Do M&As need to pass the competition test?

DEBATE

With the Competition Commission still not operationalised, mergers are taking place without any scrutiny of their impact on the market.

RAJIV MEMANI,
CEO and Country Managing Partner,
Ernst & Young India

Jet Airways has got around a 50 per cent market share after acquiring Sahara but there is still enough competition in the market

The year 2005 saw a huge increase in M&A transactions, with 568 deals valued at over $20 billion as compared to 319 deals ($9.2 billion) in 2004. Deal activity is projected to gather further momentum in 2006.

M&A transactions often raise concerns about the emergence of monopolies that would restrict fair competition and exercise undue influence in the market. However, a closer look at the Indian scenario and structure of different industries shows that these concerns are not warranted. There are certain industries, specifically infrastructure, which lend themselves, on an economic basis, to function as natural monopolies. Globally, these are regulated by an independent regulator that sets prices to protect consumer interests and also allows for third-party access based on reasonable usage fees. In most other industries, the developed world permits M&A with anti-trust legislation to address situations that could be detrimental to competition and consumer interests.

India is also in the process of implementing a new competition legislation to replace the MRTP Act. The proposed Competition Law seeks to prohibit anti-competitive agreements, abuse of dominant position and also covers regulation of combinations. We hope that the law will objectively address issues to benefit consumers without creating an additional layer of approvals and bureaucracy to regulate legitimate corporate activity.

Globalisation, falling trade and investment barriers and an increased focus on India by multinationals has necessitated Indian companies to scale up. M&A will allow companies to acquire size, market share, management talent and help drive efficiencies, thereby enabling them to compete in any market.

The recent acquisition of Air Sahara by Jet Airways, for instance, enables Jet to increase domestic market share and also gain access to infrastructure and human resources. For Sahara, it helps realise value and redirect resources to other businesses. Though Jet now has approximately 50 per cent market share, it continues to face competition. Consumers can look forward to increased benefits through better service and competition amongst these players.

A quick review of industries like IT services, telecoms, cement, financial services, healthcare and so on, which have witnessed recent consolidation activity, reveals that Indian industry still has a much larger number of incumbent players as compared to its counterparts in developed markets. We are all aware of the size limitations that we suffer from in a global context.

The watchword for Indian companies today is "globally competitive". Competition and market forces are the best regulators in most situations and endorse M&A as a useful tool for companies to leap frog and attain market leadership.

PRADEEP S MEHTA,
Secretary General, CUTS International

A pre-merger notice is required in most countries since using demergers to stop collusive behaviour is akin to unscrambling an omlettte

The recently announced acquisition of Air Sahara by Jet Airways, and the acquisition of Gujarat Ambuja by Holcim have heated the M&A scene in the country. Considering the resulting dominant status of these companies, concerns have been expressed over possible abuses. Significantly, these events have brought to fore the urgent need to operationalise the Competition Commission of India (CCI), which continues to be in a limbo. Hopefully, the much-awaited amendments to Competition Act would be tabled in the forthcoming budget session and pave the way for kick-starting the CCI.

While concerns have been expressed over Jet's dominance in controlling a significant share of parking bays and prime landing slots, Holcim, given the regional nature of cement market, is expected to have greater control over pricing of cement in certain regions. In any case cement companies anywhere are notorious for cartelising, and M&A provides them with an opportunity to legitimise their collusive behaviour.

Firms often resort to M&As to realise economies of scale, improve operating performance and so on. Economies of scale may even result in lower prices, better quality and so on. Not surprisingly, expressions in favour of big becoming bigger are heard in policy circles. Thus, some have questioned the very need for a merger control regulation in the Competition Act. They feel that the existing provisions on anti-competitive practices are a sufficient safeguard, and if required, a demerger can be ordered. But, a demerger is like unscrambling an omelette, which can be very arduous.

This is precisely the reason that merger regulations exist in competition laws to pre-empt the potential abuse of dominance, as subsequent demerger is both difficult and costly. In the US, though, demergers have been carried out successfully, when AT&T, the giant telecom company, was broken up into seven companies (baby-Bells) in 1984, in response to a federal anti-trust suit. Now, with the competitive heat in communications, these baby-Bells are coming together via M&As. In the US the current paradigm is that big becoming bigger is fine but a no-no to any competition restrictive practice.

Most competition jurisdictions in the world have a pre-merger notification requirement. Few, like in the Indian Competition Act, 2002, have a voluntary notification procedure. Nevertheless, the CCI can take suo motu action and investigate a merger for possible anti-competitive effects. However, this would put a huge strain on it, given the political clout commanded by big-ticket mergers.

It is important that CCI develop a database to keep a watch on the behaviour of the merged firm and blow the whistle when called for. For this, the Commission needs capacity building and financial and human resources to bite when required.