MERGERS AND ACQUISITION Flashcards
- mergers definition
- why control?
- 3 types of mergers
- 3 categories of mergers envisioned
1.S. 41
merger occurs when one or more undertakings directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another undertaking.
The new entity created must be distinctively different: even needing registration afresh. It also involves giving it equity sale.
It’s a creation of the law: the criteria to determine it is in the definition.
- Why is it control: the net effect that may stifle competition or give one entity dominant position and abuse of it.
- horizontal, vertical and conglomerate
- three categories of mergers now exist:
- mergers requiring a comprehensive/ full merger notification;
- mergers requiring an exclusion application; and
- mergers not requiring any notification.
8 ways in which merger may be acquired
A. 41 (2)
(a) the purchase or lease of shares, acquisition of an interest, or purchase
of assets of the other undertaking in question;
(b) the acquisition of a controlling interest in a section of the business
of an undertaking capable of itself being operated independently
whether or not the business in question is carried on by a company;
(c) the acquisition of an undertaking under receivership by another
undertaking either situated inside or outside Kenya;
(d) acquiring by whatever means the controlling interest in a foreign
undertaking that has got a controlling interest in a subsidiary in Kenya;
(e) in the case of a conglomerate undertaking, acquiring the controlling
interest of another undertaking or a section of the undertaking being
acquired capable of being operated independently;
(f)
vertical integration;
(g) exchange of shares between or among undertakings which result in
substantial change in ownership structure through whatever strategy
or means adopted by the concerned undertakings; or
(h) amalgamation, takeover or any other combination with the other
undertaking.
notifiable and non-notifiable mergers
All proposed mergers within the Kenyan economy require approval by the Authority pursuant to Section 42(2) of the Act
The Merger Threshold Guidelines provide the thresholds for merger notifications. In particular;
i. the Authority takes into consideration the combined turnover or assets of parties whichever is higher in Kenya for the preceding year;
ii. a merger must be notified to the Authority where the combined value of assets/turnover is be more than KES 1 billion and that of the target above KES 500 million;
iii. notwithstanding (ii) above, any merger where the acquirer has assets/turnover above KES 10 billion and the parties are in the same line of business or have a vertical relationship is notifiable; and
iv. mergers that meet the thresholds for notification to the COMESA Competition Commission are not notifiable to the Authority.
non-notifiable:
Certain types of transactions may satisfy the definition of merger as defined under Section 41(1) of the Act. However, the Authority considers that having regard to the object of the Act which is to, inter alia, enhance the welfare of the people of Kenya and to protect
effective competition in markets, pursuant to Section 3 of the Act, the following types of transactions, though they may otherwise satisfy the definition of a merger within the meaning of Section 41(1) may be considered for exclusion from the provisions of Part IV and
are not subject to mandatory notification:
First Leg - the parties’ combined turnover or assets in Kenya is equal to or greater than KES 1bn (approx. USD 10m) and the target’s turnover or assets in Kenya exceeds KES 500m,
Second Leg - the acquirer’s turnover or assets in Kenya exceeds KES 10bn (approx. USD 100m) and the parties are in the same market or can be vertically integrated and the transaction does not meet the COMESA thresholds,
Third Leg - if the transaction is in the carbon-based mineral sector and the value of the reserves, the rights and the associated assets to be held as a result of the transaction exceed KES 10bn, or
Fourth Leg - the parties operate in COMESA, the combined turnover or value of assets does not exceed KES 500m and two-thirds or more of their turnover or value of assets is generated or located in Kenya.
NB: no need to notify - test
- taking place wholly or entirely outside of Kenya which have no local connection;
-where the combined turnover or assets (whichever is higher) of the merging parties in Kenya does not exceed KES 500 million (USD 5 million); or
- where the COMESA Competition Commission Merger Notification Thresholds are met, and at least two-thirds of the turnover or assets (whichever is higher) is not generated or located in Kenya.
NO BLOCK EXEMPTION FOR MERGERS!
IF YOU ARE UNSURE OF WHETHER TO NOTIFY OR NOT NOTIFY AUTHORITY, ASK FOR AO FROM CAK!
What does the Authority consider in determining a proposed merger?
2 tests (C - M/MP/MS or MC/ U.EFFECT/MP/BE-E/
the relevant market in which the parties to a merger operate and conducts two tests i.e. the competition and public interest test.
- The competition test
The competition test assesses whether the merger is likely to lead to substantial lessening of competition. To answer this question, the Authority looks at an increment to market share as a result of the merger or whether as a result of the merger a firm is likely to acquire, increase or preserve its dominance or is likely to acquire a monopoly position. Firms are likely to use their dominance or monopoly to harm their competitors, consumers and suppliers.
A. relevant market
- The first step is to identify and define relevant market(s) of goods and services produced by the undertakings parties to the merger. If the goods/services of the merging undertakings are found to be in more than one market (multiple overlaps), each of the markets are
examined separately because the state of competition might vary significantly between them.
