South Africa: Efficiency Arguments In Favour Of Mergers And Acquisitions

Last Updated: 17 April 2000

American anti-trust officials while carefully scrutinising the merger between Exxon & Mobil had concerns that the merger would affect competition at almost every level in the petroleum industry.

In large mergers of this nature, companies often have to demonstrate some compelling efficiency argument in favour of the merger in order for it to obtain the necessary approval. In this article I propose to deal with some of the efficiency arguments and their respective merits.

The South African Competition Act of 1998 ("the new act"), provides that the Competition Commission must be notified about an intermediate or large merger. Although such notification only becomes compulsory when the new act comes into operation, parties to mergers should take cognisance of the recently published Competition Amendment Bill.

The Competition Amendment Bill published in March 1999 was designed to prevent mergers in contravention of the provisions of the new act being rushed through before the act came into effect. It provided that any merger regarded as an intermediate or large merger under the new act and that takes place between October 30 1998 and the date of implementation of the new act, will be deemed to be in contravention of the new act for a period of 12 months after the new act comes into operation, unless:

  • The transaction has been approved by the Competition Board in terms of the existing Maintenance and Promotion of Competition Act, 1979; or
  • The merger is notified to the Competition Commission within 3 months after the date on which the new act comes into operation.

The practical affect of the Competition Amendment Bill is that merger notification became compulsory as of 30 October 1998 to the extent that a merger is regarded as a large or intermediate merger under the new act.

In view of the requirement of merger notification and the attendant investigation by the competition authorities as to whether a merger is likely to substantially prevent or lessen competition in the relevant market, the question arises as to what efficiency arguments can be put forward by companies to justify mergers which are potentially anti-competitive.

In terms of the new act, the competition authorities can condone an anti-competitive merger, provided there are some compelling technological or efficiency gains which would be greater than or off-set the effects of any lessening of competition.

It is evident from the decision of the Competition Board in the Sasol/AECI matter, that efficiency gains are judged on their "overall welfare enhancing attributes" and not on "purely enterprise-centric pecuniary or managerial economies".

Three basic types of efficiency arguments are often put forward by companies to justify mergers which have anti-competitive implications.

The first efficiency defence is that a merger of the firms will result in cost savings. Cost savings can take several forms. Two established categories are "pecuniary" and "real economies". Pecuniary savings usually take the form of monetary savings from buying goods or services more cheaply because the larger size resulting from the merger will give the merged entity bargaining leverage relative to its suppliers.

"Real economies" on the other hand generally refers to economies or scale of some kind, such as revamping production lines and eliminating duplication. Competition authorities generally do not react positively to purely "pecuniary" cost saving efficiencies, which are often perceived to be "ephemeral" and "exaggerated". Indeed Eleanor Fox makes the point that "large costs attend large mergers", which when balanced against the pecuniary cost savings tend to undermine the validity of the cost savings argument. "Real economies" tend to be viewed far more favourably, provided there is some hard factual evidence to substantiate the claims.

The second category of efficiency defences are what might be termed technological or innovation gains. Improved efficiency in producing the particular goods or services through technical innovation and advances is a credible justification for large mergers.

If it can be demonstrated that technical initiatives as a result of a merger would result in new products being produced or existing products being produced more cheaply, to the benefit of consumers, this is likely to elicit a favourable response from the competition authorities.

Once again, the benefits of technological innovation have to be tangible and firms cannot simply assert that research and development will be greatly enhanced under the merged entity, as this has all the hallmarks of a self-serving justification.

The third category of an efficiency defence to an anti-competitive merger relates to reducing management and labour inefficiencies. Often the merger of two large firms results in a management reshuffle, designed to replace inefficient management with a more productive and efficient one. Changes in management are also inevitably accompanied by restructuring of the relevant labour force, usually by way of retrenchments. Indeed large mergers have become synonymous with equally large lay-offs.

While restructuring of management and labour can result in a more efficient organisational structure and a leaner operation, it is unlikely that this will be met with great approbation by the competition authorities. If a merger is likely to have anti-competitive consequences and also result in wide scale lay-offs it is unlikely to be approved.

In conclusion it is apparent that the greater the extent to which competition is lessened as a result of a merger or acquisition, the more manifest and substantial the efficiency gains must be.

It is incumbent on the parties to the merger to demonstrate that tangible efficiency gains will accrue to consumers as opposed to purely enhancing the interests of the companies themselves.

It is recommended that parties planning a merger should carefully weigh up the potential efficiency benefits of the transaction, particularly if they have reason to believe that the merger will be anti-competitive.

A credible efficiencies defence, while high-lighting the benefits to the relevant parties concerned, must demonstrate fundamental long-term benefits for society as a whole, including labour, the investment community and consumers in particular.

ANTHONY NORTON

For further information, please contact us.

Webber Wentzel Bowens

The material contained in this article is provided for general information purposes only and does not constitute legal or other professional advice. We accept no responsibility for any loss or damage, which may arise from reliance on information contained in this article.

© Copyright Webber Wentzel Bowens 1999. All Rights reserved.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions