COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No.: 89/LM/Oct00
In the large merger between
Trident Steel (Proprietary) Limited (“Trident Steel”)
and
Dorbyl Limited (“Dorbyl”) for the acquisition of three operations of Baldwins Steel,
a division of Dorbyl Limited
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Reasons for the Competition Tribunal’s Decision
_______________________________________________________________________
_
Approval
The Competition Tribunal issued a Merger Clearance Certificate on 6 December 2000
approving the merger between Trident and three of Dorbyl’s subsidiaries, namely the
Baldwins steel processing plants in Rosslyn, Durban and Port Elizabeth without
conditions. The reasons for our decision are set out below.
The Merger Transaction
1. Trident Steel (Pty) Ltd , the acquiring firm is a subsidiary of Tristel Holdings
(Pty) Limited, which is ultimately controlled by Aveng Limited, a large
conglomerate with interests in the construction and engineering sector having
substantial steel interests.
2. Trident Steel (Pty) Ltd is acquiring three plants from Dorbyl Limited, forming
part of its Baldwins Steel division, as a going concern. More specifically, Trident
Steel will purchase Baldwins’ three flat steel decoiling and cuttolength service
centres situate at Rosslyn, Durban and Port Elizabeth.
PART I : DOES THE MERGER LESSEN OR PREVENT COMPETITION?
The relevant products/services market
3. The two companies are steel merchants engaged in the processing of and supply
of steel products to the automotive and nonautomotive industries. The
overlapping products are cut flat steel products which can be of varying quality,
described, inter alia, as Improved Surface Finish (ISF) or nonISF.
4. The two relevant markets are ISF and nonISF steel products. NonISF products
are utilised in both the automotive and nonautomotive industries. NonISF steel
products are of a normal specified quality finish and are often used within the
automotive industry for the inner panels, as well as for the unexposed parts of
motor vehicles. ISF quality steel is a high quality steel specific to the automotive
industry. Motor car manufacturers require this type of steel specifically for the
outer body panels of motor vehicles.
5. The parties’ business activities in respect of flat steel products involve the
purchase of raw steel coils from South African and nonSouth African steel
suppliers and the decoiling and cutting of the steel for purposes of producing flat
steel products comprising steel sheets and blanks. These products are then sold to
either car manufacturers or press shops. 1
6. Customer demand for superior highgrade surface quality steel material for the
outer panels of motor vehicles (“outer blanks”), as opposed to normal quality
steel, differentiate ISF outer blanks from the nonISF category. Although non
ISF products can be produced on the same production line as ISF products the
converse is not true. ISF products require the use of sophisticated and specialized
machinery.
7. The Competition Commission and the parties are both in agreement that the
relevant product markets can be differentiated as the markets for ISF and nonISF
products. We agree with this categorization of the relevant product markets. We
products. We agree with this categorization of the relevant product markets. We
will now proceed to examine each of these markets in turn.
IMPACT OF COMPETITION IN THE NONISF MARKET
8. Baldwin’s Steel is selling only its Rosslyn, Durban and Port Elizabeth plants.
However, the remaining Baldwins plants, at Isando and Vanderbijlpark will
continue to supply nonISF materials to the motor manufacturing industry.
9. Baldwin’s currently has substantial spare capacity available at its Isando and
1 Steel coils are decoiled and cut to specific lengths which are called “sheets”. These sheets can then be cut
into smaller pieces, which in the steel industry are referred to as “blanks”. See Parties’ Competitiveness
Report at page 4
2
Vanderbijlpark plants with respect to the processing of nonISF steel products.
Baldwins’ estimates that these two operations are utilizing only 40% of their
capacity. Baldwins Steel plans to use this spare capacity in respect of these
operations more efficiently postmerger. Intensifying the productive capacity of
these remaining plants in respect of the nonISF market will undoubtedly reduce
its production costs.
10. The parties have accordingly argued that their ability to supply nonISF products
to the market will not be affected or reduced in any way, since these plants were
previously not utilized to optimum capacity even though Trident is acquiring
almost 50% of Baldwin’s capacity for cutting nonISF blanks. Therefore, they
contend that Baldwins remains in the same position to supply the market with
nonISF product as it was premerger.
11. The two remaining Baldwins plants will therefore continue to compete with
Trident and other, smaller competitors in the nonISF product category, as well as
Macsteel, whose market share in the nonISF steel blank sector is currently 15%.
Although the parties suggest that Macsteel’s market share is likely to increase
postmerger there is no evidence of why this should be so, but nevertheless it is
likely that Macsteel will at least retain its 15% market share.
12. We are therefore satisfied that the proposed transaction does not alter the existing
competitive situation in the nonISF market.
IMPACT ON COMPETITION IN THE ISF MARKET
13. Baldwins intends to exit the market for ISF blanks by selling its Rosslyn plant to
Trident, drastically reducing the level of competition in this market.
14. The Commission submitted that Baldwins and Trident each currently enjoy a 35%
market share of the ISF market. Therefore, postmerger, the combined market
share of the merged firm for producing ISF outer blanks for the domestic market
will be 70%.
share of the merged firm for producing ISF outer blanks for the domestic market
will be 70%.
15. There are no other domestic competitors in this market currently, since the costs
to establish a new operation with the sophisticated technology required to process
ISF blanks, are prohibitive. The market for ISF products is small and already
oversupplied, and one requiring huge capital investments, therefore unattractive
to potential new entrants. Macsteel, could potentially enter the market for ISF
products with lower setup costs than a completely new entrant. However the
Commission established in interviews with Macsteel, that they have never entered
the ISF market and are unlikely to, despite the fact that they have the plant
necessary to do so. 2
2 It is unclear whether Macsteel’s ISF cutting plant is technically equivalent to that of Trident.
3
16. The Commission argues that the combined entity’s only other competitive threat
comes from imports, which approximate 30% of the South African market
(according to sales figures acquired from the National Association of Automobile
Manufacturers of South Africa, NAAMSA) on the parties’ conservative estimate.
The parties were not able to furnish direct statistics evidencing the market shares
of overseas suppliers.
Will imports constrain the pricing behavior of the merged firm?
17. Once we have established that the only competitive restraint on the merged firm is
from import competition we have to establish to what extent imports can credibly
restrain it from exercising market power.
18. The Commission and the parties contended that this is an international market
insofar as the customers, the car manufacturers, can rely on imports, whether from
their parent companies abroad or other international suppliers.
19. However we have reason to doubt whether this argument is, in fact, valid for the
following reasons
(1) The competing import is not a classic substitute for the ISF product.
(2) Customer preference indicates that pricing issues are not determinative in
their choice between domestic and foreign supply.
(3) There is considerable skepticism about the potential for foreign
competition to constrain domestic producers.
(4) The barriers to entry created by tariff and incentive schemes undermine
the competitive ability of foreign competition.
The nature of the competing product
20. The parties told us that imports come in three forms: fullyassembled or complete
built up (CBU), semiknock down (SKD) or completeknock down (CKD) form.
