COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No: 56/LM/Oct01
In the large merger between:
Bidvest Group Limited
And
Paragon Business Communications Limited
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Reasons for the Competition Tribunal’s Decision
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1. Introduction
1. This transaction will result in the merger of Paragon Business Communications
Ltd (“Paragon”) and Lithotech Limited (“Lithotec”), a subsidiary of Bidvest.
2. The Competition Commission recommended that the proposed merger between
the above-mentioned parties be prohibited. It avers that the parties are leaders in
most of the product markets that it has identified. The Commission holds that the
merger will eliminate Lithotech’s only significant competitor and create an
environment in which the merged entity can behave to an appreciable extent
independently of its remaining competitors.
Proceeding
3. At a pre -hearing conference held on 14 November 2001 it was decided that the
Tribunal panel would, before the hearing was to start on 5 December, hold an
inspection in loco at Lithotec’s factory in Johannesburg in order to familiarize
itself with the different products involved in this me rger. The Tribunal also
requested additional information from the parties and the Competition
Commission on, inter alia, the different product markets, the parties’ competitors
and the joint venture.
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4. At the hearing the parties called two expert witnesses, Mr Michiel Bester of
Econometrix (Pty) Ltd, who provided a broad economic perspective of the
printing market, and Mr Nick Rockey of Trialogue (Pty) Ltd, who provided a
product market analysis. Mr Neil Birch, the group Managing Director of Lithotec
and Mr David Kidd, the CEO of Paragon provided testimony on the businesses of
the parties to the merger.
5. The Competition Commission called Mr Victor Gordon of Readers Digest, one of
Paragon’s customers, and Ms Anet Jansen, the Deputy Chief Procurement Officer
of the South African Revenue Services (SARS). SARS has, on different
occasions, awarded tenders to both Paragon and Lithotec to print tax forms.
2. The decision
6. For reasons set out below we have decided to approve the merger unconditionally.
3. The transaction
7. Bidvest wishes to acquire all of the shares of Paragon. The transaction will be
effected either directly or indirectly through Lithotech, one of Bidvest’s
subsidiaries. Bidvest has concluded agreements with certain shareholders of
Paragon, who collectively hold 50.2% of the total number of Paragon shares in
issue, as well as with Paragon. In terms of the agreements, Bidvest or Lithotech
will extend an offer to the shareholders of Paragon to purchase all of their
Paragon shares or propose a schem e of arrangement between Paragon and its
shareholders. Pursuant to either arrangement, Paragon will become a wholly
owned subsidiary of Bidvest.
8. The parties believe that the merger would result in significant efficiency gains
through cost savings thus e xtending the life of mature products. This would also
allow the merged entity to extend its operations into the more profitable and
innovative areas of their business.
4. The parties to the merger
9. Bidvest is listed on the JSE in the Industrial -Service S ector. It is the holding
company of a diverse group of companies whose activities span catering supplies,
company of a diverse group of companies whose activities span catering supplies,
food and allied products, financial and related services, freight forwarding,
clearing, packaging, stationery, linen rental, laundry, cleaning services and office
furniture supplies and related products. Bidvest’s shareholding is widely
dispersed amongst institutional investors on the JSE, the largest individual
shareholder being the Public Investment Commissioner with 10.4% of the issued
capital and s ome 48.4% of its issued capital being spread among 15 institutional
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shareholders holding in excess of 1% of the issued capital. Bidvest conducts its
office supplies business primarily through Lithotech, its wholly owned subsidiary.
10. Paragon is listed on the JSE in the Industrial -Packaging and Printing Sector and
provides a broad spectrum of business communications solutions including
business forms, customer communications and fulfillment services. Paragon’s
shareholding is widely dispersed amongst institutional investors on the JSE. The
largest individual shareholder is Lungisa Investment Holdings (Pty) Ltd with
23.56% of the issued shares capital. Lungisa is an empowerment shareholder.
Including Lungisa, five shareholders hold approximately 50.2% of th e issued
share capital.
11. In 1998 Lithotech and Paragon entered into an arrangement in terms of which
they established a joint venture company called Listings Direct (Pty) Ltd.
5. The printing industry
12. The printing industry can be divided into four spe cialized areas, each fulfilling a
specific printing activity which does not compete with the other, namely 1) the
printing of magazines and books on commercial web presses, 2) the printing of
business forms, that is, the printing of stationery for business es such as invoices,
statements and self-adhesive labels, 3) the newspaper industry, which uses a cold-
set web press to print, and 4) general commercial printers, which print all types of
brochures, letterheads, business cards, pamphlets and catalogues on sheet-fed
printers.
