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Merger: A culprit Behind Uncompetitive markets?

In a business world, business persons boldly strive to get the patronage or custom of consumers to survive and amassed the hefty of benefit in the market. As the business environment exposed to stiff and harsh competition market actors conclude various types of arrangements or agreement to be successful in the market. Among those business arrangements which business persons routinely entered, merger is the one.

Merger is a business arrangement entered between two or more legally registered independent companies or business organizations and which helps those companies to establish another fused and combined company or business organization. In effect, one business company would be swallowed by another company hence rights and obligations of two or more independent companies or business organizations would be transferred to the newly merged company. 

Merger arrangement could be carried out in different forms. Generally, merger could be materialized between companies who may have different line of relationship or companies who does not have any line relationship, what so ever. For example merger arrangement can be carried out when companies which are on the same production line, which is called horizontal integration, can merged and establish the new companies or it may be materialized among companies who are on different production line, which is called vertical integration. These ways of merger arrangement is streamlined between companies who are producing substitute goods or among input producing and input demanding companies. Other form of merger arrangement can be materialized when companies which do not have any any relation, which is called conglomerate, merged.

Merger arrangements have some identifiable benefits. Companies who produce substitutable goods could merge to enhance their market power and in effect could help merged company to decrease the production costs and realize the economy of scale. Hence, one of the benefits of competition,  which is called production efficiency, could easily be realized. Secondly, merger arrangement between input producing and output producing also enhances the merged company to carry out its production activity in a seamless way.


That is why; forthright merger between companies has been taken as a lawful arrangement which buttresses the existence of effective or workable competition in the markets. This does not, however, mean that all merger arrangements would result to the effective competition in the market. Some merger arrangements by enhancing the market power of the merged companies could affect the quality of competition in the market. That is why different countries has squarely prohibits, on their competition laws, merger arrangements which will results to anti-competitive and spelt out procedures to filter out competitive and/or anti-competitive merger arrangements.


As a result of a policy and strategic decision taken by the Ethiopian government led by EPRDF, a lot of persons have got a fertile ground to participate in the trading activity by establishing their own companies. The emulsification of trading activities by a lot of companies in Ethiopia and as these companies have a will and chance of merging with each other to enhance their market power, naturally, obliges the existence of laws and procedures which will help the government to  sift competitive and anti-competitive mergers.


In Ethiopia, the first proclamation issued to regulate market actors was trade practice proclamation, which is enacted in 2003.This law has spelt out some of anti competitive trade practices, like abuse of dominance and unfair trade practices. However this law did not entertained the issue of merger arrangement. Hence, under this law, merger either competitive or anti competitive is an allowed arrangement. That is why this law has been repealed by another law in 2010.


The pioneer proclamation which spelt out procedures for regulating merger arrangements between companies, trade practice and consumer protection law, proclaimed in 2010. As this law states clearly states merger is not a per se prohibited business arrangement, rather it is a supported arrangement as long as that merger arrangement did not cause or is likely causing significant restrictions against competition or eliminates competition. In addition mergers which may have anti-competitive effect may also be permitted when the technological, efficiency gains outweigh its anti competitive effects.


For merger arrangement to be endorsable, before the law, there are some procedural formalities that companies who are wishing to merge should go through. First, any type of merger arrangement should be notified to Trade Competition and Consumer Protection Authority, a federal organ, established primarily to realize effective competition in the market. The notification of merger arrangement may be done either by companies who are wishing to merge, or by any governmental office, either federal or regional, which has a power to register companies. Hence, no merger arrangement shall be implemented before the Authority grants permission. Secondly, permitting the merger arrangement needs a thorough assessment by the authority. The authority should meticulously assess the cost and benefits of permitting the merger arrangement of companies, the impact of the arrangement on the market or market actors. The assessment of the merger arrangement could be carried out, based on identifiable measurements, in two ways.


A merger may be assessed based on the asset or turnover of merged company. For example in South Africa, the minister of trade and industry has divided the merger arrangement, large mergers and intermediate mergers, based on the turnover or the asset of the merged company. In this country, if the turnover or asset of the merged company is below the thresholds of intermediate merger set by the ministry trade and industry, no need for companies to notify to the South African competition commission and there is no prohibition for them to merge.


The Ethiopian competition law has empowered Council of Ministers to pass a regulation which pin point acts of mergers which could be subject to supervision. However, till now as there is no any regulation enacted by the council of ministers which would specify acts of mergers which need supervision, makes all merger arrangements to be notified to the authority. Notifying all merger arrangements to the authority is only laying a burden on some meager merger arrangements and steals the time and resource of the authority. Hence, council of ministers should enact regulation which specifies those acts of mergers which needs supervision.


A merger can also be assessed by considering some identifiable factors. South African competition law illustrate some factors which should be taken when evaluating the merger notification: the actual and potential level of import competition in the market; the ease of entry into the market, including tariff and regulatory barriers; the level and trends of concentration, and history of collusion, in the market; the degree of countervailing power in the market; the dynamic characteristics of the market, including growth, innovation, and product differentiation; the nature and extent of vertical integration in the market; whether the business or part of the business of a party to the merger or proposed merger has failed or is likely to fail; and  whether the merger will result in the removal of an effective competitor. However, the Ethiopian competition law does not specify some identifiable factors to be taken, when the merger notification is done to the authority. The non existence of identifiable factors used to evaluate merger notification may create inconsistencies in the decision of the authority. Hence, the council of ministers should also enact regulations which illustrate some of the factors which should be taken by the authority whenever merger notification hand over to it.

Even then, as merger arrangement is one of the strategies taken by the business person, it is advisable for these actors to notify their merging arrangement to the Authority beforehand and get their arrangement lawful.

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Wednesday, 24 July 2024