While SKD form refers to the importation of only certain body panels of a
vehicle, for example, the doors and the bonnet, CKD products come in packs,
comprising all those components required for the assembly of a motor vehicle.
comprising all those components required for the assembly of a motor vehicle.
21. There is not enough evidence to support the contention that these products are
directly substitutable for ISF steel products. The import market share information
is ambiguous, at best. The parties’ ISF import market share estimate of 30%
comprised fully assembled (or CBU) and complete (CKD) imports. 3 Furthermore
Nevertheless the fact that historically they have never entered this market makes this issue
academic.
3 The parties later adjusted the 30% figure to an estimate of 50% but this was based only on automotive
4
this figure is not composed purely of ISF product. According to the parties, only
60% of this figure comprised ISF product. They stressed that this was an estimate
as better data was not available to them.
Customer Preferences
22. Though in this case there may be limited argument for some partial
substitutability or interchangeability between ISF blanks and SKD or CKD packs,
factors of inconvenience expressed by the customers, suggest that while these
imports are an alternative, they do not necessarily regard them as an effective,
competitive substitute for ISF outer panels. CBU products must immediately be
disregarded since many of the car manufacturers agreed that car bodies imported
in fully assembled form were not substitutable for the ISF steel panels (or blanks)
produced by the parties. Many of the customers interviewed by the Commission
reported that their decision to turn to imports might be motivated by reasons other
than local price increases. Some customers have expressed the view that
engineering, or unavailability of local supply, have frequently determined their
decision to import from overseas. Delta stated that:
“ The local sheet metal component used in the third vehicle line has
often been due to local engineering requirements and not
necessarily favourable economics.”
Similarly, Nissan and Toyota reported that steel prices were not a significant
factor in their decisions to import.
23. Some manufacturers and press shops expressed the view that products in this form
could not be sourced as readily, speedily or as reliably, as local products could.
Nissan expressed the view that it would “anticipate difficulty in obtaining
commitment for continuity of supply from overseas sourcing, due to low call off
requirements”. Baldwins itself admitted that on previous occasions, it has had to
requirements”. Baldwins itself admitted that on previous occasions, it has had to
air freight material from Europe at great cost to meet delivery times on material
committed.
24. Furthermore, South African export incentives create a preference on behalf of
some manufacturers for sourcing local steel directly from Iscor. In other words,
some manufacturers will lose out on an export credit incentive by virtue of the
fact that they favour imports over utilising local Iscor steel. VW SA expressed the
view that excessive price increases would impact their export rebates on exported
steel parts. “VW SA could import their total requirements but this would have a
major impact on future and existing export business”. 4 Cost is a concern. Daimler
Chrysler SA regards the import duties, logistics costs and cost of setting up
sales figures for the month of May 2000.
4 The DTI’s MIDP program also encourages exporters to use local steel in their vehicle exports.
5
infrastructure to support imports as additional costs. BMW’s press shop expressed
the view that although total requirements could be sourced overseas, this would
be costly and could result in the closure of local plants as it would in turn have to
pass this cost onto BMW. Furthermore, they felt that “unrealistic” price increases
by Trident postmerger would force press shops out of business.
25. On balance, the customers’ collective testimony suggests that they would not
switch to importing fully assembled or CKD component packs as readily as the
parties would have us believe. Cost is a factor, however other factors such as
export rebates, engineering requirements, additional logistics costs associated
with transport and warehousing and interruption of supply are also significant. In
general, customer responses do not indicate that imports are worthy of much
weight as an inhibitor of postmerger market power. They would not readily turn
to such imports as an alternate source of supply in the event of a price increase.
26. We accordingly do not regard the overseas imported products (CBU products,
SKD and CKD packs), though they may be an indirect form of substitution, as
direct substitutes. Substitution in one of these forms will not necessarily constrain
Trident’s market power or prevent Trident from raising prices on ISF flat steel
products up to the import parity ceiling.
The potential for foreign competition to constrain
27. The mere presence of imports does not necessarily indicate conclusively that a
market is international. Some writers and indeed other competition authorities
take the approach that a market may be a national one punctuated with sporadic
sources of supplies from overseas. This however would not necessarily warrant
delineation as an international market.
28. When we talk of the relevant geographic market we refer to the area to which
28. When we talk of the relevant geographic market we refer to the area to which
customers can “reasonably turn for sources of supply”. 5 How do we know if a
market is a national one with import competition or an international one?
29. Areeda has explained the distinction in the following way:
“When only actual imports are to be counted, courts say that the market is
nationwide and includes all sales there. When the total output of foreign firms
is to be counted, the market is said to be worldwide, or, alternatively, that it
covers the US plus one more foreign region shipping to the US…” 6
5 American Bar Association Antitrust Law Developments, 4 th (Chicago: American Bar
Association ) 1997
p 60
6 See Areeda, Hovenkamp, Solow ANTITRUST LAW Vol IIA, (1995) pg 247
6
30. The approach to defining markets taken in the Australian Merger Guidelines is to
define a market narrowly, but investigate the competitive role of imports with
circumspection. One of the factors they consider is the extent to which imports
are closely substitutable for the products of the merging firms from the
perspective of their customers, without the need for supply substitution by the
overseas producers. 7
31. There is also some scepticism about whether import figures are a reliable
indicator of competitive force. Competition academics have cautioned against
relying too heavily on import market share data. Some writers have dispelled the
relevance of import competition as being a reliable restraint on the market power
of domestic firms. In the opinion of Porter and Sakabira who have researched the
issue:
“…, our results are strongly suggestive of a view of competition as a
dynamic process in which rivalry among locally based producers drives
firms to constantly improve, in a way not substituted for by the presence
of imports ”. 8
These writers found that measures of import pressure do not necessarily account
for local competition or domestic rivalry, by finding an insignificant correlation
between such measures of import pressure and market share instability. 9
32. It is recognized that trade barriers cannot be ignored in evaluating the domestic
market. This approach has been enunciated in academic writing:
“ These factors often limit the ability of imports to restrain the exercise of
power by a domestic firm. Thus, although an analysis of the reasons imports
are entering the domestic market may lead to the conclusion that they will
continue to restrain market power effectively, the existence of trade barriers
and other traderelated costs may negate this effect.” 10
It would therefore seem that where there are restrictions on entry of imports into a
It would therefore seem that where there are restrictions on entry of imports into a
market, either by tariffs, quotas or antidumping laws, with the practical effect of
reducing accessibility of imports into that market, the potential for foreign output
to come in is unequivocally restrained, and the market must be defined more
7 Australian Merger Guidelines pages 4446, para. 5.104
8 Sakakibara and Porter, Competing at Home to Win Abroad, Evidence from Japanese Industry, an
empirical study REVIEW OF ECONOMICS AND STATISTICS ( 1.2.2000).
9 They use market share instability to signify active competition. “There are strong theoretical reasons that
instability in market positions is a sign of active competition…” at page 5.
10 Domestic Mergers: Treatment of Imports , NEW YORK UNIVERSITY LAW REVIEW Vol 60 667
(Oct 1985) at page 684
7
narrowly.11 We now consider some of those restrictions as they affect this
market.