13. Lithotech and Paragon are both involved in the printing of business forms.
6. The merger analysis
The Joint Venture
14. In 1998 Paragon and Lithotech merged their separate ‘business forms listing’
operations into a joint venture, Listings Direct, owned 67% by Lithotech and 33%
by Paragon1. Listings Direct was formed to manufacture listing paper, which can
be defined as blank or single ruled continuous paper with sprocket holes on the
be defined as blank or single ruled continuous paper with sprocket holes on the
edges for use in computer printers for printing output for presentation or
storage/archive. There was, at the time of the formation of the joint venture,
substantial excess capacity in the manufacture of listings paper because of the
decline in demand for the product. Through the merger the parties comb ined their
separate dedicated facilities for the production of listing paper.
1 The Competition Board approved the transaction in 1998.
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15. Lithotech and Paragon are the only customers of Listings Direct. They each, in
turn, distribute the product directly to the end -user or to sub -distributors of the
product. This product is purchased by end -users who range from an individual
using a small desk -top printer through to a variety of businesses ranging from
very small to very large businesses that have large data centers and that print on
large printers or large laser printers.
16. While frequently produced on large purpose -built presses, listing paper can also
be produced on most business forms presses.
17. The current transaction does not change the competitive situation in this segment
of the business forms market and it will not be discussed further.
The relevant product market
18. The Competition Commission adopted a two - pronged approach in defining the
relevant product market.
19. Firstly, drawing on the product list identified by the parties in their initial filings,
the Commission treated each product identified by the parties as constituting a
distinct product market, effectively holding that the various products are not
substitutable for each other by virtue of their different characteristics, prices and
intended uses. The Commission avers that the parties are by far the largest
players in most of these markets and are the only players positioned in all of these
markets.
20. The parties do not agree with the Commission’s analysis of the separate product
markets. While acknowledging that the Commission has constructed its relevant
markets on the basis of the product listings provided by the parties in their initial
submissions to the Commission, they aver that, in the course of the investigation,
they pointed out to the Commission that, in their view, the relevant markets were
significantly wider than that suggested by the product list. However the
Commission chose not to investigate the possibility of product substitutability and
Commission chose not to investigate the possibility of product substitutability and
assumed that the products as described b y the parties in their documents
constituted separate markets.
21. In response the Commission points out that correspondence received from
competitors tended to confirm the product listing used by the parties in their
initial submissions and which formed t he basis of the Commission’s identification
of the relevant product markets2. The Commission also points out that none of the
respondents to their questionnaire had queried any product markets identified by
the Commission.
2 The parties had provided a non -exhaustive list of competitors in each product category in their CC4(2)
documents.
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22. Secondly, the Commission has identified a ‘bundled product’. No other provider
of the products or services in question provides the variety of business forms
products or services that the parties do. This ‘bundled product’ constitutes, in the
Commission’s view, a separate relevant mark et in which the parties to this
transaction are the only players. The Commission averred that large corporate
clients as well as the public sector not only require their providers of business
forms to provide the full gamut of the products and services th at they require - a
‘one-stop shop’ - but these large customers also require their providers to provide
volumes beyond the reach of small players. For these reasons the parties are in a
league of their own and the merger would, therefore, eliminate the com petition
that currently exists between the only firms capable of providing a ‘one -stop
shop’ facility and the only firms able to provide the volume required by larger
customers.
23. We will now assess the Commission’s two approaches in greater detail.
1. The separate product markets
24. The Competition Commission defines the relevant product markets as:
1) Business forms - listing, which, as already noted, is produced by the joint
venture, Listings Direct. According to the Commission the merger will not
substantially affect this product market. As already noted, we accept this
view and this product will not be discussed further.
2) Business forms – continuous which involves the manufacturing of
various types of business forms on a continuous print basis such as
invoices and statements and which has the clients’ details printed on the
form. This is the major market in which both Lithotech and Paragon are
active. This product line represents the largest part of the parties’ income
prior to the merger.
3) Business forms – snap s ets which is a multi -ply form, continuous or
sheeted, where two or more sheets are joined by glue along one or more
sheeted, where two or more sheets are joined by glue along one or more
edges. The multi -ply forms utilize “self carbonating” paper or they are
interleaved with carbon paper. When in sheet form, many sets may be
bound into books or pads. Examples of this product are bank deposit and
withdrawal slips.