- The relevant product market comprises all those goods and or services that consumers regard as reasonably interchangeable or substitutable by reason of the goods/services characteristics, prices (using the SSNIP test) and intended use.
- The relevant geographic market comprises the area in which the undertakings concerned are involved in the supply and demand of goods or services under conditions of competition that are sufficiently homogenous and which can be distinguished from neighbouring areas because such conditions of competition are appreciably different in
those areas.
B: market participant
The Authority identifies major suppliers/buyers by name, both local and external. If there are numerous small suppliers/buyers they are grouped appropriately.
C. Measurement of MS or MC
Market concentration can be measured using such data as sales revenue, quantity of goods/services sold or capacity of the suppliers. The measures the Authority uses depend on the facts of the case and the availability of information.
The Herfindahl-Hirschman Index (HHI): this is a measure of market
concentration that takes account of the differences in the sizes of market participants, as well as their number. It is not the ultimate test on market concentration and is used by the Authority as an indicator of market concentration levels.
D. unilaterial effect
With respect to unilateral effects, the Authority will consider the potential of the merger to cause (i) loss of existing competition (including import competition), (ii) loss of potential competition, and (iii) potential vertical effects. Not all of the factors need to be present for
unilateral effects to be considered likely. Nor should this be considered an exhaustive list.
E: Market power to a seller is the ability to profitably maintain prices above competitive levels for a significant period of time. In some circumstances, a sole seller (a “monopolist”) of a product with no good substitutes can maintain a selling price that is above the level that
would prevail if the market were competitive. Similarly, in some circumstances, where only a few undertakings account for most of the sales of a product, those undertakings can exercise market power like a monopolist, by either explicitly or implicitly coordinating their
actions. Circumstances also may permit a single undertaking, not a monopolist, to exercise market power through unilateral or non-coordinated conduct, the success of which does not rely on the concurrence of other undertakings in the market or on coordinated responses by those undertakings.
F. barriers to entry and exit: natural v strategic v regulatory barriers
For a market to remain competitive, it must be possible for new undertakings to enter, and for existing ones to expand or to leave. If there are barriers that either prevent entry or delay it considerably, or that which makes it costly to enter the market, the existing undertakings might be able to raise prices above the competitive level.
NB: The Authority recognises that the competition test encompasses both the dominance test and the prevention or lessening of competition test. The Authority will apply the dominance test within the analytical framework of the substantial prevention or lessening of competition test. This will entail assessing the unilateral effects of a merger which is akin to assessing whether the merger will create or strengthen a dominant position held by one or more undertakings in a market in Kenya or a substantial part of Kenya. The market share threshold for assessing dominance will be consistent with the definition of dominance under Section 23 of the Act.
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2. Public interest test
The public interest test complements other government policies by looking at how a merger is likely to affect employment, ability of small firms to compete or gain access to markets, ability of national firms to compete in international markets and ability of firms to innovate or be more efficient.
PI factors: 3 of them
- job losses and efficiencies
- FDI: The Authority considers that the impact of foreign direct investment can create certain implications for public interest factors in merger review. Some of the more specific factors the Authority will consider may include whether a merger involving a foreign company
would significantly switch its procurement of goods and services from the local market to imports that will detrimentally affect the ability of domestic suppliers to compete in the market.
- international or regional competitiveness: he Authority will weigh any losses to potential competition against interests directed at
maintaining the presence of a market in any region or part of Kenya. Therefore, while a merger may give rise to anticompetitive effects, the Authority may approve an anticompetitive merger where it is demonstrated that there would be adverse effects on the regional competitiveness of the undertaking if the merger is not approved.
what the CAK considers on whether it will grant, deny or approved with conditions?
A.46(1)
(a) the extent to which the proposed merger would be likely to prevent orlessen competition or to restrict trade or the provision of any service
or to endanger the continuity of supplies or services;
(b) the extent to which the proposed merger would be likely to result in
any undertaking, including an undertaking not involved as a party in
the proposed merger, acquiring a dominant position in a market or
strengthening a dominant position in a market;
(c) the extent to which the proposed merger would be likely to result in
benefit to the public which would outweigh any detriment which would
be likely to result from any undertaking, including an undertaking not
involved as a party in the proposed merger, acquiring a dominant
position in a market or strengthening a dominant position in a market;
(d) the extent to which the proposed merger would be likely to affect a
particular industrial sector or region;
(e) the extent to which the proposed merger would be likely to affect
employment;
(f)the extent to which the proposed merger would be likely to affect the
ability of small undertakings to gain access to or to be competitive in
any market;
(g) the extent to which the proposed merger would be likely to affect the ability of national industries to compete in international markets;
(h) any benefits likely to be derived from the proposed merger
relating to research and development, technical efficiency, increased
production, efficient distribution of goods or provision of services and
access to markets.
