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[2015] ZACT 13
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Bytes People Solutions a divisions of Bytes Technology Group South Africa (Proprietary) Limited v Inter-Active Technologies (Proprietary) Limited (020123) [2015] ZACT 13 (20 February 2015)
COMPETITION
TRIBUNAL OF SOUTH AFRICA
Case No: 020123
In the matter
between:
Bytes Peoples
Solutions a division of
Bytes
Technology Group South Africa (Proprietary)
Limited
................................
Primary
Acquiring Firm
And
Inter-
Active Technologies (Proprietary)
Limited
...........................................................
Primary
Target Firm
Panel: Norman Manoim
(Presiding Member)
: Yasmin Carrim
(Tribunal Member)
: Andreas Wessels
(Tribunal Member)
Heard on : 28
January 2015
Order Issued on : 30
January 2015
Reasons Issued on :
20 February 2015
Reasons for
Decision
Approval
[1] On 30 January
2015 the Competition Tribunal (“Tribunal”) conditionally
approved the merger between Bytes Peoples
Solutions a division of
Bytes Technology Group South Africa (Proprietary) Limited (“Bytes
Peoples Solutions”) and Inter-Active
Technologies (Proprietary)
Limited (“IAT”).
[2] The reasons for
approving the proposed transaction follow.
Background
[3] On the 28
January 2015 the Tribunal heard a proposed transaction between Bytes
Peoples Solutions and IAT.
[4] Prior to the
hearing the Tribunal received information relating to employment
concerns raised by a third party intervener which
was not contained
in the Commissions record. The third party intervener alleged that
retrenchments made by IAT prior to the proposed
transaction had not
been disclosed to the Commission. The third party further alleged
that the motivation behind these retrenchments
was IAT’s effort
to improve its position in merger negotiations with Bytes Peoples
Solutions.
[5] However no
interveners were present to make submissions at the hearing. The
Commission was instructed by the Tribunal to further
investigate the
allegations made by the third party intervener and to establish the
number of retrenchments that were not disclosed.
[6] The hearing was
accordingly postponed to the 30 January 2015.
Parties to
transaction
Primary acquiring
firm
[7] The primary
acquiring firm is Bytes Peoples Solutions, a division of Bytes
Technology Group South Africa (Pty) Ltd, a private
company, which is
ultimately a wholly-owned subsidiary of Allied Electronics
Corporation Limited (“Altron”).
[8] Altron is a
public investment holding company incorporated in South Africa and
listed on the Johannesburg Stock Exchange. Altron,
in addition to
controlling Bytes Technology, similarly controls Power Technology
Limited and Allied Technology limited.
Primary target
firm
[9] The primary
target firm, IAT is a private company incorporated in accordance with
the laws of South Africa and controlled by
three shareholders,
Brendan James van Staaden, Jacqueline van Staaden and Mukhunde
Bhikha.
Proposed
transaction and rationale
[10] The proposed
transaction results in Bytes People Solutions acquiring !AT as a
going concern. Bytes, post-merger, will have
sole control over IAT
[11]
Bytes People Solutions stated that the acquisition of IAT is in order
to "expand its service offering, achieve economies
of scale and
establish itself as a ‘one stop shop
1
as regards the provision of BPO services.”
1
[12] IAT’s
rationale is motivated by its current difficult financial position.
Relevant Market
[13]
For purposes of this assessment the Commission considered the market
to be the provision of Business Process Outsourcing (“BPO”)
services. This is not particularly specific market definition nor
should it be considered useful in analysing such a merger in
future
if the acquisition was more significant. BPO services are services
customer firms could do in house but elect to outsource
them to a
supplier to save costs and drive efficiencies. The services cover a
range of activities ranging from call centres to
financial and
accounting and some legal services, data processing and debt
collection.
2
Thus the services individually are not substitutes for one another
but BPO providers bundle the provision of these services and
offer
them to customers which want to outsource them.
[14] In respect of
the merging parties BPO offering IAT and Bytes People Solutions both
provide help desk services in the form of
call centres. The merging
parties provided the technology, personnel and related infrastructure
required for the provision of call
centres.
[15] The Commission
assessed the likely effect of the proposed transaction on a national
geographic scope to which the merging parties
similarly concur.
Impact on
competition
[16]
According to the Commission’s findings the proposed transaction
results in a horizontal overlap of the merging partie
s'
activities
in the provision of BPO services.