Import Tariffs & Logistics Costs
33. The tariff on imports currently ranges from 32.5% 43% depending on their
form.12 The parties’ understated these figures, suggesting an average of 5%.
Tariffs are lower for CKD or SKD products, and gradually increase as the imports
become more builtup. There are also transport and warehousing costs associated
with importing overseas products. Though the differentials between the different
type of imports has not been canvassed by the parties, again, one would presume
that transport and warehousing costs would increase depending on the extent to
which the imports are builtup. 13
Export Incentive Scheme
34. The Export Incentive Scheme referred to earlier will also act as a disincentive to
import for those manufacturers who qualify.
Currency Fluctuations
35. Exchange rate fluctuations can also influence customer demand for imports as
substitutes. Even were the Tribunal to accept that the imports were an effective
substitute for ISF steel blanks, in order to effectively curtail competition, imports
must be competitively priced. 14
36. To illustrate the competitiveness of imports, the parties quote the per unit cost of
the side frame for the BMW E46 (new 3 series) obtainable from Iscor as being
substantially less than importing the equivalent product from Germany. However,
these figures were calculated using the euro rate in existence in midOctober (i.e.
11 Similarly, in the LTV Corporation/Republic Steel merger (5 Trade Reg. Rep CCH) 1984, the existence
of import restraints lead the Justice Department to exclude steel imports from the EEC and Japan as a
consideration in the market, notwithstanding that they accounted for more than 13% of the domestic steel
market.
12 DTI estimate tariffs on CKD parts at 32.5% and 43.5% on CBU models (per Johann Cloete, DTI’s
Director of Motor Assembly and Components, Jan 2001).
13 BMW SA’s press shop, August Lapple expressed the view that variance between local and imported
material is about 20% “with the added financial burden of longer lead times which result in added
stockholding charges”.
14 Olin Corporation, 5 Trade Reg. Rep. FTC 1990 – at para 632 “ Exchange rates are a relevant factor in
assessing the extent to which foreign firms are able to influence competition in the US. DOJ Guidelines
S3.23. The more volatile the relevant exchange rate, the more significant the potentially adverse effects
from a domestic merger can be. – Ordover and Willig, Perspectives on mergers and World Competition,
supra, at 203. As a general rule, foreign producers provide less competition to domestic producers when
the value of the foreign producers’ currency increases relative to the US dollar.” (Kamerschen, Tr.
271112; Ordover, Tr. 9665)
8
6.1 Rand per Euro). If one conducts the same calculation on current euro rates of
6.79 Rand per Euro,(the rate at the date of hearing in December 2000) imports
become more expensive, indicating that exchange rate volatility can influence the
import figure, making it variable, at best, and reducing the likelihood of their
acting as a competitive restraint on domestic prices. 15
The following example is based on the parties’ cost figures quoted per unit for a
BMW E 46 side frame imported from Germany and the cost of a local side frame
sourced locally from Iscor:
IMPORT PRICE
(converted from Euros to Rands at current exchange rates of 6.79)
Present Imported Price (29 euros@6.79) R196.91
Import Duty @ 5% R 9.85
Total R206.75
DOMESTIC PRICE
Local Price 16 R178.36
Iscor’s increases as of
Jan 2001 @ 10% R 17.84
Total R 196.20
This example indicates that imports are clearly not competitively priced on
present exchange rates. 17
37. Accordingly with respect to the ISF market under consideration, there is clearly a
case for limitation of imports to actual imports. The parties have not documented
that the imports are a regular, steady supply. Instead the ambivalent responses
indicate that imports merely serve to overcome shortages in domestic supply on
an ad hoc basis from the manufacturers’ parent companies overseas. While we
must not exclude from our consideration the possibility of future potential sources
of overseas supply as the demand for superior quality steel increases, we are
compelled to “take the market as we find it.” 18 We could not possibly include in
our assessment total foreign output simply because tariffs, logistics costs,
customer preferences, product differentiation and exchange rate fluctuations all
militate against this being regarded as a truly international market, thereby
15 As at the date of decision, the South African Rand had further depreciated to R7.30 to the euro.
Therefore imported products are likely to be even more expensive on present exchange rates.
16 Cost per unit quoted by the parties as at October 2000.
17 NOTE: transport and warehousing costs are excluded therefore the differential is
probably larger. Furthermore, we use the parties’ conservative 5% tariff figure. On the
DTI’s higher tariff figures, imports would be even more expensive.
18 Areeda, Hovenkamp, Solow, Antitrust Law, Vol IIA, page 247
9
effectively excluding these other imports from the analysis.
38. We accordingly find that the market for processed flat steel products (outer
blanks) is a national one, subject to some import competition.
Countervailing Power
39. The parties and the Commission made much of the countervailing power of the
customers (the car manufacturers) and the suppliers (notably Iscor). They argue
that since the customers are large multinational entities, with extensive overseas
networks and resources, they have the ability to constrain any attempt by the
merged entity to elevate prices. Similarly, Iscor’s power to impose supply side
constraints would provide significant restraints on exercise of a monopoly power
by the parties. Notwithstanding these arguments, the fact remains that
countervailing power in a postmerger marketplace where there will only be one
domestic supplier of ISF outer blanks to the automotive industry, is unpersuasive.
In reality, postmerger there will be no other domestic steel processor that will
constrain the merged entity from pricing up to at least import parity.
40. Accordingly, considering that Trident will be the only domestic steel
processor of outer steel blanks for the automotive industry postmerger, as
well as the unreliability of imports as a likely competitive force, we find that
the merger will result in a substantial lessening of competition in the ISF
market.
PART 2: EFFICIENCY GAINS
41. Having found that the merger is likely to substantially prevent or lessen
competition, Section 16(1)(a)(i) of the Act requires that we must next determine
whether the merger is likely to result in any technological, efficiency or other pro
competitive gain 19 which
“will be greater than, and offset, the effects of any prevention or lessening
of competition, that may result or is likely to result from the merger and
of competition, that may result or is likely to result from the merger and
that would not likely be obtained if the merger is prevented...”
