M&A from competition point of view

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Offline Imrul Hasan Tusher

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M&A from competition point of view
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M&A from competition point of view

Merger & acquisition (M&A) plays a key role in a modern economy.These terms are also understood as concentration and combination of enterprises. Bangladesh competition law defined as acquisition and combination.Every M&A involves a set of positive and negative effects for the firms or the market in general. It is, however, important to carefully examine whether a merger will have anti-competitive effects, for example if the new entity becomes a dominant player and significantly lessens competition in the market.

A merger or acquisition is when two companies join to form a new company, or one company takes over another company with new ownership and management structure with combination of management of two companies.Competitionlaw bars mergers when the effect "may be substantially to lessen competition or to tend to create a monopoly."

A merger or acquisition can be of three types: (a) acquisitions of control, voting rights, shares and assets, (b)acquisition of control over an enterprise that is engaged in similar or identical services as that of the acquirer and (c) mergers and amalgamations.

Three basic kinds of M&A are: horizontal mergers, which involve two competitors; vertical mergers, which involve firms in a buyer-seller relationship; and potential competition mergers, in which the buyer is likely to enter the market and become a potential competitor of the seller, or vice versa.

A horizontal M&A is between two or more undertakings producing or offering substantially similar goods or services in the relevant market at the same level of business (e.g., a merger between two manufacturers or two distributors or two retailers).

A vertical M&A is amerger between two or more companies who are a part of the same industry or associate at different stages of the supply chain for the same product or service. For example, automobile companies joining with a parts supplier or distributor of car in the market are vertical merger.

A potential competitor, yet to come actively in the relevant market,is subject to anticompetitive law to prevent a likely competitive constraint in the foreseeable future.

Another category of M&A prohibited in law is conglomerate M&A where the merging parties operate in different products market but having the possibility of constraining the competition.

Competition Commission mandated to identify mergers that are likely either to increase the likelihood of coordination among firms in the relevant market when no coordination existed prior to the merger, or to increase the likelihood that any existing coordinated interaction among the remaining firms would be more successful, complete, or sustainable. Competition authorities monitor M&A activity to help ensure they are procompetitive and do not result in excess market power and anticompetitive behavior.

Companies can engage in M&A activities for a variety of reasons. For instance, companies might want to acquire new technology and capabilities, enter a new market, or reach a certain scale. For instance, a M&A can increase the efficiency of the combined firms by allowing them to leverage each others technology to create better products and services for consumers, or it can result in the new firm gaining excess market power that it abuses to the detriment of consumers.

A joint venture is a kind of merger, it involve the integration of parts of the business activities of the undertakings to the joint venture, including a contribution of productive assets to the new joint venture. This can result in a reduction or elimination of competition between the undertakings to the joint venture in the joint ventures field of activity.

M&A have the potentialto contribute significantly to the growth of business operations in terms ofactivity (turnover) and resources (core assets). The M&As of the firms with unrelated businesses or conglomerate mergers help the firm to diversify and reduce their risk profile. In contrast, M&A, especially horizontal, lead to a decrease in competing market players. This reduction in the number of competitors may adversely affect the degree of competition and lead to accumulation of market power with the merged entity. This market power may potentially become a source of abusive business practices impacting thedevelopment of markets and the state of consumer welfare.The competition law perspective is to examine whether a proposed combination is likely to harmcompetition.

The mandate of many competition agencies in many countries extends to merger control, i.e. companies need to notify the agency if they are planning to merge. The CompetitionAct2012 also empowered Bangladesh Competition Commission(BCC) to regulate acquisition and combination. The expressions acquisition in theSection 2 (1a) defined "acquisition" means to acquire or to agree to acquire, directly orindirectly, any share, voting rights or assets of any enterprise or to take control over assets or management thereof and in the section 2 (h) "combination" means acquisition or taking control or amalgamationor merger in trade. The acquisition and combination are subject to scrutiny and approval by the Bangladesh Competition Commission. BCC has not yet formulated the policy of combination (merger) and acquisition.

Certain quantitative and legal and economic conceptual constructs will be undertaken to reach a decision as to whether a merger is likely to substantially prevent or lessen competition. These may include but are not limited to: (1) Market Definition, (2) Market Concentration, (3) Horizontal Mergers and their Possible Unilateral and Coordinated Effects, (4) Non-Horizontal Mergers and their Possible Foreclosure and Coordinated Effects, (5) Barriers to Entry, (6) Countervailing Power, (7) Efficiencies, (8) Failing Undertakings.

The primary criterion of M&A policy is to set threshold to examine whether a M&A needs to be notified is based on thresholds fixed based on value of assets and turnover of the parties to the combination, or the assets and turnover of the group to which the parties belong.

The assets and turnover of the enterprise over which the acquirer already has direct or indirect control will also be considered in addition to the figures of assets and turnover of the acquirer and the enterprise being acquired, while applying the individual threshold criteria as stated above.

A concentration must be notified to the Authority if the combined annual turnover of the undertakings concerned exceeds a certain amount in different countries. The term "concentrations" about such mergers, acquisitions and agreements. Bangladesh Competition Commission have no M&A policy and no reporting threshold yet.

M&A plays a critical role in the economy, and smart competition policy is vital to ensure M&A activity is pro-competition.The search for technology has always been an M&A strategy. Such acquisitions or joint ventures whose fundamental purpose is to create or protect firm value through the acquisition of technology. Mergers and acquisitions based on synergies between the operations of merging firms may lead to substantial cost savings which may get passed on to the consumers in the form of lower prices and may contribute to the process of innovation.

M&As are not per se illegal. The prohibition of anti-competitive concentration is one of the three core areas of a competition law (Cartel, misuse of dominant position and anti-competitive(M&A). Combining the activities of different companies can allow for a more cost-efficient development and distribution of products and services. This can make the company, and by extension the industry, more competitive.

The writer is a Non-Government Adviser, Bangladesh Competition Commission

Source: https://www.observerbd.com/news.php?id=468959