4) Business forms – to sheet , which is a business form that is delivered in
loose sheets. The sheets are either the result of printing a roll which is then
converted to separate sheets before delivery or paper purchased in sheets
and merely printed. The loose sheets can be bound into books. This
product line is not one of the core product lines in which the parties are
active.
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5) Direct mail printing , involves printing for direct mail companies. Clients
such as insurance companies have their documents printed, personalized
and posted to policyholders by one company.
6) Laser printing involves high quality printing using large laser printing
machines. Personalized dir ect mail printing and bank statements are
printed in this way. It involves three processes namely printing,
personalization and mailing which cannot be split. A computer image is
transferred to the paper at high speeds. Large laser printers can take
various types of paper:
• Plain paper sheets from the paper mills
• Pre-printed sheets from a printer
• Pre-printed packs of continuous paper
• Pre-printed rolls of paper from a printer
• Plain paper rolls from the paper mills
7) Mailing i.e. where items are inserted into an envelope, manually or
mechanically. The items to be mailed are delivered to the local postal
depot in bulk, facilitating discounts for the client. Items can be inserted by
machine if standard. Hand insertion is effective for small runs and novel
items. Items may be personalized or standard such as magazines.
8) Self Adhesive Labels is a process similar to forms printing except the
substrate is a label paper and the most common print technology is
flexography.
9) Book Binding , where in business forms terms, books are created by
binding sheeted forms with various cover options. This is not one of the
core activities of the parties.
10) Equipment Sales involves the sales of machines such as those that fold
letters into envelopes, ready for posting. These machines are generally
referred to as form handling equipment. This is not one of the core
activities of the parties.
11) Logistics and Fulfillment relates to the outsourcing of the customer’s
non-core activities such as storage and distribution of printed and other
consumable items on the customer’s behalf. It involves a group of
activities such as warehousing, picking and packaging, distribution and
activities such as warehousing, picking and packaging, distribution and
procurement services. According to the parties this is a growing area of
business. This is a new service that the part ies are entering, largely
inspired by the growing desire on the part of their clients to focus on their
core business activities and outsource the ancillary activities related to
their business.
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12) Web Finishing involves further processing of printed sheets of paper by,
for example, adding pressure glue to the edges of the letter in order to
make it a self -sealing envelope, or by adding stamps to letters that can be
removed in order to reveal PIN codes. The most common products
manufactured under this heading are salary advices and water and
electricity accounts. The process is done on specialized equipment called a
Hunckler machine3.
13) Paper Rolls and Carbon involves the purchasing, manufacturing and
selling of till rolls, ATM rolls, fax rolls, thermo paper ro lls and carbon
paper.
14) Sale of Paper and Envelopes , a procurement function provided by the
parties to major corporate customers to source their paper and envelopes
requirements. This is not a core product of the parties and the parties
generally only service major corporate customers.
25. We will focus our analysis on Business Forms – Continuous (no.2), Business
Forms – Snap Sets (no.3), Business Forms – To Sheet (no.4), Direct Mail printing
(no.5), Laser Printing (no. 6) Mailing (no.7) and Web Finishing (no12).4
26. The parties do not accept the Commission’s market definition. They essentially
argue that “business forms -continuous” (no.2), “business forms-snap sets” (no.3)
and “business forms-to sheet” (no.4) comprise, for the purpose of defining the
relevant market, a single product and should form part of a wider market defined
as “business forms”. They point out that both ‘business forms -to sheet’ and
‘business forms-snap sets’ are close derivatives of ‘business forms -continuous’ –
in the former the contin uous web of paper is cut into individual sheets prior to
delivery to the customer while in ‘business form – snap sets’ the output of
‘business forms-continuous’ is simply bound into a pad or small booklet.
27. The same approach, they claim, should be followed with regard to direct mail
printing, web finishing and laser printing, which could all be regarded as
printing, web finishing and laser printing, which could all be regarded as
derivatives of a particular type of business forms – essentially and advertising
brochure - and should not be defined by the actual processes involved.
28. The parties aver that web finishing is a secondary process because it combines
more than one traditional product into a single product by adding an adhesive
patch or a self -adhesive label to it, depending on the customer’s needs. Laser
printing could also be regarded as a secondary process in cases where certain
3 The parties said that there were currently 5 Hunkler machines in the country all of which will be in the
hands of the merged entity. Lithotech indicated that they were prepared to sell 2 machines, if they could
find buyers. 4 We will not further consider Business Forms L isting, (no.1), because it is not affected by the merger.