THE LEGAL ISSUES
42. The section was based on section 96 of the Canadian Act. 20 The Canadian Act
19 As a convenient shorthand we shall refer to these as efficiency gains in our discussion .
20 Section 96 (1)states “The Tribunal shall not make an order under section 92 if it finds that the merger or
proposed merger in respect of which the application is made has brought about or is likely to bring about
10
itself seems to have been inspired by a trend in economic literature since the late
1960’s that recognized that a merger can both lessen competition and create
efficiencies and that a proper enforcement policy should seek to maximize overall
efficiency in the economy. This approach owes its origins to a series of articles
written by the distinguished US economist Oliver Williamson who developed a
hypothesis known in the literature as the “Williamson trade off”. The Williamson
analysis is only relevant when the merger creates both market power and
economies. Williamson argued that cost efficiencies would be far greater than
social losses resulting from increased economic power. He demonstrated that a
relatively small cost reduction would offset a relatively large price increase
thereby making society indifferent to the merger. 21
43. The Williamson model was attractive to many economists for its elegance and
simplicity. The problem for antitrust enforcers was how to translate its framework
into policy. In practice getting the data to satisfy the theoretical model is far more
daunting . Even critics from the Chicago school such as Posner have proved
skeptical:
“Not only is the measurement of efficiency … an intractable subject for
litigation; but an estimate of a challenged merger’s cost savings could not
be utilized in determining the total economic effect of the merger unless
an estimate was also made of the monopoly costs of the merger – and we
simply do not know enough about the effect of marginal increases in the
concentration ratio…to predict the price effects.” 22
Similarly Fisher and Lande argue that:
“As a result of the complexities of a generalized Williamson tradeoff the
ideal of a case by case balancing of efficiencies and market power effects
becomes too unmanageable to be of any practical value , despite its initial
appeal as a theoretical paradigm.” 23
appeal as a theoretical paradigm.” 23
44. Even Canadian commentators are skeptical about whether their section 96 has
worked in practice. According to McFetridge section 96 has had little effect on
merger enforcement in Canada. 24
gains in efficiency that will be greater than, and will offset, the effects of any prevention or lessening of
competition that will result or is likely to result from the merger or proposed merger and that the gains in
efficiency would not likely be attained if the order were made. ”
21 See Kipp Viscusi , Vernon and Harrington, Economics of Regulation and Antitrust , 2 nd Edition pg 203
22 Judge Richard Posner, Antitrust Law: An Economic Perspective (Chicago:University of Chicago Press),
1976 p 112
23 Fisher and Lande Efficiency Considerations in Merger Enforcement 71 CALIFORNIA LAW REVIEW
1625 (1983)
24 See McFetridge The Prospects for the Efficiency Defence 26 CANADIAN BUSINESS LAW
JOURNAL 357 (1996)
11
45. American writers unlike their courts seem for the most part to recognize that
efficiencies should be treated as a defence 25 although they differ on the extent to
which they feel the defence should be recognised.
46. In Europe an efficiency defence has not been recognized in any decision to date
nor is it clear that the Merger Regulations allow for it. 26 In some cases where
efficiency issues are considered it would appear that the Commission views
efficiencies as an offence rather than a defence as efficiencies might strengthen on
this analysis a dominant position. 27
47. Neven et al in criticizing the Commission’s approach concede that in those
situations there is a trade off but argue that this should not mean that these types
of mergers should be condemned. They state that:
“Carried to its logical conclusion, such an argument would imply that, if
only privately profitable mergers are proposed none should be allowed.”
28
48. The Canadians incorporated “trade off” analysis into their statute through section
96, boldly treading where other authorities were still too reticent to go. 29 Our
section 16(1)(a)(i) formulation as we indicated above, followed the Canadian
lead. It remains for us then not to debate the desirability of such a test in the
statute but how it should be interpreted.
49. The application of this provision of the Act raises several issues.(1) On who does
the onus of establishing the efficiency gain rest? (2) What type of gains are
acceptable (3) How is the offset or tradeoff between the competitive loss and the
efficiency gain calibrated? (4) Does the gain need to be passed on to the
consumer? (5) Would the efficiency be obtained without the merger or put in
another way is the efficiency mergerspecific?
50. We will proceed to examine each one of these in turn.
50. We will proceed to examine each one of these in turn.
25 See Kattan Efficiencies and Merger Analysis 62 ANTITRUST LAW JOURNAL 513 (1994)
26 See Nevan et al, MERGER IN DAYLIGHT 62,1167 (1993)
27 See Nevan et al op cit ,116,where the authors refer to the Commission’s decisions inter alia in the
following cases AT&T/NCR, Aerospatiele /Alenia/ DeHavilland and PanAm/Delta. surprising approach to
efficiency analysis is not a European creation. A similar approach once existed in the FTC where parties
eventually were incentivised to talk down efficiencies lest they be held against them. See Fisher and Lande
op cit 15912 fn 60 for their comment on the FTC decision on the Foremost .
28 See Nevan et al op cit ,116.
29 Some of the legislative history to section 96 appears in the Hillsdown decision. It appears that efficiency
concerns date back to amendments to the Combines Investigation Act in the late seventies. See Director of
Investigation and Research v Hillsdown Holdings (Canada ) Ltd ., [1992] 41 C.P.R. 3d 289 pg 8792. The
debate around the present section occurred in 1986.
12
The onus
51. We have previously held that the onus of establishing the efficiency defence rests
on the merging parties 30. This approach is consistent with the approach taken in
Canada and the United States. 31 The significance of the Canadian authority is
that as we pointed out earlier our section is closely modeled on theirs. As the
OECD32 has explained the rationale for this approach is the fact that in a pre
merger notification system mergers must be evaluated before they can be
implemented. It goes without saying that the task of identifying and quantifying
claimed post merger efficiencies at the premerger stage is difficult. Due to
asymmetries in information it is the parties to the merger and not the competition
authorities that are best placed to provide this information.
What types of efficiency gains are acceptable?
52. Every merger brings about some form of efficiency gain even if it is trivial. Did
the legislature intend that each claimed cent in cost savings be factored into the
trade –off of lost competition? We would suggest not and that what the legislature
contemplated was either something more significant or enduring. In the United
States courts have historically been extremely sceptical about efficiency claims.
In United States v Philadelphia National Bank 33 the Supreme Court held:
“We are clear… that a merger the effect of which may be substantially to
lessen competition is not saved because on some ultimate reckoning of
social or economic debits or credits, it may be deemed beneficial”
53. In FTC v Proctor And Gamble 34 Justice Harlan in a concurring judgment wrote:
“Economies cannot be premised solely on dollar figures, lest accounting
controversies dominate proceedings. Economies employed in defence of a
merger must be shown in what economists label ‘real’ terms.”
54. Fisher and Lande’s interpretation of this is that the Court is saying Congress did
54. Fisher and Lande’s interpretation of this is that the Court is saying Congress did
not signal an intention to ignore economic values rather we ( the Court ) recognize
our own limited ability to balance market power and efficiency effects.
30 See TongaatHulett Group Ltd and Transvaal Suiker Bpk & Others 83/LM/Jul00 where the Tribunal
held that the onus rests on the parties to establish that the efficiencies sacrificed by an anticompetitive
merger are countervailed by efficiency gains. (at paragraph 100).
