrated industries with HHI thresholds between 1,000 and 1,800 "potentially raise significant competitive concerns".
On 19 August 2010, the Agencies issued revised Guidelines. The previous Guidelines had remained unchanged since 1992, aside from the addition of a section on the analysis of efficiencies in merger review in 1997. Some of the main changes to the Guidelines since they were last revised in 1997 include, inter alia the following:
- The Guidelines downplay the importance of market definition in horizontal merger analysis. This change is likely a reaction to recent decisions by several federal courts rejecting the market definitions proposed by the Agencies, including those in the Whole Foods/Wild Oats and Oracle/PeopleSoft merger challenges.
- Instead, the Guidelines now explicitly sets out numerous empirical and theoretical tools and evidence that can be used to assess the competitive effects of a transaction including, for example, merger simulation models, economic tests of “upward pricing pressure” the use of “natural experiments” and “critical loss analysis”.
- Further, the Guidelines explains that powerful buyers may constrain the ability of the merging parties to profitably increase prices, but that the presence of a powerful buyer alone will not lead the Agencies to presume an absence of adverse competitive effects.
- In addition, the Guidelines explain that mergers of competing buyers can potentially lead to a reduction in competition because of “monopsony power”.
- The Guidelines also addresses partial acquisitions, or transactions in which a buyer acquires a minority interest in a competing firm. Although such transactions may not eliminate competition between the parties, the Agencies will examine them much as they would a full merger if, for example, the transaction results in the buyer acquiring effective control or all or substantially all of the competing firm’s assets. The Agencies also may investigate such deals to determine, for example, whether the buyer (i) will have a reduced incentive to compete; (ii) will be able to influence the competitive conduct of the target firm; or (iii) will have access to non-public, competitively sensitive information from the competing firm.
- The Guidelines eliminated the “safe harbour” provision, contained in the 1992 Guidelines, which provided that harmful unilateral effects of a horizontal merger would not arise so long as the merged firm had a market share of below 35%.
- However, the HHI thresholds have been upwardly revised. The Guidelines state that the agencies will consider markets “unconcentrated” if, after the merger, they have a HHI below 1,500 (an increase from a threshold of 1,000). A market will be considered “highly concentrated” at a HHI of 2,500 or greater (an increase from 1,800). A merger producing (i) an increase of more than 200 HHI points and (ii) a post-merger HHI exceeding 2,500 “will be presumed to be likely to enhance market power”. The new thresholds, however, do not represent a loosening of horizontal merger review standards but, instead, conform the Guidelines to the thresholds that the agencies have most often used in practice.
As mentioned, the South African competition authorities have borrowed from 1992 Guidelines in their approach to merger analysis. In addition, the South African competition authorities work closely with their international counterparts in various forums such as the International Competition Network (“ICN”) and it is therefore likely that they will align their approach to merger analysis with that of the revised Guidelines. However, it remains to be seen whether they will also adopt some of the more debated provisions of the revised Guidelines, such as the increases in HHI standards, the elimination of the safe harbour thresholds, the downplay the importance of market definition in horizontal merger analysis and / or more emphasis on empirical tools to measure and predict anticompetitive effects.
After all, actual practice suggests that the South African Competition Commission (“the Commission”), being the investigative arm of the South African competition authorities, rarely challenges mergers where the combined market shares of the merging parties are below 35% on the basis of unilateral effects, illustrating that, in actual practice the Commission is already leaning more towards applying higher HHI thresholds.
However, in line with the revised provisions of the Guidelines, using purely structural tests to assess the potential competitive effects of mergers is, not in line with best practice, as competitive dynamics in markets are increasingly important in determining the likely effects of mergers on competition. A middle ground of more realistic structural
thresholds combined with an assessment of competitive dynamics may significantly enhance transparency to businesses wishing to merge in terms of the likely outcome and timing of their transactions.