Thrashing out the new merger thresholds
Small, intermediate and large
With effect from 1st April 2009, the Department of Trade and Industry has revised the merger thresholds for the first time since 2001. Mergers are classified in South Africa as small, intermediate or large. Intermediate and large mergers must be notified to the competition authorities for review, but not so small mergers, which are presumed not to lead to a substantial prevention or lessening of competition. The Competition Commission does however have the discretion to require the notification of a small merger, within six months of the deal being concluded, if it takes a view that the merger was potentially anti-competitive. Therefore, if the parties to a small merger think it might be anti-competitive, they should notify it in advance for review, rather than face the possibility that it might have to be unscrambled later.
The new thresholds
An intermediate merger is one in which the target firm has a turnover or asset value of R80m or more, and in which any combination of the acquiring firm’s assets or turnover, and the target firm’s assets or turnover, exceeds R560m. These thresholds have been increased from R30m and R200m respectively. The revised thresholds for large mergers are now R190m for the target firm (up from R100m) and R6,6bn for the combined figure (previously R3,5bn).
Filing fees are also up, to R100000 for an intermediate merger (from R75000) and to R350000 for a larger merger (from R250000).
A real increase in thresholds and a real decrease in fees
The rate of increase in these various thresholds and fees ranges from 33% to 167%. Inflation in South Africa, as measured by the increase in the consumer price index (CPI) between 2001 and 2008, was 51%. The filing fees have increased by 33% (intermediate mergers) and 40% (large mergers), but the merger thresholds have risen by multiples of the inflation rate. The target and combined thresholds for intermediate mergers have risen by 167% and 180% respectively, and the corresponding threshold increases for large mergers are 90% and 89%.
Filing fees have therefore fallen in real terms for mergers that are still notifiable. The fee for intermediate mergers is down almost 12% in real terms, and the fee for large mergers is down about 7% in real terms.
Filing fees have fallen even further for mergers that are now classified as intermediate rather than large, and fees have of course fallen to zero for mergers that were previously classified as intermediate but which are now small. For example, a merger involving a target firm with turnover of R30m was an intermediate merger until 31st March, but as from 1st April, even a merger involving a target with turnover of R79m is small. In real terms, the target threshold has risen from R30m to R53m. The authorities have clearly decided they are dealing with too many mergers that have no effect on competition whatsoever.
False negatives and false positives
The problem is that not all industries are created equal. To illustrate: an industry might have many equally-sized large competitors, so many that a merger between two of them will not affect competition at all; but so large that any merger in the industry will be notifiable. This is the “false positive”: the threshold catches the transaction but shouldn’t. Another industry might have three very small competitors, so small that a merger between any two will not be notifiable, and yet a three-to-two merger is generally very bad for competition. This is a “false negative”: the merger falls under the threshold but it shouldn’t. Certainly, merger thresholds are an imperfect tool for selecting mergers for review by the authorities.
Increased vigilance over small mergers will mean uncertainty
Merger analysts at the Competition Commission might be tempted to require more notifications of small mergers than before. That would frustrate the main purpose of the thresholds: certainty to businesses about when they need to notify their transactions. It would be unfortunate if a long-overdue increase in the merger thresholds creates a bigger grey area of uncertainty between the truly small merger and the genuinely notifiable, intermediate one.
The Commission and the Tribunal
The Competition Commission investigates all mergers, and decides on intermediate mergers, but merely makes its recommendations on large mergers to the Competition Tribunal, which has the final say. With the thresholds for large mergers having risen at almost double the rate of inflation since 2001, many deals will no longer go to the Tribunal for determination. This might lead to more appeals and reviews of Commission decisions by parties who want the greater expertise of the Tribunal to be exercised.
The effect of the global slowdown
At the very moment when the merger thresholds have been raised so dramatically, the global economy has fallen into a severe recession. The effect is that turnover and asset values will fall in the medium term, as economic activity declines. This magnifies the extent to which the merger thresholds have risen.
The new thresholds are nevertheless well-judged
Despite the danger of false negatives, and the timing that coincides with a global recession, the authorities seem to have judged the new fees and thresholds rather well. The fees are down in real terms, and if merger review is in the public interest, then at least part of the cost is an externality, for which the merging parties themselves should not have to pay.
Granted, the thresholds over-compensate for inflation, but given the very long intervals between revisions, the average turnover and asset figures of transactions will soon catch up. Something to consider in future would be an annual, US-style indexation of the thresholds to the CPI.