31 See FTC v Staples,Inc 970 F.Supp 1066,1089 (D.D.C. 1997) and Director of Investigation and Research
v Hillsdown Holdings (Canada ) Ltd., [1992] 41 C.P.R. 3d 289
32 See “ Competition Policy and Efficiency claims in Horizontal Agreements – OECD, Paris 1996 pg 5.
33 374 U.S. 321, 371 (1963)
34 386 U.S. 568 (1967)
13
55. It seems that the types of efficiencies that will be recognized are by no means
clearcut. Part of this is due to the paradox created between the desirability and
the measurability of a claimed efficiency. As Robert Pitofsky has so trenchantly
observed claims of efficiency are “easy to assert and sometimes difficult to
disprove.”35 The most beneficial efficiencies are those associated with
innovation36 or as they are otherwise known, “dynamic efficiencies”, because
these are efficiencies to product or service quality precisely those benefits
competition seeks to induce. 37 Kattan argues that innovation has the quality of a
public good in that its use by one party does not exclude others from using it
simultaneously. He argues that despite protection afforded by intellectual property
many innovations are imitated within a short time of their introduction. 38 Yet
these efficiencies are also the hardest to quantify in practice. 39 At the other end of
the scale are so called pecuniary efficiencies e.g. tax savings or lower input costs
resulting from improved bargaining power with suppliers. These may be the
easiest to “put a number” to, but are not considered real savings in resources and
are less favored. 40 Production efficiencies are somewhere along the continuum
between innovation and pecuniary efficiencies. Production efficiencies are those
efficiencies that permit firms to produce more output or better quality output from
the same amount of input. 41
35 See Kattan op cit pg 514.
36 See comments of Professor Michael Porter who in commenting on the US Merger guidelines criticized
them for its emphasis on static efficiencies and observed “Only scant attention is paid to innovation or
progressiveness as an important goal that antitrust policy should concern itself with” See Porter and Stern,
The New Challenge to America’s Prosperity :Findings from the Innovation Index (Council on
The New Challenge to America’s Prosperity :Findings from the Innovation Index (Council on
Competitiveness ,1999) Quoted in Current American Antitrust is Mortally Wounded and an Alternative is
well Developed Charles D. Weller ANTIRUST LAW REPORT 11 March 2000.
See also “Dynamic efficiency is the most important beneficial effect of competition” Empirical Evidence
of the Benefits From Applying Competition Law UNITED NATIONS CONFERENCE ON TRADE AND
DEVELOPMENT, 24 November UNCTAD report p 8
37 Economists often speak of efficiencies as being of a “dynamic” or “static nature”. Static efficiency may
be further divided into allocative efficiency and productive efficiency. Allocative efficiency is defined as
the allocation of products through the price system in the optimum manner required to satisfy consumer
demand which will occur where the output of each product is at the level where the marginal cost of
producing extra units equals their price. UNCTAD REPORT, op cit p5
38 See Kattan op cit pg 523. Kattan refers to various studies including recent work by Salop and Roberts
who argue that certain efficiencies have a spillover effect because rivals replicate them over time.
39 See OECD report op cit pg 6. “ Dynamic efficiencies benefit consumers no less than productive
efficiencies but they are inherently more difficult to measure making their use more problematic in the
trade off defence.”
40 OECD report op cit pg 6. See also the Canadian Tribunal case of Commissioner v Superior Propane
Uversion dated 30 August 2000, where the Commission argued that procurement claims by the merging
forms that they could negotiate discounts in truck and freight rates were largely pecuniary. The Tribunal
accepted this criticism and rejected these claims in its assessment.
41 As Margaret Sanderson explains “ Production efficiencies include productlevel, plantlevel and
multiplantlevel operating and fixed cost efficiencies; savings associated with integrating new activities
within the firm; and savings attributable to the transfer of superior production techniques and knowhow
from one of the merging parties to the other Plantlevel savings refer to those that flow from specialization,
elimination of duplication, reduced downtime, smaller inventory requirements, or the avoidance of capital
14
56. Production efficiencies can themselves be further classified into various types
including plant level economies, distribution, procurement and capital cost
economies, research and development. Not all merit equal recognition as part of
an efficiency defence. Areeda treats plant size and plant specialization economies
as those most worthy of recognition but is more sceptical about claims for others
frequently raised which he describes as “ordinary efficiencies” e.g. distribution,
procurement and overhead economies. 42
57. In Canada in the Hillsdown , the first case to deal with the efficiency defence in
any detail, the Tribunal did not make any finding as to the types of efficiency that
it would consider acceptable. 43
58. In its most recent judgment and indeed the only case thus far where the Tribunal
has accepted an efficiency defence under section 96 the Tribunal in
Commissioner of Competition v Superior Propane Inc and ICG Propane Inc
(“Superior”44) was far more solicitous about accepting efficiency claims but did
not establish a set of criteria for determining which are worthy of recognition and
which were not. This is perhaps because the Tribunal accepted a total surplus
standard to its analysis of which we say more below.
59. The U.S. Merger Guidelines 45 provide some indications on their preference:
“The Agency has found that certain types of efficiencies are more likely to
be cognizable and substantial than others. For example, efficiencies
resulting from shifting production among facilities formerly owned
separately, which enable the merging firms to reduce the marginal cost of
production, are more likely to be susceptible to verification, merger
specific and substantial, and are less likely to result from anticompetitive
reductions in output. Other efficiencies, such as those relating to research
reductions in output. Other efficiencies, such as those relating to research
and development are potentially substantial but are generally less
susceptible to verification and may be the result of anticompetitive output
reductions. Yet others, such as those relating to procurement,
management or capital costs are less likely to be mergerspecific or
expenditures that would otherwise be required. Multiplant level savings include those associated with plant
specialization, rationalization of administrative and management functions, and the rationalization of
research and development activities. Efficiencies also may be brought about in respect of distribution,
advertising and raising capital. A reduction in transaction costs associated with integrating activities that
previously were performed by third parties, such as contracting for inputs, distribution and services, also
may constitute production efficiencies.” See Margaret Sanderson Efficiency Analysis in Canadian Merger
Cases ANTITUST LAW JOURNAL 623 (1997)
42 See Areeda para 975. See also Sanderson op cit pg632
43 supra
44 supra
45 Section 4 Horizontal Merger Guidelines Issued by the U.S. Department of Justice and the Federal Trade
Commission April 8, 1997.
15
substantial, or may not be cognizable for other reasons.”
60. There is also debate about whether only reductions in marginal cost should be
included as efficiencies as fixed costs reductions have no effect on current price.
Others argue that in the long run the cost of replacement is a marginal cost and
should be recognised. 46
61. In the Tongaat Hulett case we gave the following examples of efficiency gains
contemplated by the Act:
“One that for example evidences new products or processes that will flow
from the merger of the two companies, or that identifies new markets that
will be penetrated in consequence of the merger, markets that neither firm
on their own would have been capable of entering, or that significantly
enhances the intensity with which productive capacity is utilised . ”
62. We pointed out in Tongaat Hulett that these were not intended to be an exhaustive
list . We would similarly be reluctant to propose a list in this decision although we
come to a more tentative conclusion below in our conclusion.
Measuring the Trade off
63. Section 16, as we indicated earlier, requires that the efficiency gains must be
“greater than” and “offset” the anticompetitive effects. This presupposes a
weighing process, which suggests that the efficiencies must be capable of
measurement, as opposed to broad speculative assertions. To give meaning to the
efficiency assessment we need a way to verify the efficiency gains asserted and
then establish how they “tradeoff” against the loss to competition. Verification
itself is conceptually difficult. First one must assess efficiencies quantitatively
then the likelihood they will occur. This is the approach taken in the US merger
guidelines:
“Therefore the merging firms must substantiate efficiency claims so that
the Agency can verify by reasonable means the likelihood and magnitude
of each asserted efficiency, how and when each would be achieved, (and
of each asserted efficiency, how and when each would be achieved, (and
any costs of doing so), how each would enhance the merged firm’s ability
and incentive to compete, and why each would be merger specific.
