Abstract
Mergers and acquisitions (M&As) are integral to the global financial landscape, with worldwide M&A activity averaging around 1 trillion US dollars over eight consecutive quarters from the third quarter in 2020 to the second quarter in 2022. In sub-Saharan Africa, M&A transactions reached 21 billion US dollars in 2022, notably lower than the record 87,2 billion US dollars in 2021. South Africa and Egypt remain the most active target countries, followed by Nigeria and Kenya. While academic research has traditionally focused on competition-related aspects of mergers, there has been limited exploration of public interest considerations (PICs) in South African M&As. This study aims to fill this gap by analysing recent cases involving public interest considerations imposed on mergers and acquisitions in South Africa, by shedding light on how they influence merger approvals and corporate behaviour. The South African Competition Act of 1998 grants the Competition Commission and Competition Tribunal jurisdiction over all M&A activities in the country. Besides competition-related factors, the Act explicitly introduces public interest considerations, which include socio-economic development (SED) through broad-based black economic empowerment (BBBEE), small and medium-sized enterprises (SMEs), supplier development funds (SDFs), and employment and industrial promotion (for specific industries or regions in South Africa). These public interest considerations are unique to South African legislation, distinguishing it from international competition laws. Although some public interest considerations may be taken into account in the application of competition policy in other countries, the explicit mentioning and evaluating of this as a separate M&A consideration is unique to the South African competition landscape.
The literature review delves into the motivations and reasons behind these business mergers. It explores the various factors driving M&As and highlights the application of public interest considerations within the context of M&As in South Africa. The literature review begins by identifying several key motivations for business mergers, including synergy, risk diversification, market entry, and economies of scale. Market entry, in particular, is a significant driver for multinational companies looking to expand into new markets without establishing entirely new entities. Instead, they achieve market entry by merging with existing and reliable companies. Mergers have occurred in waves across different economic sectors worldwide. The next section analyses a number of case studies in terms of recent M&As in South Africa. Prominent case studies of M&As in South Africa, such as the Walmart/Massmart merger in 2010, the PepsiCo/Pioneer Foods acquisition in 2020, and the Heineken/Distell merger in 2023, serve as examples of how public interest considerations have expanded over time, encompassing various socioeconomic aspects, including employment, industrial development, and empowerment of historically disadvantaged individuals. Furthermore, public interest considerations raise concerns about the potential for extended delays and increased cost in M&A transactions where the Heineken/Distell merger, for instance, faced significant delays due to the complex public interest requirements set by the Competition Commission. Several observers have also noted that public interest is consistently considered as part of merger decisions in South Africa. Competition authorities are increasingly applying these considerations regularly while sometimes moving away from a legally based approach to a broader socio-economic approach when handling mergers and acquisition cases.
The methodology was informed by a unique database used for analysis, which was compiled from information obtained from 35 Competition Commission newsletters, five Competition Tribunal annual reports, and numerous merger case files and supporting documents related to decisions made by the Commission and Tribunal. It was supplemented with official documents and websites of the respective companies involved in the mergers. The data from the Commission, Tribunal, and company documents and websites included variables such as merger case numbers, primary acquiring and target companies, the date of the case hearing and merger finalisation, the size of the mergers, the sector or industry involved, the types of public interest consideration (PICs) imposed on the mergers, whether supplier development funds were required, and whether the mergers involved international companies or only local companies, as well as the time taken to approve the transactions.
All small, intermediate, or large mergers from 2010 to 2019 that included public interest considerations as a requirement were considered. Ultimately, a pooled cross-sectional database of 221 mergers was included as the sample for the study. This comprised four small, 77 intermediate, and 91 large mergers, with 49 being unaccounted for in terms of merger size. The relative percentages of each merger category were as follows: 1,8% small, 34,8% intermediate, 41,2% large, and 22,2% of the mergers were unaccounted for. Data available during the collection period for the years 2020 to 2021 was insufficient due to the Coronavirus pandemic (COVID-19 pandemic). Data was imported into Microsoft Excel, and specific trends were identified. An analysis of the annual percentage of mergers in South Africa with and without requirements from 2010 to 2019 clearly shows that, while there were several mergers subject to PICs, most mergers were still not linked to any specific requirements. The highest percentage of mergers with requirements was in 2014 (11,6%). In contrast, the lowest percentage was in 2010 (2,4%), whereas the average for the ten years was 6,8%. In practical terms, this means that seven out of every 100 mergers in South Africa from 2010 to 2019 had to meet some form of public interest requirement.
The results further indicate that among the 221 cases under scrutiny, a distinction emerged between 45 international and 176 local mergers. A key finding was that international mergers, over this period, were substantially more susceptible to public interest requirements when compared to locally based transactions. In particular, international mergers exhibited a notably higher prevalence of requirements across various categories, including those pertaining to SMEs, employment and BBBEE conditions. It became evident that the employment condition stood as the prevailing requirement across the sectors studied. This observation was reflective of South Africa’s persistently high unemployment rate, making it an unsurprising priority. The mining sector, in particular, drew considerable attention. In addition to the anticipated high employment requirements, this sector also exhibited the highest percentage of BBBEE and development fund requirements. Furthermore, a distinctive aspect of the analysis examined the profitability of the target company being acquired. Notably, there were instances of mergers with companies reporting significant losses or negative profitability, and these invariably triggered employment requirements. The rationale for this could be traced to the desire to safeguard employment opportunities and mitigate job losses following the merger. On the contrary, mergers involving profitable target companies demonstrated a pattern similar to the previous findings, with employment requirements being paramount, followed by SME provisions. To ascertain whether this surge in mergers correlated with a corresponding increase in public interest requirements, the analysis was split into two distinct periods: 2010–2014 and 2015–2019. The data revealed that while the absolute number of mergers with public interest requirements did not experience a significant increase, the percentages demonstrated a marked upswing. Except for SME requirements, all other public interest requirements – BBBEE, development funds, employment, and industry or regional requirements – showed an increase. This suggested that the focus on public interest considerations had indeed been intensified.
South Africa’s approach to competition policy stands as a unique model globally, emphasising the inclusion of PICs in merger assessments by competition authorities. The findings provide valuable insights into the characteristics of mergers subject to public interest requirements in South Africa over the past decade. It underscores that PICs are receiving increased attention and application, reflecting a deliberate effort to address diverse economic and social objectives in the country. The question is, however, whether these are areas of society where competition authorities should be involved in such a direct way – despite the fact that these are indeed noble considerations. Already in 1999, professor Duncan Reekie (1999) published an economic review and evaluation of the new Competition Act in which he warned that the inclusion of the public interest clause could lead to subjective and flexible interpretations (Reekie 1999) – possibly increasing the level of frictional cost inherent in such transactions. Competition policy is therefore not necessarily the best option to address South Africa’s various socio-economic problems.
Furthermore, the results of the study also highlight the potential complexities and uncertainties associated with the diverse scope and combination of these requirements in mergers, which could impact decision-making by both local and international businesses. Local and international companies may for example be reluctant to consider mergers due to the uncertain application of the public interest requirements. Additionally, the article calls for ongoing monitoring of the effectiveness of these public interest provisions and a more thorough exploration of their influence on business planning and decisions, emphasizing the importance of allocating resources for monitoring and further academic research in this field.
Keywords: competition policy; mergers and acquisitions; public interest considerations
- This article’s featured image was created by Alexas_Fotos and obtained from Pixabay.