Brief Summary

Competition — Merger approval — Unconditional approval of merger between Siemens Limited and Marqott Holdings (Pty) Ltd — Siemens, a subsidiary of Siemens AG, seeks to acquire Marqott to re-enter the medium-voltage switchgear market — Merger deemed pro-competitive as it allows Siemens to utilize Marqott’s facilities and technology to meet new Eskom standards — No significant competition concerns identified as Siemens did not previously compete in the local market for MV switchgear.

Comprehensive Summary

Summary of Judgment

1. Introduction

These proceedings concerned a large merger heard by the Competition Tribunal of South Africa. The Tribunal was required to decide whether to approve a proposed transaction in which Siemens Limited would acquire Marqott Holdings (Pty) Ltd, thereby obtaining control of the target firm.

The acquiring firm was Siemens Limited (Siemens), described as the primary South African subsidiary of Siemens Aktiengesellschaft (Siemens AG), a German-incorporated entity with widely held shareholding. The target firm was Marqott Holdings (Pty) Ltd (Marqott), a South African private company operating through a wholly owned subsidiary, Marqott (Pty) Ltd, and owned and jointly controlled by four individual shareholders.

In procedural terms, the Tribunal recorded that on 17 May 2006 it unconditionally approved the proposed merger. The document provided sets out the Tribunal’s reasons for decision, dated 22 May 2006, and indicates that the Tribunal’s conclusion aligned with the Competition Commission’s recommendation that the merger be approved.

The general subject-matter of the dispute concerned whether the merger was likely to substantially prevent or lessen competition in the relevant markets and whether there were any public interest concerns, in circumstances where the transaction had both horizontal (in relation to turnkey projects) and vertical features (linking switchgear manufacture/assembly and downstream turnkey project activity).

2. Material Facts

Siemens AG, Siemens, and Marqott’s shareholders entered into a Memorandum of Understanding under which Siemens would acquire the entire ordinary share capital of Marqott. The Tribunal accepted that, post-merger, Siemens would exercise full control over Marqott’s business.

A central undisputed factual element underpinning the transaction was the parties’ historic relationship. In 1998, Siemens elected to divest the medium-voltage (MV) switchgear manufacturing portion of its business to Marqott. Siemens AG then licensed Marqott to manufacture and assemble Siemens’ MV switchgear in South Africa. The Tribunal accepted that, since that divestiture and licensing arrangement, Siemens had not been active in South Africa in the market for the supply of MV switchgear as a competing supplier, and that Siemens locally sourced MV equipment from Marqott when Siemens needed such products for customers.

The Tribunal treated as material the commercial context linked to Eskom’s technical standards. The reasons record that Eskom had issued tenders requiring compliance with European IEC specifications for MV switchgear and that Marqott’s then-existing technology did not comply, creating a risk that Marqott’s technology would become obsolete and that it could be removed from lists of suppliers invited to tender if it could not meet those standards. The Tribunal also noted that Marqott sought ongoing access to Siemens original equipment manufacturer technology, particularly in view of the expiry in 2008 of the ten-year licence agreement concluded in 1998.

In relation to market participation, the Tribunal accepted that both parties were active broadly in “power transmission and distribution” services, but that there were two markets relevant to the analysis: the market for manufacture/assembly and sourcing of MV switchgear equipment, and the market for turnkey projects involving the design, supply, installation, commissioning, and maintenance of electricity substations. The Tribunal identified that the “real overlap” between Siemens and Marqott existed in the turnkey projects market, because Siemens was not directly manufacturing MV switchgear locally but was rather linked to Marqott through the licensing and sourcing arrangement.

On geography, the Tribunal recorded the parties’ contention that the affected geographic markets were global because customers could procure through worldwide bidding and global suppliers could compete. However, it accepted the Commission’s investigation which treated the MV switchgear manufacture market as global, while treating the turnkey projects services market as national in character, given that many customers were South African municipalities and local power-intensive entities. The Tribunal expressly stated it was unnecessary to reach a definitive conclusion on whether MV switchgear supply was international or local because Siemens did not compete in supplying MV switchgear into South Africa due to the licensing agreement with Marqott.

In assessing competitive constraints, the Tribunal accepted evidence that the merged firm would face competition from large manufacturers such as ABB, ALSTOM, Schneider Electric, and General Electric, and that there were also several eastern manufacturers active in MV switchgear. The Tribunal also accepted the parties’ market share estimates presented in ranges for both the global MV switchgear manufacture market and the national turnkey projects market.

A further material factual feature concerned the nature of procurement in turnkey projects. The Tribunal accepted that turnkey work was commonly undertaken through invitation-to-tender, that customers frequently specify equipment to be used, and that even a successful bidder might source equipment from competitors where required by the tender specification or where a competitor’s product was more cost effective.

On public interest, the Tribunal accepted the parties’ submission that Siemens would employ all Marqott staff and noted that the parties tendered a condition in the sale of shares that no Marqott employees may be retrenched for two years from the date of approval. The Tribunal also recorded that registered trade unions referred to in the record (including Solidarity, and the Commission’s understanding regarding NUMSA) did not adopt an adverse view about the merger’s potential negative employment effects.

3. Legal Issues

The central legal questions were whether the proposed acquisition was likely to result in a substantial lessening or prevention of competition in any relevant market, considering both horizontal effects (particularly in turnkey projects where both firms were active) and vertical effects (given Siemens’ position as licensor and technology provider in relation to MV switchgear, and the linkage between MV switchgear manufacture/assembly and turnkey projects).