Efficiency claims will not be considered if they are vague and speculative
or otherwise cannot be verified by reasonable means”. 47
64. The Canadians take a similar approach :
46 See Kattan op cit pg 533
47Section 4 Horizontal Merger Guidelines Issued by the U.S. Department of Justice and the Federal Trade
Commission April 8, 1997
16
“In general, parties should provide a reasonable and objectively verifiable
explanation of why efficiencies that are available would not likely be
sought by alternative means if the order were made. ”48.
65. Verification is not the only hurdle one has to cross in offset analysis. The
assessment of the trade off is even more formidable. The case law and the
literature suggest that two approaches can be followed; a formulaic approach such
as that favored in the Superior case and a discretionary approach such as the US
Merger Guidelines. The formulaic leads one to approach the problem as an
economist would do in a classroom demonstrating Williamson’s trade off.
Efficiencies claimed and deadweight losses are calculated in terms of a formula
and then compared. 49 If the efficiency as calculated exceeds the deadweight loss
the trade off requirement has been satisfied. One can see immediately why some
find this approach attractive. Once the numbers have been verified the outcome is
definitive. The problem with the formulaic approach is that the losses and gains
are not always susceptible to measurement by the same units and on the same
scale. The one may be quantitative and measurable in units such as rands, the
other may be qualitative and defy easy calibration. How does one balance a loss
associated with a possible 15% price increase with the gains associated with an
innovation in product performance? Another problem with adopting measuring
only deadweight loss is that market power effects may lead to price increases by
other firms and thus the deadweight loss may be understated. 50
66. When adopting the flexible approach the competition adjudicator relies on its
discretion rather than an equation. But the adjudicator can’t begin exercising its
discretion unless it has formulated a policy approach to guide it in its evaluation.
discretion unless it has formulated a policy approach to guide it in its evaluation.
The danger with this approach is that it can lead to uncertainty – how will parties
know in advance whether claims of efficiency will be accepted? Nevertheless we
would not see these two approaches as mutually exclusive and a flexible approach
that recognizes and weighs the evidence of a formulaic result has merit.
67. Sanderson is reassuring on this point:
“Indeed it is important not to view the tradeoff analysis as an exact
science, even where quantitative estimates are available. Discretion has
been exercised at various points in time, particularly when assigning
probability weights to cost savings and when quantifying anticompetitive
effects. The aim of the exercise is to compare two orders of magnitude –
efficiencies versus anticompetitive effects – and not to make a decision
based on the fact that n+1 > n. Furthermore, comparing orders of
48 Canadian Merger Guidelines, Part 5 page 47
49 See Fisher and Lande op cit and Superior for examples of the workings
50 See Kip, Viscusi et al op cit pg 207
17
magnitude generally is feasible” 51
Must the gain be passed on to the consumer?
68. Perhaps the most controversial issue of all is who should benefit from the
efficiency claimed? Put in another way, if efficiency defences are to be
recognized, is it a requirement that they lead to lower prices for consumers i.e.
consumer welfare, or is it sufficient that producers benefit, which means since we
have already accepted that the merger is anticompetitive, there will be a wealth
transfer from consumers to producers.
69. These are sometimes referred to as the choice between a consumer welfare and a
total welfare standard. 52 Under a consumer welfare standard efficiencies must be
passed through to consumers in some proportion. Under a total welfare standard
welfare transfers from consumers to producers are regarded as socially neutral –
all that is required is that the transaction leads to an increase in the sum of
consumer and producer surplus. On this approach the question of whose pockets
should benefit is not considered to be of any economic significance since the
wealth is not lost to society whether it transforms itself into lower prices for
consumers or a greater dividend for the shareholders of producers. This answer is
not a settled one in competition law. Neither in the United States nor Canada have
Courts definitively answered this question and to the extent they show an
inclination so do so they have come to opposing conclusions. In brief, in Canada
the Merger Guidelines have adopted a total welfare approach but this approach
was questioned by the Tribunal in the Hillsdown case where Justice Reed seemed
to opt for a consumer welfare standard based on the legislative history of the
Act.53 A consumer welfare approach would ordinarily require a much greater
Act.53 A consumer welfare approach would ordinarily require a much greater
magnitude of efficiencies than the total surplus standard. 54 This approach was not
followed in the Canadian Tribunal’s most recent decision in Superior where the
Tribunal held that the total surplus is the correct standard. 55 Here the Tribunal
51 Sanderson op cit pg 637
52 Consumer surplus is a measure of consumer welfare and is defined as the excess of social valuation of
product over price paid. It is measured by the area of a triangle below a demand curve and above the
observed price. Consumer surplus is the difference between what a consumer is willing to pay and what she
has to pay. Consumer surplus is widely used as a measure of consumer welfare. Consumer welfare is
defined as the individual benefits derived from consumption of goods and services. Usage of consumer
surplus as a measure of consumer welfare is however controversial for some. Producer surplus refers to the
amount of income a producer would receive in excess of what they require in order to supply a given
number of units of a factor. It is measured by the area above the supply curve and below observed price.
Total surplus is the sum of consumer and producer surplus. See Glossary of Industrial Organisation
Economics and Competition Law. OECD Paris.
53 See Hillsdown op cit pages 8496 . McFetridge argues that the standard set by the Tribunal would mean
that the efficiency defence would be available only in cases where savings were so great that the prices
charged by the merged entity did not rise at all. See McFetridge op cit pg 3545.
54 See OECD report op cit pg 6
55 See Superior decision 447.
18
traded off the efficiency gain against the deadweight loss and coming to the
conclusion that the former was the greater, found the efficiency defence had
succeeded. The decision was not unanimous however.
70. The United States has a less complicated approach. In part this is due to the fact
that the efficiency defence is a common law creation and not written into statute.
As such, it is interpreted as a discretionary tool and does not require a trade off
analysis bedeviled by statutory interpretation. Those who have addressed the issue
refer to this as the “passing on” requirement. Areeda explains this as:
“whether all or at least most of the efficiencies will be reflected in lower
customer prices rather than higher owner profits.”
71. In FTC v University Health Inc the Court held that :
“ ..a defendant who seeks to overcome a presumption that a proposed
transaction would substantially lessen competition must demonstrate that
the intended acquisition would result in significant economies and that
these economies would ultimately benefit competition and, hence,
consumers.”56
72. In FTC v Staples 57 the Court applied a pass through rate analysis in rejecting an
efficiency defence raised by the merging parties. The Court did not consider
whether the efficiencies had to be passed through in order to be accepted and
appears to have accepted this requirement as a given.
