COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case no.: 66/LM/Sep04
In the large merger between:
Bytes Technology Group SA (Pty) Ltd
and
CS Computer Services Holdings Ltd
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Reasons
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Introduction
1. On 17 November 2004 the Competition Tribunal approved the merger
between Bytes Technology Group SA (Pty) Ltd and CS Computer
Services Holdings Ltd without conditions. The reasons are set out below.
The transaction
2. Bytes Technology Group Ltd (“BTG”), which is controlled by Altron, will
acquire, through its subsidiary, Bytes Technology Group South Africa (Pty)
Ltd (“BTG SA”), all the issued shares in CS Computer Services Holdings
Ltd (“CSH”).
Rationale for the transaction
3. According to BTG the proposed transaction would add a range of
complementary services to BTG SA’s portfolio, including IT services in
areas in which BTG does not operate at all. The transaction would also
provide economies of scale in certain areas where they are not currently
prevalent in either of the acquiring or target companies. Moreover, CSH is
in dire financial straits and would have to close down if an acceptable
solution is not found soon.
Prehearing
4. A prehearing was held on 15 November 2004. The Tribunal indicated
that it would call the following witnesses:
1) Michael Arnold, CEO of FNB: SelfService Channel
2) James Baird, MD of NCR International South Africa (Pty) Ltd
3) Thomas Makoro of Diebold
4) Peter Barclay, MD of Banking Machine Services (“BMS”)
5. The parties indicated that they would call David Lewis Fink, Acting CEO of
CSH.
Competitive assessment
The relevant market
6. The product markets in which both parties compete on a national basis
are:
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1. IT infrastructure
outsourcing services; 1
2. Maintenance services
in respect of desktop
and pointofsale
equipment; 2
3. The provision of
networking services
and products;
4. The provision of SAP
solutions; 3 and
5. Maintenance services
in respect of ATM
equipment
7. In none of the above markets, except the market for maintenance services
in respect of ATM equipment, would the merged entity, post the
transaction, compete among the top three players, nor would its market
shares in any of these markets increase above 12%. 4 However, in the
market for Maintenance services in respect of ATM equipment, the
merged entity would be dominant, accounting for almost 60% of the
market. The effect of the transaction on competition within this product
market, therefore, requires closer scrutiny.
The impact of the merger on the market for Maintenance services in respect
of ATM equipment
8. In South Africa, the major Banks currently use two competing brands of
1 These services comprise various activities associated with outsourcing and management of one or more
elements of the client/server and network communication environment.
2 This concerns maintenance of equipment such as desktops, laptops, printers, scanners, bar code readers,
etc.
3 This involves business consulting, blueprinting, configuration, implementation, training and post
implementation support of SAP products.
4 The merged entity’s market shares post the merger would be 2% in the market for IT infrastructure
outsourcing services, 12% in the market for maintenance services in respect of desktop and pointofsale
equipment, 5% in the market for the provision of SAP solutions and 3% in the market for the provision of
networking services and products.
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ATM machines, namely NCR and Diebold. 5 The brands are represented
in the market as follows:
BANK ATM BRAND
FNB NCR
Standard Bank Diebold
ABSA NCR and Diebold
Nedbank NCR
9. BTG SA is the sole licensed distributor for NCR products (including ATM
machines and spare parts) locally, while NCR’s main rival, Diebold, does
its own distribution and maintenance of Diebold ATM’s. 6 NCR has a
market share of 60% in the ATM machines market while Diebold has 30%.
The remaining 10% is supplied by a competitor known as Wincon Nixdorf,
represented locally by AST. 7
10. Apart from being the sole distributor of NCR machines BTG SA is also
involved in the downstream market for the maintenance of NCR brand of
ATM’s, as is CSH. 8 Although there are five firms in South Africa that
provide maintenance services for ATMs, there is only one other
competitor, apart from BTG SA and CSH, that services NCR machines,
namely Banking Machines Services (“BMS”). 9 BMS is an independent
service provider that currently has no relationship with NCR South Africa
although it does the maintenance of NCR machines. It sources its parts
from the UK and USA directly. Post the transaction the merged entity will
have a market share of 60%, Diebold 20% and BMS 4%. 10
11. Contracts for the maintenance of ATMs are usually awarded via a tender
5 Both brands originate from Ohio in the USA.
6 NCR is regarded as the dominant player in terms of ATM machines in the world. It operates through sole
distributors but there is no exclusivity arrangement in terms of maintenance.
7 See transcript page 78.
8 CSH acquired the IT Customer Services Division of FNB, which included the inhouse ATM
maintenance business, in March 2003. Included in the deal was a oneyear maintenance contract in respect
of FNB’s ATM base.
9 BMS is a new entrant into the industry and is presently engaged in a pilot project to service some of
FNB’s ATM machines.
FNB’s ATM machines.
10 These market share figures are based on the assumption that the Diebold and NCR ATM machines are
substitutable. According to FNB it would take between 510 years to switch from one ATM brand to the
other.
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process. Parameters that are, inter alia, taken into consideration are the
speed of repairing an ATM and the model that needs to be serviced. It is
therefore important to have a national footprint.
