Practitioner Breakfast

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Practitioner Breakfast

• Sandton Hilton
• 11 November 2005

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Introduction

• The purpose of todays breakfast is to give the
  Commission the opportunity to discuss with our
  practitioners practical ways to enhance merger
  filings and to get feedback from practitioners on
  experiences

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Topics of Discussion

• Evaluating employment effects of merger
  transactions information required for a proper
  analysis
• Filing or information requirements in vertical
  mergers
• Information requirements in property transactions
• How to qualify for fast-tracking

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Evaluating employment effects

• The Act requires an evaluation of the effect of a
  transaction on employment (and other public
  interest considerations)
• When the effect is significant the authorities
  can prohibit a transaction or approve it subject
  to conditions
• Recently the Commission and Tribunal have
  approved a number of matters with significant
  employment effects subject to behavioural
  conditions designed to alleviate the negative
  employment effects of transactions
• Examples

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What can practitioners do?

• Advise your clients early in the consultation
  process to consider remedies to the employment
  effects.
• Recent remedies have included
• Training programmes and funding
• First options at new job opportunities
• Relocation of employees to areas where jobs are
  available
• Moratoria on retrenchments for a set period
• Provide the Commission with thorough information
  early in the investigation

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What kind of information is required (1)?

• Current (pre-merger) levels of employment at both
  merging parties with a breakdown into four
  categories
• Unskilled
• Semi-skilled
• Skilled
• Highly skilled
• Natural attrition rate at firms of the merging
  parties

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What kind of information is required (2)?

• Anticipated job losses
• Worst-case scenario
• Other scenarios and the conditions that will
  inform outcomes
• Breakdown per job category
• Numbers
• Job descriptions of each category and affected
  positions
• Job grading of each affected category
• Average skill set
• Qualifications
• Mobility of affected employees per job category
• Alternative employment opportunities
• Expected period of unemployment

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What kind of information is required (3)?

• Impact of the merger on employees terms and
  conditions of employment
• Impact of the merger on a region
• Identify affected geographic regions or
  communities
• Discuss and quantify the indirect impact on
  employment
• Plans to mitigate the effects of employment
  losses
• Retrenchment packages
• Counseling
• Retraining or job reservation

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Special cases

• Failing firm arguments
• Absent the merger job losses would be even more
  significant
• The above requires a thorough analysis and the
  test may be similar to the failing firm test
• International transactions
• The acquiring firm has not considered the SA
  subsidiaries and cannot give an opinion on the
  likely effect of the transaction
• The Commission will consider a moratorium on
  retrenchments as a result of the merger for a one
  year period

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Questions on the Commissions approach to the
analysis of and information requirements of
employment effects of mergers
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Information requirements in vertical mergers
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The problem with investigating and analysing
vertical mergers

• The merger forms do not specifically speak to
  vertical mergers and as a result the Commission
  often receives poor, unworkable filings in
  vertical mergers
• Close to 20 of mergers notified require vertical
  analysis
• In most instances the Commission requires
  additional information from the parties in order
  to complete its investigations
• As practitioners you can assist the investigative
  process and decrease turnaround times by ensuring
  that adequate information is provided at the
  initial stage

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What is a vertical merger?

• A merger between firms
• in a vertical relationship (supplier-customer)
• involved in successive stages of production/
  distribution/ the supply chain/ functional markets

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Theories of harm in vertical mergers

• Raising rivals costs by means of foreclosure
• Input
• Customer
• Complete/ partial
• Facilitate collusion
• Evading price regulation

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Information required in vertical mergers

• Two relevant product and geographic market
  definitions (upstream and downstream)
• Market information for each of the two relevant
  product markets (market shares, competitors, etc)
• Relevant analysis of both markets in terms of
  S12A(2)

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Further information required in vertical mergers

• Contact details of both parties
• Customers
• Competitors
• Suppliers
• Details of actual sales or purchases between the
  upstream or downstream markets
• Relative contribution of inputs to downstream
  production costs
• Item 19

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Questions on the information requirements for
vertical mergers
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Property transactions

• Property transactions make up nearly 20 of the
  mergers notified to the Commission
• Adequate case precedent exists to inform market
  definition and information requirements
• Property transactions can be dealt with
  expeditiously when correct, relevant information
  is submitted to the Commission

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Information requirements in property transactions

• Relevant market definitions are based on the type
  of property, description of the property and
  geographic location (Commission practice and
  Tribunal precedent)

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Categories of property markets

• Types of properties are
• Office
• Industrial
• Retail
• Others (hotels, etc)

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Descriptions of types of properties (product
market)

• Office
• Grades P, A, B and C
• Industrial property
• Light and heavy
• Retail
• Regional, neighbourhood and community shopping
  centres and local convenience

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Geographic market definitions

• Properties compete in areas referred to as nodes
  (in accordance with SAPOA classification)
• SAPOA only gathers information on office space,
  but the nodal segmentation of the markets remains
  relevant for analysing other relevant product
  markets in property cases

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Conclusion on relevant markets in property cases

• Three elements (type, description and geographic
  node) should be present for proper market
  definition
• Examples Grade A office space in the
  Braamfontein node, or retail space in a regional
  shopping centre in the Cape Town CBD

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Market share information

• Market share information is usually based on
  gross lettable area (GLA)
• GLA is unfortunately not available for all types
  of properties in all nodes
• Alternative sources of information
• Agents
• Brokers

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Questions on property markets and information
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How to really qualify for fast-tracking

• The Commission has made an undertaking to
  finalise non-problematic, intermediate mergers
  within 20 days if certain conditions are met
• A significant number of the intermediate, phase 1
  mergers filed with the Commission do not qualify
  for fast-tracking
• This impacts on turnaround times (for the
  Commission and practitioners)

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To qualify for fast-tracking a notification
should meet all of the following requirements

• Intermediate merger
• Classified as a phase 1 investigation
• Jurisdiction is clear and uncontested
• Filings are complete and correct and no
  additional information is required by the
  Commission
• There are no significant public interest concerns
  arising from the proposed transaction
• The filing is be accompanied by comfort letters
  from the relevant trade unions.

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What is a phase 1 merger? Any one of the
following

• New entrant no overlap exists between the
  activities of the parties. Includes management
  buy-outs
• No geographic overlap exists between the
  activities of the parties.
• Where the parties are active in the same relevant
  market(s), but the market share(s) of the merged
  entity is/are 15 or less.

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What is a phase 1 merger? Any one of the
following

• Where the parties are active in the same relevant
  market(s) and the market share(s) of the merged
  entity in one or more of these relevant markets
  is/are above 15, but
• The post-acquisition HHI is below 1000 points.
• The post-merger HHI is between 1000 1800
  points, but the increase in the HHI is below 100
  points.
• The post-merger HHI is above 1800 points, but the
  increase in the HHI is less than 50 points.
• In the case of vertical transactions when the
  market share of the merged entity is 15 or below
  in upstream and downstream markets post merger

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How to ensure that your intermediate, phase 1
really qualifies for fast-tracking

• Where market definition is a possible dispute,
  provide complete motivations for your conclusions
  on market definition
• Provide market shares and competitive analyses
  for broad and narrow markets
• Encourage your clients to openly engage with the
  trade unions at an early stage
• Provide full customer and competitor lists for
  all markets
• Explore jurisdictional issues before notification

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Questions on fast tracking