Furthermore, competition is not substantially affected in the market for Self Adhesive Labels, (no.8), Book
Binding (no.9), Equipment Sales (no.10), Logistic and Fulfillment (no.11), Paper Rolls and Carbon (no.13)
and Sale of Paper and Envelopes (no.14) and we will, therefore, not include them in our analysis.
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personalized customer data is printed on a paper, which may or may not contain
some other ink and image from a previous process. There are two types of laser
printers, one being continuous feed and the other sheet fed.5
29. In defining direct mail printing the Commission followed a narrow approach as
opposed to the wider approach contended for by the parties. According to Mr
Birch, the MD of Lithotec, direct mailing is an advertising type message, which
could either be linked to a billing message or not, and which is sent directly to an
individual. These forms are produced on a machine with the capability of running
a number of colours, usually more than four colours. Apart from the newsprint
industry, this is the biggest print sector and it could include for example a leaflet
advertising a special offer, which is not personalized but which is mailed with a
personalized item. Many direct mail items are merely inserted into envelopes
along with a letter. P roduction of Direct Mail by the forms industry is a relatively
new initiative. This has traditionally been the domain of the commercial printers
and web offset printers.
30. The Commission, on the other hand, regarded this as a product consisting of
printing, personalization and mailing. They argue that it could not be regarded as
direct mailing if one company does printing and another does personalization and
mailing.
31. The evidence presented by both the Commission and the parties was inconclusive.
Clearly, the mere fact that discrete elements of a product may be produced
through distinctive processes and by separate firms does not, of necessity, place
them in distinct product markets for the purpose of identifying the relevant
market. Conversely, there may be – and frequently are – several distinct product
markets that come in to play in the production of a single product even if all are
produced by a single vertically integrated firm. Whether the distinct stages of
produced by a single vertically integrated firm. Whether the distinct stages of
production constitute distinct relevant markets has to be decided on the specific
facts of the case in question and the Commission errs in insisting that merely
because the parties have identified a number of separate products that they have,
in so doing, identified discrete relevant product mar kets. In this case, our
examination of the facts supports the parties’ version – ‘business form - to sheet’
and business forms – snap sheet’ represent minor accretions to the value of the
basic product which is ‘business forms continuous’. It is therefor e ‘business
forms – continuous,’ defined to include ‘business forms - to sheet’ and ‘business
forms – snap sheet’, that constitutes one of the relevant product markets.
5 Laser printing is a secondary process where personalized information, usually customer determined data,
is printed on paper that may or may not already contain some ink from a previous printing process. Usually
small businesses that require less volume than a medium to large company would print their own business
forms on their desk laser printers. However, they are not in the same category as medium to large
companies that require more colour and detail in their print as well as higher volumes in less time. These
companies would normally make use of professional laser printers or would have their own large in -house
printing facilities such as Woolworths.
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32. Identical conclusions follow with regard to direct mail printing, web finishing and
laser printing. In our view the relevant market is ‘direct mail printing’, defined to
include web finishing and laser printing. Again, each of these processes may be
undertaken by one integrated firm or they may be undertaken in separate firms.
But they a re part of the direct mail printing market. This is the second relevant
product market.
2. The “bundled” product market
33. What of the Commission’s contention that there is a market for a bundled product
- a market in which all or a great many of the services and products referred to
above are provided - that is distinct from the separate product markets in which
the discrete services and products are supplied? 6 In summary the Commission
holds that the unique ability of the parties to provide a broad spectrum of products
and/or services place them in a distinct league of their own within the industry.
The parties, in contrast with their competitors, are active in all the product lines
referred to above.
34. The evidence of Mr. Victor Gordon of Readers Di gest, a witness called by the
Commission, tended to support this argument. Readers Digest is effectively a mail
order publisher and is a large customer of Paragon. Mr. Gordon is the
procurement officer, responsible for procuring the services of providers l ike
Paragon. He suggested that there was a convenience factor attached to a bundled
product and that he would not willingly sub -divide a large contract between
different competitors. However on cross -examination he agreed that his contract
could be divided into different sub -processes, which could be undertaken by
different companies. He nevertheless expressed a clear preference for the ‘one -
stop shop’ facility offered, uniquely, by the parties.