[17] The market
share accretion of the merging parties is minimal according to the
estimation of market shares in the provision
of BPO services provided
by the merging parties. Business Process enabling South Africa
(“BPeSA”) stated that market
share comparisons are
difficult and the success of a company should be calculated by the
density of employees.
[18] The Commission
utilizing this test found the merging party’s employee density
constitutes 0.8% of the total estimated
size of the market. The
Commission further found several other competitors in the BPO market
and concluded that the market is fragmented.
The conclusion made by
the Commission in respect of the overlap is that the proposed
transaction will unlikely substantially prevent
or lessen
competition.
[19] The proposed
transaction raises no vertical competition issues.
[20] We concur with
the Commission’s competition assessment, i.e. that the proposed
transaction is unlikely to substantially
prevent or lessen
competition in any relevant market given the small market share
accretion if one applies the Commission’s
employee density
metric. However even if this methodology is not considered definitive
the parlous state of the target firm its
declining market share, the
lack of customer objection and the countervailing power many of them
can exercise suggest that the
Commission’s conclusion is
well-founded.
Public interest
[21] As outlined
earlier, the case raises a public interest issue around employment
The Commission in its initial report recommended
that the merger be
approved subject to a condition which limits merger specific
retrenchments to a maximum of 70 employees of which
a bias in favour
of semi- skilled employees requires not more than 20 of the maximum
number of retrenched shall comprise of semi-
skilled employees. The
merging parties agreed to the imposition of this condition.
[22] As noted
earlier, when the matter first came before us we asked the Commission
to investigate the allegation by a former employee
that IAT had
embarked on retrenchments prior to the merger which had not been
disclosed to the Commission. The Commission conducted
this
investigation by requiring further information from the merging
parties including board minutes and correspondence and consulting
with retrenched employees. On the basis of what was admittedly a
hurried investigation it appears that IAT had not disclosed to
the
Commission that 43 employees had been retrenched during the periods
of 7 March 2014 to 14 December 2014. This period coincides
with the
period in which the current merger was being considered between the
merging parties. The merging parties do not dispute
the number of
retrenchments or when they took place but they deny that they had any
connection to the merger negotiations.
[23] Section 12(3)
of the Act requires the Tribunal to consider whether a merger can or
cannot be justified on substantial public
interest grounds. One of
these grounds is the effect on employment.
[24]The
Tribunal has in several decisions in the past considered that if a
merger leads to retrenchments which would otherwise not
occur but for
the nexus of the merger these can be considered merger specific and
hence relevant to consider as part of its section
12(3) enquiry. On
the other hand if the retrenchments would have occurred regardless of
the merger these are considered operational
and matters for labour
law not the public interest enquiry under section 12A(3). We have
referred in the past to the distinction
then between merger specific
and operational retrenchments.
3
In the Walmart case
4
the Competition Appeal Court ordered the reinstatement of employees
who had been retrenched prior to the merger when these had
occurred
at time when the parties were negotiating the merger and these
retrenchments were considered part of the act of consummating
the
merger.
[25] In this case
the first factual enquiry we have to perform is to ascertain whether
the 43 pre-merger retrenchments had a nexus
to the transition, If not
the enquiry ends if they did we must enquire further.
Factual Issues
[26] The factual
issues are common cause. At the end of its 2014 financial year IAT
suffered a loss
5
.
[27] In June 2014
internal minutes of IAT show that it was considering various merger
proposals including one from Bytes. Pursuant
to this a further
meeting took place between representatives of the respective firms on
25 July when “synergies”were
explored.
[28] It is not clear
what came of these initial discussions, but minutes of an IAT meeting
in September 2014 indicate that its board
had decided not to pursue
any of the merger proposals. On 8 October 2014 Bytes sent an
unsolicited offer to purchase IAT which
the latter declined. However
on 17 October 2014, IAT was advised by its banker First National Bank
that its funding facility had
been withdrawn on the grounds that it
had not complied with several of the conditions attached to the
facility.
[29] Immediately
thereafter IAT re-commenced negotiations with Bytes and an agreement
of sale was entered into which underpins the
current transaction.
However as part of the sale agreement the parties also agreed that
the now beleaguered IAT would be given
a funding facility by Bytes to
allow it to continue trading until the deal, which was notified to
the Commission on 21 November
2014, had been approved.
