Competion authority

Magdeline Gabaraane | Wednesday October 10, 2012 00:00

Mergers and acquisitions transactions are after all business transactions that are geared towards enhancing the operational and financial efficiency of companies concerned, and consequently services offered to consumers. Mergers and acquisitions basically take place when two or more independent companies combine their businesses.  The process by which a merger and acquisition takes place can either be through purchasing/leasing of shares or assets or any other form of combination that might be deemed appropriate.  In an ideal market economy these types of transactions are encouraged as they are deemed to bring about efficiencies for the businesses, which should ideally translate into better service offerings for the consumers.  However, we  do not live in an ideal world and merger regulation is thus necessary to ensure that markets function optimally.

The regulation of mergers and acquisitions is thus an attempt to prevent the development of market structures that may enhance the ability of firms to abuse their market power, to the detriment of consumers.  Take for instance a merger of businesses operating in the same market as actual competitors - horizontal mergers.  In such an instance, the coming together of these businesses will result in a removal of an effective competitor in that market in which they operate.This may give rise to serious competition concerns because the removal of a competitor and thus the reduction of competitors in the market increases the market share of the new merged company and market concentration, resulting in a reduction of customer choice.  In the absence of any form of regulatory mechanisms that ensure that the new merged company does not abuse its increased market power, such a transaction may have negative consequences on consumer welfare and the economy.  In addition, in a market where there are already few players (what economists call oligopoly) any further reduction in the number of players on account of the merger may facilitate the ability of the few remaining firms to collude - again to the detriment of the consumer.  As a result, competition authorities are usually concerned that mergers of this nature will lead to a decline in service levels and a rise in prices, often referred to as co-ordinated effects of a merger.

This above example does not mean mergers and acquisitions do not raise competition concerns when they take place between non-competing companies.  A merger may take place between vertically integrated companies, such as, a manufacturer and its distributor.  There is a lot of debate in economic literature on the competitive effects of these types of mergers. Some argue that mergers between vertically integrated companies give rise to little or no competition concerns and that in most cases the efficiencies that arise from the merger outweigh any anti-competitive effects.

However, the counter view and primary concern with these types of vertical mergers relates to their potential to result in foreclosure, post-merger. This is a situation where the upstream business sources its inputs and other supplies exclusively from the down- stream business it has acquired or merged with - while in the past it may have diversified its input procurement thus facilitating competition. In such a situation competition may become significantly reduced as other competing suppliers cannot have access to the customer base, resulting in serious competition concerns.  It is for this reason that the Botswana Competition Act sees the need to regulate this particular type of merger.  

Other types of mergers that are neither vertical nor horizontal in nature are regarded as conglomerate mergers and these typically occur between businesses with no functional link or economic relationship.  For instance, a transport company acquiring an insurance company.  These types of mergers generally attract the least attention from competition authorities.  The area of concern when regulating these mergers may be regarding the scope and scale of goods and services that the merged company will have post transaction and their extent of complementarity.  Imagine a merger of this type taking place where one of the companies has considerable market power so as to facilitate tying or bundling of the services it offers. Tying describes a situation where a product is sold on condition that you purchase another product from the same seller. Such a conduct could under certain circumstances eliminate a sufficient number of competitors and capacity from the market and hence needs to be regulated.

In a nutshell, irrespective of whether a merger is vertical, horizontal or conglomerate, the Competition Authority must determine whether the merger or acquisition is likely to substantially prevent or lessen competition in a market.  As well as ascertain the likelihood of the merger resulting in the company acquiring a dominant position in the market, which would need to be assessed for potential for abuse. 

Merger regulation by its nature provides for a regime where the effect of a merger is assessed prior to its implementation in an attempt to curb any negative consequences that may arise thereof.  

*Magdeline Gabaraane is the director of Mergers and Monopolies at the Competition Authority.For feedback send your comments and inquiries to gideon.nkala@competitionauthority.co.bw