35. Lithotec pointed out that customers such as Readers Digest (and this, by its own
admission, includes Readers Digest itself) continually sample the market with a
admission, includes Readers Digest itself) continually sample the market with a
view to comparing the cost of the various components of a bundled contract. The
parties aver that margins on, for example, laser printing and mailing, are very
tight. The parties also argued that the participation of printing brokers and other
agents, notably advertising agencies, facilitated the ability of customers to
contract out the component pieces of a job that involved a number of technically
distinct processes. They provided limited concrete evidence in support of their
argument. They further held, and again supported this with limited evidence, that
this had enabled relatively small firms to win large contracts, key components of
which were contr acted out to providers of one or other of the various services
comprising the total job. The parties claimed that they themselves frequently
contracted to perform particular components of a larger job.
6 Courts have recognized that a “cluster” of distinct products or services may be combined into a single
relevant market, based principally on a consumer preference for a “one -stop -shop”. See Therman Industries
Incorporated v Pa’n Pak Stores Incorporated, 709 F.Supp 985, 1987-1 Trade Cases page 67,591 and United
States v Philadelphia National Bank, 374 U.S. 321, 356.
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36. Although the evidence presented in support of these arguments was sparse, it was
not effectively countered by the Commission. The fact that the parties are able to
provide a ‘one -stop shop’ service may, in particular instances, give them a
competitive advantage. It is, however, by no means clear that th is immunizes
them from competition from participants who are only able to provide a single
component of the larger ‘bundle’ of services or products required by the
customer. Or, expressed conversely, it does not allow the parties to behave
independently of the competitive response of those who provide a less
comprehensive service than that provided by the parties to this transaction. The
evidence of the representative of Readers Digest clearly establishes that it is
convenient for a large customer whose b usiness forms product incorporates a
number of discrete printing and mailing products to utilize the services of a single
company. However, should the price of the ‘bundled’ product increase
significantly, there are few barriers to seeking out less costly providers of the
various discrete products and services.
37. The representative of SARS, Ms Jansen, indicated that the parties’ ability to
produce high volume products was another factor that put the merging parties in a
league of their own. 7 Due to the con fidentiality aspects of tax information, it was
imperative that one single supplier be used. In response the parties argued that tax
forms do not fit into any of the normal product categories and should be
distinguished from other business forms. Moreover, tax forms are a dynamic
product whose specifications change from tender to tender, which are produced
once per annum and which increasingly involve complex IT infrastructure thus
raising the prospect of software firms competing for tax form contracts. In any
event, in their view there is, in the parties’ view, no reason why a broker could
event, in their view there is, in the parties’ view, no reason why a broker could
not, through sub -contracts that may include relatively small firms, construct a
joint venture or consortium in order to tender for these large contracts. This is
exactly what Lithotech, Paragon and Universal did a few years ago when a very
large quantity of the IRP5 booklet was required by SARS.
38. Once again while the quantity and quality of evidence presented by the
Commission and the parties was less than satisfactory, on balance we believe that
it casts significant doubt on the Commission’s contentions in regard to both the
bundled product and the importance of volume.
39. In summary then we conclude that the relevant product markets are ‘business
forms – continuous’ which incorporate ‘business forms – to sheet’ and ‘business
forms – snap sheet’ and ‘direct mailing’ which includes ‘laser printing’ and ‘web
finishing’. The ‘bundled product’ does not, in our view, constitute a separate
relevant market.
7 Ms. Jansen’s view is lent weight by the fact that there were only three candidates in the last major SARS
tender, these being Lithotec, Paragon and Merpak. The latter was eliminated because it was unable to meet
all of the tender requirements, in particular, it was unable to put up the R1 million required. The contract
was won by Paragon, it was previously held by Lithotec.
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The relevant geographic market
40. Both the Commission and the parties contend that the geographic market is
national.
41. Evidence supplied by the witness from Readers Digest seemed to suggest that the
market was not national but rather local because he preferred to use only printer s
in the Cape Town area. He argued that the logistics of managing a complex
printing job incorporating several discrete processes favoured using service
providers proximate to the client. Again while we accept that convenience
favours a narrow geographica l market, there appear, in the event of a price
increase, to be no significant barriers to utilizing providers elsewhere in the
country – indeed, on cross -examination this was effectively admitted by the
witness. The parties also re -emphasized the actual and potential role of printing
brokers in coordinating the logistics of a complex process.
42. We conclude then that the geographic market is national.
7. Impact on competition
43. We are now required to consider whether the merger will substantially preve nt or
lessen competition in the relevant markets. In undertaking this assessment we
will take account of the non -exhaustive list of criteria provided for in section
12A(2) of the Act.