remedies - 2 types
- structural remedies
The Authority considers that a structural remedy may be appropriate to address any changes to market structure that will follow as from the substantial lessening of competition in the post-merger market. If this type of remedial approach is employed by the Authority, in prescribing structural conditions, the Authority may impose any combination, not limited to, the following requirements on the merging undertakings - Behavioural remedies
They will be used to curtail the potential for the merged undertaking to behave anti-competitively in the post-merger market. If a structural remedy is not commercially practical or not appropriate in the case at hand or cannot be accomplished
within a specified time, the Authority may employ a behavioural remedy. Behavioural remedies are considered by the Authority to also be enabling remedies which allow effective competition to be preserved in the post-merger market.
what mergers with foreign companies?
S. 6:
The Authority considers that a structural remedy may be appropriate to address any changes to market structure that will follow as from the substantial lessening of competition in the post-merger market. If this type of remedial approach is employed by the Authority, in prescribing structural conditions, the Authority may impose any combination, not limited to, the following requirements on the merging undertakings
the statutory period for filing and verdict?
The Competition Authority is required to make a determination on an application to merge within 60 days after the date on which it receives the notification.
However, within 30 days of the receipt of the notification to merge, the Authority is entitled to request further information in writing from one of the parties involved, in which case the Competition Authority would be required to make a determination within 60 days after the date it receives the additional information requested.
In some instances the Competition Authority may allow the parties to make oral representations as a result of which the Competition Authority would be required to make its determination within 30 days after the date the hearing conference is concluded.
In addition, the Competition Authority has the power to extend any of the above periods due to the complexity of the issues involved, as long as any such extension is done before that period’s expiry and is in writing.
The extension must not exceed 60 days.
COMESA?
since Kenya is a member,
if 2 firms from 2 countries in this region merge, they must inform
it has its own guidelines. Thus,
Aside from the requirement that a transaction constitutes a merger for purposes of the Regulations, the Regulations also require that ‘both the acquiring firm and target firm or either the acquiring firm or target firm operate in two or more Member States’ (i.e. the Regional Dimension Test), and that the financial thresholds for mandatory notification be met (i.e. the Thresholds Test), for mandatory merger notification obligations to apply.
COMESA ARE SUPERIOR TO THE GUIDELINES IN KENYA!!! - check the exclusionary 4 part test!
must apply for exclusion if:
In terms of additional thresholds, the Rules set out that parties must apply for exclusion from the CAK where either of the following thresholds are satisfied:
- the parties’ combined turnover or assets in Kenya is between KES 500m and KES 1bn, or
- all transactions involving firms engaged in prospecting in the carbon-based mineral sector (irrespective of asset value).
The Rules codify the existing practice that the CAK must respond to an application for exclusion within 14 days.
3 CASES ON MERGERS
- Acquisition of chevron kenya by total kenya
- Total kenya applied for merger with chevron kenya ltd
Relevant market:
- Product market was defined as importation and distribution of petroleum products.
- Geographic market was denied as national but further broken down into major roads in the whole country.
Analysis:
- The market with 29 players was found to be highly concentrated where five multination controlled 84.07%
- Post-merger CR5 was 87.41%
- Pre-merger HHI was 1627.36 and a post-merger HHI of 2069.485
- There exist high entry barriers and the only credible mode of entry can be through acquisition of existing retail network. .
Assets with competition concerns were:
- Retail outlets
- Intoplanes facilities at airports
- Loading arms
- Depots
Conclusion: if approved the merger would create competition concerns
Recommendations: the commission therefore recommended that the acquisition be approved on condition that some of the chevron’s retails outlets, etc be sold to other interested buyers. - Merger between spinkit dairy ltd and brookside dairy ltd
Relevant market:
- Product market was defined as processed milk products while geographical market was national.
- Brookside Dairy intended to acquire 100% of the issued share capital of SpinKnit Dairy Ltd
Analysis:
- Many small players with consumers exhibit loyalty to these regional dairies. There is however, one large government parastatal KCC with a market share of 3% which is also the sole producer of powdered milk
- Risk of manipulation of domestic prices in terms of collusion to fix prices is non existant because KCC is a government parastatal.
- Entry barriers are fairly low, and it Is therefore difficult for the resultant firm to abuse its position in the long run
- The transaction was expected to increase job opportunities both directly and indirectly.
- The two firms intended to combine resources to set up a milk drying plant which would be expensive for either of the firms.
Conclusion
- The proposed transaction would boost export potential.
- This consolidation would equip Kenyan firms to compete with imports.
- It would also enhance competition and efficiency.
- The resultant firm would be large enough to compete with market leader (KCC) challenging its monopoly in processing powdered milk.
Recommendation:
- The Commission recommended that the transaction be approved unconditionally
