The global credit crunch and the recession that will follow will surely impact on the size and number of M&A deals in 2009, although there may well be more distress sales than usual, whether of entire businesses or non-core assets. There are also competition considerations that will influence whether certain deals will be permitted in South Africa or not. The Competition Commission and the Competition Tribunal are tasked with assessing notifiable mergers in terms of the Competition Act, No. 89 of 1998.
The depreciation of the Rand against major currencies will have shrunk some markets so that domestic competitors are no longer constrained by imported substitutes, because currency depreciation raises the price of imports. Accordingly, some deals might be rejected by the competition authorities because they lead to domestic dominance, unconstrained by imports from foreign competitors.
Also, the recession might cause the exit of key competitors from certain markets, which might reduce the chances that the authorities would allow further concentration by merger in those sectors.
Against these considerations, there are at least three reasons why the impending recession may lead to a more permissive stance towards M&A deals by the competition authorities.
First, falling sales and output volumes mean that mergers are more likely to result in verifiable efficiency gains, such as plant rationalisation, than if merging parties were to retain their production capacity, as they might under conditions of more robust economic growth. The competition authorities have in the past been persuaded to approve otherwise anticompetitive mergers that are nevertheless justified by valid efficiency claims.
Secondly, one of the factors listed in the Act that the authorities must take into consideration when reviewing mergers is the so-called failing firm defence. If the target firm would be likely to fail altogether in the absence of a proposed merger, then the authorities will be more inclined to approve it, even if it is somewhat anticompetitive. The reasoning is that prohibiting a merger with a troubled firm would lead to the exit of that firm from the market due to its bankruptcy, which would likely restrict competition at least as severely as if it were purchased by a competitor.
And finally, there are specific public interest considerations in South African merger review that come to the fore in troubled economic times. These relate to employment savings. Some mergers, in sectors especially affected by the recessionary conditions, will nevertheless preserve jobs that might otherwise be lost, in the absence of a proposed merger.
The South African competition law therefore seems to be flexible enough to lead to satisfactory, common sense outcomes in merger review, in economic conditions of both expansion and recession, without compromising on the promotion of competition.
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