44. It is common cause that the merger will result in the elimination of a significant
competitor. Indeed both Lithotec and Paragon explicitly acknowledged that each
consider the other to be their most significant competitor. However, while this is
naturally significant, it is not dispositive of the question of market power. We
must consider the share of the relevant market that the merged entity will possess
as well as a number of other significant factors including barriers to entry and the
dynamic characteristics of the market.
Market share
45. While market shares are by no m eans dispositive of the question of market power,
it is widely accepted that they provide, at the very least, a sound first
it is widely accepted that they provide, at the very least, a sound first
approximation of its extent. However, market share evidence is as reliable as the
underlying definition of the relevant markets us ed in calculating shares. As
already indicated we do not believe that either the Commission or the parties have
provided us with a clear view of the relevant market.
46. We were supplied with two different sets of market shares:
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1) The Competition Commission based its calculation of the market shares on
turnover figures as supplied by the parties in their merger notification and as
supplied by the market participants8. This method is also called a “bottom -up”
approach9; and
2) The expert witness from Trialogue, Mr. Rockey, who used a ““top down” 10
methodology to quantify the market. In using the “top down” approach Mr.
Rocky calculated the market share for business forms by taking into account
paper inputs to the business forms industry, which comprised uncoated reels
and carbonless papers. Carbonless paper, in his opinion, presented the most
reliable indicator of market shares in the business form market as, according
to his evidence, it is used solely for the production of business forms. He also
used a differe nt method to calculate the market share for laser printing, based
on the number of machines in use and the number of ‘clicks’11 recorded.
Their respective conclusions predictably diverge significantly. These are
summarized in the table below:
MAIN PRO DUCTS
COMPETITION COMMISSION
%
EXPERT WITNESS
%
Business Form snap sets
52.9
-
Business forms continuous
64.7
-
All carbonless forms12
-
36
Direct mail printing
50.7
Small
Laser printing
35
10
Mailing
33.1
20
Web finishing
87
-
8 Th e market information supplied by other market participants is claimed confidential information and will
not be supplied in this report. 9 “bottom -up” is where the size of an industry is determined by assessing the size of all participants
competing in a certain industry sector. 10 “top -down” refers to analysis of market share through evaluation of global inputs and outputs of an
industry sector. 11 A “click” represents one image placed on the paper. Xerox and Oce dominate the supply of laser printers
and p art of the supplier agreement is a service contract, where users pay suppliers of printers a fee ‘per
click’. 12 This is also defined by the parties as Business forms and includes Business form continuous, Business
form snap sets and Business form sheet.
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47. On the basis of their market share figures the Commission then calculated HHI 13
figures to determine concentration in the each relevant product market. It
identified four markets where the post -merger HHI exceeded 1800 and changed
by more than 100 points in consequence of the merger. These are business forms -
listing, business forms -continuous, business forms-snap sets and web finished
products. In the business forms -continuous the post merger HHI would be in
excess of 4000 points and the change would be 1628, which is presumptive of
considerable market power.
48. However, the methodologies and empirical bases utilized by both the parties and
the Commission are open to question. While the ‘bottom -up’ approach is the
more conventional method utilized in c alculating market shares, the parties are
correct to point out that it is more reliable in markets with a limited number of
participants. We should add, however, that we could find no basis to the parties’
claim that the Commission had omitted several imp ortant competitors in
calculating market shares. On the contrary, the Commission has diligently tracked
down participants in the industry, in the process, identifying competitors not listed
in the parties’ initial submission. However, a significant ‘resid ual’ category
remains in the Commission’s market share calculations and this may account for
some of the discrepancy in the respective market share calculations. As for the
‘top-down’ approach employed by the parties, we have simply not been provided
with sufficient evidence to arrive at a confident assessment of this methodology or
its empirical basis.
49. The difference between the estimates provided for the direct mail market is
particularly striking. This appears to be attributable to the different approac hes
followed in defining the market. For reasons that are not immediately apparent,
the Commission appears to hold that a direct mailing service can only be provided
the Commission appears to hold that a direct mailing service can only be provided
as part of a bundled product that includes printing, web finishing, laser printing
and mailing – given then that the parties are uniquely capable of providing a
bundled product, their share of this market is, per definition, considerable. 14 The
parties, on the other hand, hold that discrete parts of the direct mailing service can
be and are provided by a large number of participants.
50. The market share, and hence the HHI, calculations do not, in this instance,
provide a reliable indication of market power, although even on the lower
estimates of the parties, the post -merger market share in the ‘bu siness forms –
continuous’ market is, on the face of it, cause for concern.