A further legal question was whether the transaction raised any public interest concerns, particularly in relation to employment effects and skills development, based on the submissions made and the conditions tendered by the merging parties.

The dispute required the Tribunal to make an assessment involving the application of competition principles to the facts, including market characterisation and competitive effects, rather than resolving primary factual disputes on contested evidence. It also involved an element of evaluative judgment, particularly in assessing the likelihood of foreclosure or other competitive harm in a tender-driven environment and in weighing public interest submissions.

4. Court’s Reasoning

The Tribunal approached the competitive assessment by first distinguishing the relevant areas of activity. It treated the transaction as involving two relevant markets: MV switchgear manufacture/assembly and the provision of turnkey projects. It reasoned that the merger was not a conventional horizontal combination in MV switchgear in South Africa because Siemens had, since 1998, not been active as a competing MV switchgear supplier in South Africa due to the licensing arrangement under which Marqott manufactured and assembled Siemens MV switchgear. This factual framing supported the Tribunal’s view that the merger had significant vertical integration characteristics.

On the horizontal dimension, the Tribunal accepted that the merged firm would remain subject to competition from established large players and other manufacturers, and it considered the market share ranges put up by the parties. In the turnkey projects market, where overlap existed, the Tribunal made several observations it regarded as supportive of approval. It noted that MV switchgear was sourced from principal offices and regional manufacturing locations of entities active in MV switchgear manufacture, while turnkey services were carried out by local subsidiaries of those manufacturers. It further reasoned that the transaction would place Siemens on a similar footing to vertically integrated competitors (such as ABB and Alstom), by enabling Siemens itself to become vertically integrated.

On the vertical dimension, the Tribunal reasoned that the technology licensor–licensee relationship in MV switchgear had already been exclusive from both sides, and therefore the merger did not change the competitive landscape in a way that would lessen competition through a reduction in existing independent licensing opportunities between Siemens and Marqott. It then considered the vertical linkage between MV switchgear manufacture and downstream turnkey services. The Tribunal emphasised the tender-based nature of turnkey procurement and accepted that customers often specify the equipment to be used, and that bidders may source competitors’ products when required by specifications or cost considerations. Against that market structure, the Tribunal was satisfied that the merger did not create a meaningful risk of input or customer foreclosure that would substantially lessen competition, particularly given the presence of alternative suppliers and the realities of tender specifications and cost effectiveness. The Tribunal also noted the parties’ insistence that MV switchgear manufacturing would remain integral to the merged entity’s business and that the entity would continue to supply equipment to third parties as required.

Drawing these strands together, the Tribunal stated that it was given comfort by the evidence that neither the horizontal nor vertical concerns identified were likely to give rise to a substantial lessening or prevention of competition, and it expressed that this conclusion held regardless of the particular market-definition approach adopted.

On public interest, the Tribunal considered the parties’ submissions regarding skills development, anticipated infrastructure growth, and employment. It placed weight on the undertaking that Siemens would employ all current Marqott staff and the tendered condition that no Marqott employees would be retrenched for two years following approval. It also took account of the position reflected in the record that relevant trade unions did not hold an adverse view of the transaction’s effect on members. On this basis, it concluded that the merger would have no adverse public interest consequences.

5. Outcome and Relief

The Tribunal unconditionally approved the proposed merger between Siemens Limited and Marqott Holdings (Pty) Ltd, endorsing the Commission’s recommendation that the transaction be approved.

No separate remedial or behavioural conditions were imposed by the Tribunal in its order approving the merger. The reasons record a no-retrenchment condition as having been tendered as part of the sale of shares, but the Tribunal’s approval is described as unconditional.

The reasons for decision do not record any costs order.

Cases Cited

No reported cases were cited in the reasons for decision.

Legislation Cited

No legislation was expressly cited in the reasons for decision.

Rules of Court Cited

No rules of court were cited in the reasons for decision.

Held

The Competition Tribunal held that the proposed acquisition, assessed across the identified horizontal and vertical dimensions, was not likely to result in a substantial lessening or prevention of competition in the relevant markets, including the market for MV switchgear manufacture (treated as global for purposes of the analysis) and the market for turnkey projects services (treated as national).

The Tribunal further held that the merger raised no adverse public interest consequences, having regard to the employment-related assurances and the tendered two-year non-retrenchment undertaking referenced in the record, as well as the absence of opposition from relevant trade unions on employment grounds.

LEGAL PRINCIPLES

The Tribunal applied the principle that merger assessment requires identifying the relevant markets implicated by the transaction and evaluating whether the merger is likely to substantially prevent or lessen competition, including through both horizontal overlap and vertical integration effects.

The reasons reflect that, where procurement is conducted largely through tender processes and customers may specify inputs or select suppliers based on suitability and cost effectiveness, the assessment of foreclosure and competitive harm is informed by those market realities, including the practical ability and incentives of a merged firm to foreclose rivals.

The Tribunal further applied the principle that merger control involves considering public interest effects alongside competition effects, with particular attention (on the facts of this matter) to employment-related consequences and undertakings affecting job retention.

Siemens Limited and Marqott Holdings (Pty) Ltd (21/LM/Mar06) [2006] ZACT 43; [2006] 1 CPLR 356 (CT) (22 May 2006)