[30] It is not clear
from the record when discussions with potential buyers for IAT
commenced; we only know from minutes that they
were in existence at
least from June 2014. On the assumption that they may have been
contemplated earlier, possibly after the bad
set of results in the
financial year ending in February 2014, we considered the number of
retrenchments that took place since then.
[31] During this
period 28 retrenchments took place associated with the direct loss of
business of a call centre operation for a
particular client which had
cancelled its contract with IAT. All parties were agreed that such
retrenchments were clearly operational
given the nexus between the
contract cancellation and the loss of employment. Some of these
employees were indeed offered re-employment
elsewhere. We therefore
do not need to consider these retrenchments further as their lack of
merger specificity is self-evident.
[32] However 15
employees were retrenched in the latter part of 2014 as part of a
series of ‘non-client specific’ set
of retrenchments
referred to by IAT as the phase 1 and phase 2 retrenchments.
[33] The phase 1 and
2 retrenchments were effected at various stages - the first at the
end of September, the next at two dates
in November and the last at
the end of December.
[34]
Two former employees of IAT who made impressive oral submissions
during our hearings argued that the coincidence between the
timing of
the negotiations and the retrenchments was sufficiently close in time
as to suggest that they were merger specific
6
.
They
were also of the view that from their perspective, prior to their own
retrenchments lAT's prospects were good and there was
hence no reason
for the retrenchments other than the advent of the merger.
[35] The merging
parties denied the linkage. According to Mr Van Staaden of IAT
although the phase 1 and 2 retrenchments (bar the
one in September)
had been effected after the transaction with Bytes had been finalised
in October, the decision to retrench this
number of employees had
already taken place at a meeting of the board in August and he was
able to show the relevant entry in the
minutes to support his
contention.
[36] He was asked
why if the firm needed to retrench in August it had turned down an
offer to merge with Bytes in September. The
explanation was that
although trading times were difficult, the firm at that time thought
that future prospects were good until
the bank facility was
withdrawn.
[37]There is
however, bar this possible anomaly, insufficient evidence to suggest
that the phase 1 and 2 retrenchments were not
merger specific. There
is no indication in the minutes of either company or the
correspondence produced, to suggest that there
was a link to the
present transaction, although the contemplation of a merger more
generally and the one with Bytes more specifically,
had coincided
with the period of the retrenchments.
[38] The two
employees and the Commission all fairly conceded this fact.
[39] We are
therefore on the current record, bolstered by the oral evidence of
both parties at the hearing, unable to find that
the phase 1 and
phase 2 retrenchments were merger specific.
[40] As regards the
issue of future retrenchments the condition agreed to between the
merging parties and the Commission limits
future retrenchments to a
maximum of 70 employees and is further qualified by the caveat that
of this number no more than 20 may
be semi-skilled employees. This
seems a reasonable condition given the troubled state of the IAT
business that Bytes has inherited,
whilst at the same time offering
enhanced protection to less skilled employees - and hence those less
likely to obtain new employment.
Conclusion
[41] In this case
the merging parties should have disclosed information pertaining to
retrenchments made prior to the proposed transaction
given that they
were effected after the date that the transaction was contemplated.
By not doing so the hearing of the matter was
prolonged.
[42] In light of the
reasons mentioned above, we conclude that the proposed transaction is
unlikely to substantially prevent or
lessen competition in any
relevant market. We conclude that there is no evidence to corroborate
the contention that the retrenchments
made prior to the proposed
transaction were merger specific and therefore we do not think that
it warrants alterations to the Commission’s
conditions.
Accordingly we approve the proposed transaction subject to the
conditions submitted by the Commission in its initial
report.
20 February 2015
DATE
Norman Manoim
Yasmin Carrim and
Andreas Wessels concurring
Tribunal Researcher:
Aneesa Ravat
For the merging
parties: Natalia Lopes and Aziza Mdee of EdwardNathanSonnenbergs Inc.
For the Commission:
Maanda Lambani and Nompucuko Nontombana
1
Inter alia
Schedule to Form
CC4(2) on pg 28 of the record.
2
Inter
alia
The
Commission’s Report pg 13.
3
BB
investment Company (Pty) and Adcock Ingram Holdings (Pty) Ltd CT
case no: 018713
4
The
Minister of Economic Development and The. Competition Tribunal in
South African Commercial Catering and Wal-Mart Stores INC
CAC no:
110/CAC/JuIl 1 111/CAC/JUN11
5
The amount is confidential
6
The
former employees were Mr Nobel and Mr Koloi.