13 The HHI is the Hirschman -Herfindahl Index, which measures concentration in a market. The 1992 U.S.
Horizontal Merger Guidelines states that: “ Where post merger HHI exceeds 1800, it would be presumed
that mergers producing an increase in the HHI of more than 100 points are likely to create or enhance
market power or facilitate its exercise.” 14 See the Commission’s recommendation on page 21 of the confidential version under “Direct Mail
Printing”, where they say that when printing, personalization and mail ing are split between different
companies then it is not classified as direct printing anymore.
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Level and trends of concentration
51. There is a recent history of acquisitions in this industry. Lithotec and Paragon
have both participated actively in the acquisition of new businesses. On the face
of it this does suggest a trend of increasing concentration. However, on closer
examination it appears that both have purchased businesses in one or other niche
market, generally niches in which the acquiring parties have not been ac tive
players.15
52. The parties claim that the level and trend of concentration is not accurately
revealed, by simply examining the identity of those who win significant contracts
in the business forms market. This would, for example, not reflect the great man y
occasions on which the ‘main contractor’ acts as a coordinator of the activities of
a number of firms, including small firms. Hence it is common for a distributor
company (the firm Forms Independent was specifically mentioned) to put its
name to a contract and then outsource or sub-contract certain parts of the contract.
Lithotech itself has performed this co-ordinating function on numerous occasions.
53. The parties made reference to relatively large players such as Universal Business
Forms, Lexlines, Gillmitch and Burlington Data Print but also insisted that many
smaller players such as Ren -form, Focus Forms, Manny McCann, Dusi Business
Forms, Rapid Run, CNH Printers and Western Computer Forms actively
participated in large contracts that were frequently , although incorrectly,
identified with the ‘main contractor’. According to the parties large customers
were generally content to split large printing jobs between smaller players.
Standard Bank exemplified a large customer well known for splitting high v olume
jobs between several players.
54. Sub-contracting not only enabled small companies to participate as sub -
contractors in contracts won by the large players. It also enabled small players to
contractors in contracts won by the large players. It also enabled small players to
win large contracts and then to sub -contract components of the contract to other
players. Examples were provided of smaller players winning very significant
contracts - hence Ren -form succeeded in winning the contract for post box
renewal forms, previously a Lithotec contract. Focus Forms, another small
player, had won a major tender from the Johannesburg Metro, previously a client
of Lithotec.
55. We are persuaded by this evidence, which was not challenged by the
Commission. Moreover it appears to be corroborated by the existence of many
small firms of long -standing in this industry. Evidence presented suggests that
relatively small firms have survived for extraordinarily long periods in this
industry. On the face of it this seems to indicate that conditions in this industry –
these may be demand conditions or techn ological conditions or its continuing
15 The parties have provided us with a list of acquisitions that they have made during recent years. From
this it seems that both Litotech and Paragon have acqu ired businesses in laser printing, mailing and
fulfillment.
15
craft characteristics – conduce to small firms establishing a product niche and a
reliable customer base that enables them to remain competitive despite the
relatively small scale of their operations.
The dynamic characteristics of the market
56. The parties made much of the ‘maturity’ of this market. This is presented as the
key dynamic feature of this market. The traditional business form was presented
as a product in terminal decline, particularly vulnerable to the a dvances in
electronic technology. Mr. Birch claims that the industry has seen a general
decline in the demand for business forms over the last 10 years - more
specifically, the demand for business forms -continuous is declining by 8% per
annum. New technol ogy and product innovation, such as SAP and Adobe
Acrobat16 is reducing the usage of paper in the office – the phenomenon referred
to as the ‘paperless office’. Customer demand is also moving away from the
traditional printing products such as ‘business for ms–continuous’ towards
‘business form - to sheet’. The parties do not have a significant position in the
latter market segment. The movement towards sheet is facilitated by the shift to
shorter runs and quicker delivery and response in the market. In orde r to counter
this decline the parties have started to shift their focus to novel add -on features
such as web finishing and to products that are not normally regarded as business
forms such as ballot forms and lottery tickets.
