Mergers and acquisitions (M&A) are vital ingredients for a well performing economic system. Through M&A, the better-managed firms take care of the weaker performers leading to better use of the economy’s scarce resources. The success of M&A will be measured in the returns on the capital (debt and equity capital) so risked. The shareholders and the managers acting for the acquiring companies must hope for returns above the required risk-adjusted returns set for them in the market place. If they succeed, they will be improving the economy (improving the relationship between inputs and outputs) and adding wealth for their shareholders. There is a clear public interest in successful M&A activity.
But any such agreement reached between the buyer and seller of a whole company (or part of it) has a further hurdle to clear. The government may decide that the planned merger should be disallowed in a different public interest or, if permitted, that it should be made subject to conditions that can make the takeover more expensive and the larger business less successful. Increasingly, this has become the practice of competition policy in SA, especially when the intended acquirer is a large foreign-owned company.
What has been demanded of the foreign acquirer, even when the intended merger is judged to increase, rather than reduce potential competition in the market place, can only be described as a shakedown exercised by the competition authorities. For example, the demands made of Walmart in its takeover of Massmart and, more recently, in similar demands made of AB Inbev in its takeover of SABMiller. These are unpredictably expensive interventions in business relationships that add to the cost and risks of M&A. They will discourage such attempted activity and the ordinarily welcome flows of financial and intellectual capital accompanying M&A initiated offshore. It is perhaps good politics, but very poor business practice that is unhelpful to economic growth.
Perhaps more damaging to the economy and to the owners of businesses are the now usual conditions for approval, which stipulate that employment be guaranteed at pre-merger levels. Such demands must make it harder to realise the cost savings that a merger might otherwise make possible. A competitive economy, actively competing for labour and capital, so as to improve returns on capital and the productivity of labour through M&A, is inconsistent with guaranteed employment. There is a public interest in employing labour most productively and in labour mobility – not in guaranteed employment that benefits a few private interests.
In recent rulings, the Competition Commission has extended its reach further to the boardroom, in effect instructing merger intending managers and owners how to run their operations. To approve the merger of Southern Sun Hotels with listed hotel-owning company Hospitality, it demanded that the latter be managed independently by its own executive team “.. that would not include anyone who is involved in management in any capacity at Southern Sun”. Thus the rights and responsibilities that come with ownership were truncated. It came to a similar recent ruling, for similar reasons, the presumed sharing of presumed confidential information, on African Rainbow Capital’s deal to buy 30% of the shares in ooba — a mortgage originator controlled by SA’s biggest estate agencies.
What the Commission seems unable to recognise is that competition of the kind that most effectively challenges established firms will come from innovation and the application of technology, not from current participants and current practice. A good example of this is the large current and future threat to the pricing and other power of hotel owners and operators in Cape Town that comes from Airbnb, which has a large and growing presence in the Cape Town market.
The competition authorities in SA are in danger of overreach, if not hubris. It would benefit from a better understanding of and more respect for dynamic market forces and be much less inclined to interfere with them. And so would the economy and its growth prospects.