12. The Competition Commission reported in its recommendation that some of
the entities’ customers and competitors had expressed concern about the
merger. FNB felt uncomfortable dealing with a dominant firm while Nedcor
was concerned that its ability to exert countervailing power would diminish
as a result of the merger. 11 It also indicated that switching from the NCR
to the Diebold ATM machine, and vice versa, would be very costly.
Concerns expressed by BTG’s competitors, inter alia, included:
• BTG would become stronger and the level of concentration in the
market for the maintenance of ATMs would be increased; and
• Whether competitors would be able to secure tenders because of
the existence of a dominant player post the merger.
13. We were informed that BMS has the ability to service NCR machines and
that it is not dependent on BTG for sourcing spare parts, since it imports
spare parts directly from an independent manufacturer in the UK as well
as the USA. 12 Diebold has, furthermore, entered into an alliance with
BMS for servicing machines which would not only give BMS national
footprint but would also make it possible for Diebold to be able to service
NCR machines as well. According to Mr. Makoro, Managing Director of
Diebold South Africa, the relationship between Diebold and BMS is based
on a Memorandum of Understanding providing additional capacity for
service and maintenance of ATM’s. 13 Although Diebold would rather
supply and service its own ATMs it indicated to the Tribunal that some of
its customers that use both ATM brands might prefer to use only one
service provider to do the maintenance of the machines. In such instances
service provider to do the maintenance of the machines. In such instances
Diebold would then provide the maintenance for both brands.
14. The Commission’s investigation also revealed a possible discriminatory
practice in the form of a discount given on license fees in order to use
NCR diagnostic kits, which are used to service NCR ATM machines. 14
According to the Commission NCR appears to discriminate against firms
who do not have a license to use NCR diagnostic kits by giving them
11 ABSA did not express any concerns about the merger since it has an exclusive maintenance agreement
with BTG. Nedbank was also not concerned about the transaction.
12 According to BMS NCR itself had at certain times in the past sourced spare parts from BMS.
13 According to Barclay, of BMS, their alliance with Diebold will ensure that they do cross training in
servicing both brands.
14 Diagnostics effectively speeds up the diagnostic process, which in turn lowers labour cost since it
enables an engineer to locate a problem within an ATM machine much faster.
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smaller discounts. 15 This puts them at a competitive disadvantage when
they tender for a contract. BTG, for instance, will get a significant
“relationship” discount compared to other South African companies
because, according to NCR policy, BTG is the exclusive local distributor of
NCR machines and therefore generates a lot of revenue for NCR. 16
15. According to Mr. Baird, Managing Director of NCR South Africa, the
licence programme is a worldwide programme, which was introduced to
tighten security with regard to NCR ATMs. The levy is not a revenue
generating instrument but is used for research and development in order
to create and keep diagnostics up to date and improve ATM functions.
When a company applies for a license to use the diagnostics to service an
ATM it will be asked by NCR to identify the individual engineers who will
work on the diagnostics of each ATM machine, so that when fraud is
committed NCR can trace the engineer responsible for that specific ATM
machine. 17
16. FNB also raised concerns about NCR’s discount structures in licensing its
diagnostic kits and says that the additional cost will be passed on to the
banks and hence the consumer. 18 This fee would also render a new
entrant such as BMS uncompetitive in the short term and the banks will be
forced to use BTG to lower maintenance costs. However, FNB has
admitted that it does have a multiple vendor policy for the maintenance of
ATM machines in order to actively benchmark prices as well as encourage
innovation between competitors.
17. The merging parties operate in a concentrated industry with a small, but
strong, client base where contracts are awarded via tenders. CSH was in
financial dire straits because it had lost the FNB contract. It was indeed a
failing firm. The merger would thus not result in the removal of an effective
failing firm. The merger would thus not result in the removal of an effective
competitor. In fact, after the merger, the status quo would remain. BTG,
the large player, and BMS, a new emerging player, will remain in the
market as competitors, hence competition would not be intensified but will
be maintained. FNB has also indicated to the Tribunal that it is considering
awarding BMS a contract to service 600 of its NCR ATM’s while the
balance of 1600 would be serviced by BTG, an indication that banks
15 The Commission has undertook to investigate the merits of initiating an investigation into NCR’s
discount policy. See page 16 of its recommendation.
16 The timing of the introduction of the license fee is somewhat under suspicion. BMS was told of this in a
letter dated 15 September 2004, a day after BMS received a Request for Proposal to tender for the
Maintenance of FNB ATM machines.
17 Diebold, NCR’s rival also charges a license fee.
18 This was confirmed by Barclay of BMS, see page 51 and 53 of the transcript.
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would still be in a position to replace service providers. 19
18. Finally BTG’s customers are large banking institutions with countervailing
power.20 Makoro confirms this when he points out that Diebold tries to
keep prices transparent while limiting any premiums to its customers. 21
19. We therefore find that the transaction would not substantially prevent or
lessen competition in the relevant market nor would it have an adverse
effect on any public interest issues.
____________ 17 January 2005
D Lewis Date
Concurring: N Manoim, Y Carrim
19 BMS has, for the past five months, been servicing 18 of FNB’s ATM machines as part of a trial run.
20 This is admitted by Arnold of FNB.
21 See page 13 and 80 of the transcript.
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