57. It is not immediately appare nt why the competition authorities should adopt a
more permissive approach to mergers in ‘mature’ product markets. Certainly
business forms and direct mailing remain significant markets and there is no
suggestion of a serious profit squeeze in these marke ts, although evidence of
capacity underutilization is obviously indicative of the pressure experienced by
firms in this industry. In any event, in an effectively functioning market product
firms in this industry. In any event, in an effectively functioning market product
cycle maturity would reflect itself in lower prices and profitabili ty. The most
vulnerable firms would exit the industry and the more entrepreneurial would, as
appears to be the case with respect to the parties to this transaction, seek out new
products and new market niches. A competition authority dedicated to ensuri ng
the integrity of market processes would have no call to arrest this process by
approving anti-competitive mergers any more than it would have reason for
turning a blind eye to collusion or other anti -competitive practices perpetrated in
‘mature’ markets. There is persuasive evidence of new technologies contributing
to declines in the traditional business forms market – for example, electronic data
storage and communication technologies reduce the requirement for multiple
copies.
16 SAP is an accounting and materials management package used in large corporations and has the ability to
present data in electronic format, which is accessible to users who are on that system. A dobe Acrobat
converts existing forms to digital form, to which the user can add information and print on demand, which
saves printing costs .
16
58. A consideration of tec hnological development is called for when there is evidence
that suggests that new alternative products constrain the ability of those in the
traditional market to raise prices. Evidence in support of this contention is, at
best, anecdotal. Moreover, th e Commission points out that converting businesses
from the use of traditional business forms to electronic data storage and
communication requires costly initial investment in hardware and software and a
commitment to employing high level manpower capable of operating and
maintaining new technologies.
59. We are also persuaded by the Commission’s contention that the ‘maturity’ of the
product is likely to discourage new entry and may on balance militate against
approving the merger.
60. In summary, although there is some evidence of ‘maturity’ or decline in certain
important niches of this industry, we are not of the view that the ‘maturity’ of the
product or the ‘dynamic characteristics’ of the market in question constitute
grounds for approval of the merger.
Barriers to entry
61. The parties insist that the barriers to new entry are particularly low. They reason
that the global decline in the output of business forms has resulted in the
availability of used machinery at unusually low prices. They also argue that new
entrants utilizing advanced electronic technologies are increasingly capable of
entering the business forms market. The evidence presented in support of these
contentions was sketchy at best. In any event we are persuaded by the
Commission’s argument that the maturity of the product will act as a powerful
disincentive to would-be new entrants.
62. However, we are persuaded that the existence of installed excess capacity will
enable a rapid supply response from existing competitors should the merged
entity conduct itself in an anti -competitive manner. This is a powerful argument
in favour of approving the transaction.
Countervailing power
in favour of approving the transaction.
Countervailing power
63. The parties aver that their large customers are extremely aggressive evidenced by
their willingness to split tender s and to conclude individual contracts with
multiple suppliers. For example Standard Bank specifically reserves the right to
show a supplier’s pricing structure to a previously disadvantaged supplier in order
to enable the latter to meet the quote of its c ompetitors. Certain bidding processes
have also been brought onto the internet. Shell, for example, places its tender
documents on the internet and allows a period of open bidding in which the
competing parties have access to the bid prices of their competitors and are able to
enter new bids in an attempt to secure the company’s business. The
countervailing power of these large customers is exacerbated by their ability, in
17
the event of monopolistic conduct by their service provider, to handle their
printing requirement in-house.
8. Public Interest
64. No significant public interest arguments were presented in respect of this
transaction.
9. Conclusion and order
65. We have already noted that the identification of the relevant market has proved
unusually complex in this case. While the evidence does not support the
Commission’s contention that the market for the ‘bundled’ product constitutes the
relevant market, nor are we satisfied that the relevant markets are defined by a
narrow identification of what ap pear to be discrete steps in the production of a
final product be it a business form – with or without the addition of distinguishing
‘bells and whistles’ – or a directly mailed form. We have rather sought to identify
the ‘basic’ business form or the ‘bas ic’ mailed product and to incorporate into
those definition the incremental features that generally form part of those basic
products without losing sight of the fact that these features may, and frequently
are, added by separate, stand-alone firms.
66. On o ur tentative market definition market shares appear to remain reasonably
high. - in ‘business forms – continuous’ this is so even on the parties lower
estimate. However, there is evidence that small firms are able to thrive in this
market and provide sign ificant competition to the larger players, of significant
installed excess capacity that will enable a rapid supply response in the face of
anti-competitive conduct, and of considerable countervailing power. While we
are skeptical of the imminence of the vaunted ‘paperless office’ clearly new
technology is changing the face of this industry and will constrain the ability of
the merged entity to raise price.
67. We have accordingly decided to approve the transaction unconditionally.
16 January 2002
D. Lewis Date
Concurring: N. Manoim and M. Holden