To reject a merger or not
Mergers and acquisitions are taking place every day. This is healthy for the world economy. Mergers and acquisitions are crucial for the efficient functioning of the market. They allow firms to achieve efficiencies, such as economies of scale, economies of scope and diversify risk across a range of activities. They also provide a mechanism for resuscitating underperforming firms.
In Malawi, the situation is no different. The past five years have seen a rising number of mergers in various industries ranging from insurance, security, banking, telecommunications and agriculture, among others.
The increase has provoked a heated discourse on the implications of these mergers to the country’s economy and, therefore, the role of regulatory bodies such as the Competition and Fair Trading Commission (CFTC).
The Competition and Fair Trading Act (CFTA) gives powers to CFTC to assess the effect of mergers and acquisitions in order to regulate them. In assessing mergers, the CFTC’s primary interest is investigating whether or not, the proposed transaction would jeopardise competition in the relevant market.
The assessment of the effect of a merger on competition focuses on whether the transaction will alter the market structure by reducing the number of market players or will lead to creation of a market environment that incentivises competitors to engage in anti-competitive conducts. While mergers can impede competition, the majority of mergers do not have negative effect on competition. For example, according to the 2015 European Commission report on competition policy, out of 318 merger cases that were considered by the EU Competition Commission, only 20 were found to raise competition concerns and were cleared subject to commitments by the parties and none was rejected.
This goes to show that most mergers are not anti-competitive. Thus, in reviewing mergers, the CFTC is conscious to this fact and, therefore, considers benefits that a merger may bring to the economy in addition to assessing the anti-competitive effects.
Depending on the outcome of its assessment, the CFTC may unconditionally approve a merger transaction; or approve with conditions (remedies) or totally reject it. Rejection of a merger is a last resort decision and is opted for only when there are no feasible structural or behaviour remedies to address the anti-competition effects.
Based on guiding principles issued by the International Competition Network (ICN), before imposing remedies, the commission must be satisfied that the remedy is necessary and tailor-made to address the likely harm. These remedies may be structural such as sale of a business, assets or other rights such as Intellectual Property Rights. They may also be behavioural such as pricing and supply obligations.
Since the inception of the CFTC, there have been very few mergers that have been found to be anti-competitive. Most of the mergers that have been considered by the CFTC have either been between a non-resident party and a resident party or between resident parties triggered by underperformance of the target firm. Such mergers are less likely to be found to alter market structure and other parameters of competition. However, the fact that there is likelihood that such mergers may negatively affect competition, they still need to be reviewed by the CFTC.
As can be seen from the foregoing, the objective of reviewing mergers is not to frustrate the transaction, but rather ensure that post-merger competition is sustained and consumer welfare is safeguarded. The CFTC can only determine the likely effect of a merger transaction upon conducting an assessment as provided for under sections 37 and 38 of the Competition and Fair Trading Act. It is for this reason that the CFTC encourages parties to merger transactions to notify the commission before consummating the merger. n