73. The Merger Guidelines as revised in 1997 state:
“To make the requisite determination, the Agency considers whether
cognizable efficiencies likely would be sufficient to reverse the merger’s
potential to harm consumers in the relevant market, e.g. by preventing
price increases in that market” 58
74. One writer has cynically captured the approach of the United States Courts to
efficiencies by observing that:
efficiencies by observing that:
“Courts have tended to reject efficiency claims on evidentiary grounds in
cases in which they found mergers to be anticompetitive and to credit
56 See FTC v University Health 938 F2d 1206,1223(11 th Circuit 1991)
57 See FTC v Staples,Inc 970 F.Supp 1066,1090 (D.D.C. 1997) The Court found that although the merging
firms had alleged that 66% of the savings achieved from the merger specific efficiencies would be passed
on to consumers in the form of lower prices, historically the evidence showed past cost savings in respect
of one of the firms, Staples, had led to a pass through rate of only15 – 17%.
58 Merger Guidelines 4 pg 31
19
claimed efficiencies when sustaining transactions on competitive
grounds.”59
75. A further problem is the credibility of claims that efficiency gains will be passed
on. What if postmerger it is not implemented? Does one unscramble the merger
on those grounds? What if other factors intervened preventing parties even in
good faith from effecting the pass through? Requiring a pass on as a prerequisite
for establishing the efficiency defence would be subject to the same criticisms that
other price control remedies are viz. that it is not appropriate for the regulator to
become a price setter.
Are the efficiencies mergerspecific?
76. The final requirement of section 16(1)(a) is that it must be shown that the
efficiencies “would not likely be obtained if the merger is prevented” . Expressed
differently this is a requirement that the efficiencies must be “mergerspecific” to
be cognizable. If the efficiencies could come about through some other legal
arrangement or organizational form that is not a merger, or if one of the firms
could achieve a claimed efficiency on its own, the efficiency defence fails.
77. The Canadian Merger Guidelines in its categorization of efficiency gains excludes
those claimed efficiency gains that:
“ would be likely to be attained if the order that would be required to
remedy the anticompetitive effect of the merger were made.” 60.
Textual analysis
78. Our statute differs from its Canadian counterpart in some important respects.
Firstly our concept of efficiency is used in section 16 in combination with the
words “technological or other procompetitive gain”. Adopting an eiusdem
generis approach and trying to discern a common meaning between these three
words, this would suggest that in this context, efficiencies that equate to
“technological gains” i.e. dynamic efficiencies or “procompetitive gains” i.e.
those that constitute real economies, not mere pecuniary gains, are to be favoured.
79. Secondly in the “purpose” clause, which we find in section 2(a) of the Act,
efficiency is conceptually linked to notions of a dynamic nature:
“ to promote the efficiency, adaptability and development of the
economy” [our emphasis]
59 See Joseph Kattan , op cit 513, 518
60 In other words, an assessment is required of whether the anticipated gains would be realized by
alternative means if the merger were disallowed
20
This choice of language is, once again, suggestive of notions of dynamic and
productive efficiencies.
80. Thirdly the use of employment as a public interest concern in section 16(3)(ii)
which must be taken into account in assessing the desirability of the merger
suggests that employment reduction should not be recognized as an efficiency in
terms of section 16 (1)(a)(i). The legislature can hardly be seen to be giving a
defence in one section (16(1)(a)(i)) and taking it away in another (section 16(3)
(ii)).
Conclusion
81. This lengthy digression into comparative jurisprudence illustrates the Pandora’s
box that the efficiency defence opens; for it admits of no simple solutions, small
wonder why some have sought to keep well away from it. Nevertheless we
believe that trawling through the literature and the case law despite the eddying
currents of controversy that rage through them, some recurring principles emerge
which suggest an approach to these issues that is both consistent with our statute
and best practice. We propose the following test – where efficiencies constitute
“real” efficiencies and there is evidence to verify them of a quantitative or
qualitative nature, evidence that the efficiencies will benefit consumers, is less
compelling. On the other hand, where efficiencies demonstrate less compelling
economies, evidence of a pass through to consumers should be demonstrated and
although no threshold for this is suggested, they need to be more than trivial, but
neither is it necessary that they are wholly passed on. The test is thus one where
real economies and benefit to consumers exist in an inverse relationship. The
more compelling the former the less compelling need be the latter. When we talk
of real economies we would, without proposing an exhaustive list, include
of real economies we would, without proposing an exhaustive list, include
dynamic efficiencies, production efficiencies ranging from plant economies of
scope and scale to research and development efficiencies that might not be
achieved short of merger. Pecuniary efficiencies would not constitute real
economies nor would those that result in a mere redistribution of income from the
customers, suppliers or employees to the merged entity. Without categorically
rejecting them we would be more sceptical than the Canadian courts in accepting
certain efficiencies such as administrative efficiencies since these can be
established in most mergers. As our discussion of the textual features of our Act
has shown, it could not have been the intention of the legislature that a merger
that is anticompetitive could be immunized by a demonstration of savings on clips
and clerks.
82. Whilst this approach may be criticized for giving the competition authority too
much discretion at the expense of business certainty, the alternative which is to
interpret this section as a mathematical comparison of two areas on a Williamson
21
diagram, permits an approach so clinical and rigid that it would reduce the proper
exercise of a discretion to a matter of calculus.
THE FACTUAL ISSUES
83. We turn now to applying this analysis to the current facts. The merging parties
have identified three efficiencies that they associate with the merger. These are:
(i) Plant scale efficiencies and plant use efficiencies
(ii) Supply production efficiencies
(iii) Volume discounts
We examine each one in turn.
Plant efficiencies
84. Baldwins currently manufactures ISF material at its Rosslyn plant. Motorcar
manufacturers are continually setting higher specifications for the finishes to their
vehicles, BMW being a prime example. This has placed pressure on Baldwins and
Trident who must deliver ISF product that meets these more exacting standards.
Unfortunately the steel supplied by ISCOR is not of the required quality and
hence it requires better quality plant to clean it up so it meets the standard. Lack
of sophisticated, stateoftheart equipment has meant Baldwins has been forced
to utilize its press feed line to process the outer blank ISF products, tying up
capacity and decreasing efficiency. The press feed line’s designated purpose is
actually for punching holes and dropouts in formed flat products, for example,
pressing out windows to produce a window frame. Steel is then removed from the
centre of the blank to produce the window frame. Trident does not experience the
same problem with inferior quality steel. Its stateoftheart equipment eliminates
problem of inferior, dirty and unevenly oiled steel material obtained from ISCOR
because they have washing and reoiling capabilities that clean off surface
defects. Additionally their processing lines are presently being underutilised.
85. The parties estimate that the current capital expenditure required for the
processing of outer steel blanks by Baldwins on its press feed line approximates
R3,000 per hour. Should processing such outer blank products be effected on
Trident’s processing lines, the cost will be reduced to R1,500 per hour. This
amounts to a substantial cost saving of 50%. Consolidation of the firms’
manufacturing processes would reduce the amount of “scrap” generated by each
firm individually. Baldwins scrap rate is estimated by the parties to currently be
in the region of between 7%8%, whereas Trident’s is lower, at 2%3%. Once the
manufacturing operations are integrated, the average will approximate 3%, on the
parties’ submissions, generating cost savings that would add to the efficient use of
Trident’s plant. It is accordingly clear that by acquiring Baldwins’ press feed line
and utilising its own plant facilities and cuttolength line to optimal purpose,
22
Trident will process ISF blanks more efficiently and costeffectively than before,
ensuring the merged entity becomes a competitive, lowcost processor of steel
blanks.
86. The merger will also allow for plant level reorganisation, achieving significant
real economies. Trident’s excess capacity will be used to perform Baldwins’
existing cutting capacity. Baldwins’ press feed line would then be free to be used
for its optimal function i.e. the pressing of blanks for windows and doors, a
function Trident does not currently provide as it does not have the requisite
machinery. Clearly the ability to provide this additional service will make Trident
more competitive. By way of example, Trident say that this new capacity will
enable them to compete for the processing of the outer steel blanks for the new
MercedesBenz CClass contracts, a contract that they would otherwise not be
sourced locally. This contract is valued at R50 million per annum. None of the
economies we have outlined above would have been achieved without the merger.
Supply efficiencies
87. The merger would also lead to production efficiency gains for the supplier. Iscor
provides a standard list of products it supplies which incorporates a finite product
range. The exact products that make it onto the standard list are determined by the
amount of tonnage of the product merchants order annually. Iscor demarcates a
minimum amount of tonnage merchants must order annually to make it worth
their while to manufacture it, and therefore put it on their list. The combined
entity would order more tonnage annually, thereby inducing Iscor to place that
particular product on the standard list. If the product is not on the list, merchants
sourcing from Iscor have to incur the cost of buying alternative products which
subsequently have to be cut down to size by them. The balance is then disposed of
subsequently have to be cut down to size by them. The balance is then disposed of
as scrap. Therefore getting Iscor to supply as many products as possible on this
standard list is crucial to minimize wastage in the steel merchants’ plants. For
instance if Iscor’s standard list product is in a 1100mm form, but the parties only
require 850 mm they would have to cut it down to size. The remaining material
would have to be utilized as scrap or in some other lower value form. Premerger
the parties’ individual ordering levels are too low, whereas post merger the
combined quantities of both entities would ensure the order reaches the requisite
level, to be placed on the standard list.
.
88. Although the parties were not able to precisely quantify the efficiencies that
would result from such reductions of wastage, it is obvious that having such a
standardized system would allow Iscor to make available correctly sized products,
encouraging increased production and output levels, by getting the right product to
market faster and reducing wastage. By optimizing their own processes, suppliers
improve the efficiency of the industry as a whole. 61
61 In the Canadian Merger Guidelines, this efficiency is expressly contemplated:
23
89. This same principle was referred to in Hillsdown62, where the Court quoted with
approval the following speech by the former Director of Investigation and
Research on 15 October 1988:
“ However cost savings resulting from larger volume orders, which
enables the purchaser to attain economies of scale or incur lower
transaction costs, may reflect real efficiency gains and consequently may
be accepted for consideration. If the placement of larger volume orders
also enables the supplier to reduce costs, part of which are transferred to
the purchaser in the form of lower prices, then that part may also qualify
as real efficiency gains.”
Volume discounts
90. The parties also claim a further efficiency gain because they will become entitled
to volume discounts from Iscor. We treat this claim with much greater scepticism
than the others. Volume discounts on their own do not, in the absence of other
categories of efficiency gains, necessarily constitute the standard of efficiency
contemplated in section by 16(a)(i)). These are not gains brought about by a
saving of resources. As the Canadian Guidelines suggest:
“ this is contrasted against gains that are anticipated to arise as a result of
increased bargaining leverage that enables the merged entity to extract
wage concessions or volume discounts from suppliers that are not cost
justified, representing a mere distribution of income to the merged entity
from employees or the supplier, as the case may be. Such gains are not
brought about by a saving in resource.” 63
Accordingly we have not taken volume discounts into account in weighing up the
efficiencies.
“ … where the supplier is able to offer better terms as a result of the fact that larger orders from the
merged entity will enable the supplier to attain economies of scale, reduce transaction costs or achieve
other savings.”
62 supra
other savings.”
62 supra
63 See Canadian Guidelines. Areeda says if larger firms acquire greater discounts because of their
bargaining power this is simply a transfer of income from supplier to purchaser without any resource
saving. If the post merger firms acquire monopsony power vis a vis purchasers , far from creating a
defence, is affirmatively harmful as a monopsony creates the same resource dislocation that a monopoly
does. See Areeda op cit 975i.
24
Conclusion
91. The efficiencies the parties have claimed are in our view sufficient to be “greater
than and to offset” any anticompetitive effect. Although we have insufficient
evidence to quantify this in the form of calculations 64, the efficiencies claimed
are so overwhelming, especially in relation to the plant reorganisation that is
entailed and the reduction of the scrap rate that they suggest, that they will dwarf
the anticompetitive effects. We must bear in mind that the merging firms ability to
increase price is only up to the import parity price. Any move on their part to
price above this will lead to customers sourcing overseas. Since this import parity
price is not likely to be much higher than the current market price, the
anticompetitive effects whilst real, are constrained. 65 Had this not been the case,
we may have either found the trade off had not been sufficiently established or we
might have considered approving the merger, but subject to appropriate
behavioral conditions.
92. The efficiencies contemplated could not have been achieved without the merger.
Baldwins produced evidence to demonstrate that its Rosslyn plant had been run at
a loss for more than two years. The firm was not committed to expending any
more on the plant and no other buyers could be found for it. Extracts from
Director’s minutes dated 5 August 1999 show that the company was concerned
about its Rosslyn plant’s profitability for some time and was investigating various
options, prior to its ultimate decision to sell. 66 The supply efficiencies from Iscor
required a single firms’ order and could not be achieved by the firms individually.
Although there is no evidence that the efficiencies will be passed through to
consumers in the form of lower prices, the nature of the efficiencies is such that
consumers in the form of lower prices, the nature of the efficiencies is such that
this need not be shown in the context of this merger if we apply the
proportionality test we have adopted above.
Public Interest Issues
93. If the merger proceeds, the parties estimate the number of retrenchments
following the implementation of the merger will not exceed 10 and this will affect
only management staff (general managers, sales managers, debtors clerks and
inventory controllers). Thereafter, they estimate a further 40 employees will leave
Trident’s employ at a normal industry rate of attrition. In contrast if the merger is
prevented Baldwins would be forced to close down some of its plants and scale
64 Although we do know that the cutting line of Trident which will now assume the volume that Baldwins
previously did on its press feed machine will lead to a 50% cut in costs.
65 August Lapple, a major customer, (the press shop for BMW) have suggested that this would be
approximately 20%.
66 This concern seems to have been well known in the industry and was referred to in Volkswagen’s
statement to the Commission.
25
back at others leading to a greater loss of employment. 67
Conclusion
In light of the above the Tribunal is satisfied that although the merger does substantially
prevent or lessen competition in the ISF market, the parties have successfully discharged
the onus of proving that such anticompetitive effects are convincingly offset by the
efficiency gains the merged entity, as well as the industry, are liable to experience as a
result of the merger. For this reason the merger is approved.
30 January 2001
N.M. Manoim Date
Concurring: S. Zilwa and P.E Maponya
67 Baldwins suggested this figure could be as high as 250.
26