Mergers Allow Businesses to Grow and Develop - Economics Assignment Help

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Background

Introduction
Mergers allow businesses to grow and develop. A merger allows independent competitors to coordinate their prices and output decisions to maximise joint profits. When a merger occurs it can either affect competition in a positive or negative way. The merging parties or competitor’s performance such as profits, concentration levels, growth rates, markets shares, productivity and social welfare could be affected. Since the merging firms have become one they do not compete with each other and are not sufficiently constrained by competition from competitors, the combined firm has an incentive to raise its prices and thus reduce competition. (the introductory paragraph can be a bit more specific about what you are doing in this paper. While you can introduce the concept of mergers generally, it should be more focused on what this paper is about).This mini dissertation is based on the decision that was made by the South African Commission Tribunal in 2016 in relation to the merger between Coca-Cola Beverages Africa Limited (“CCBA”) and various Coca-Cola and related bottling operations. The South African Commission Tribunal conditionally approved the merger. The proposed merger was divided into two separate components the Bottling transaction and the Branding Transaction (Competition Tribunal of South Africa, Case No: LM243Mar15).

• The research study will evaluate what has happened in the relevant market after conditions were imposed to open up fridge space. The firms involved in the merger were CCBA which was the acquiring firm and was to be a subsidiary of SABMiller Plc (“SABMiller”). SABMiller wanted to acquire 57% and exercise control over CCBA whereas Gutsche Family Investments (“GFI”) wanted to acquire 31% and The Coca-Cola Company (“TCCC”) wanted to acquire 11.3%. The Target firms were Coca-Cola Sabco Proprietary Limited (“Sabco”), Coca-Cola Fortune Proprietary Limited (“CCF”), Coca-Cola Shanduka Beverages South Africa Proprietary Limited (“CCSB”), Waveside Proprietary Limited (“Waveside”) and Coca-Cola Canners of Southern Africa Proprietary Limited (“Canners”).
• The Commission during its investigation found that there was a vertical relationship between TCCC and the bottlers since the bottlers manufactured and bottled TCCC products which are then distributed to wholesalers and retailers. The Commission concluded that the bottling operations will not change following the proposed merger and the agreements between TCCC and the bottlers would still be maintained. Coming to the branding transaction the acquiring firm was TCCC and the targeted firms were SABMiller’s Appletiser and Lecoal Brands (Competition Tribunal of South Africa, Case No: LM243Mar15). The Commission discovered that there was an overlap between TCCC and SABMiller in relation to the Appletiser and Lecol brands since both TCCC and SABMiller manufacture and sell Non-alcoholic beverages (“NAB”). The Commission found that there was very little substitution between fruit juices and other NABs like your carbonated soft drinks. Also on the demand side customers generally switched between the different sub-segments of the broader fruit juice market. Therefore, it was found that the competitive dynamics will not change, only there would be a transfer of the brand from SABMiller to TCCC.
• However, the Commission found out that there was lack of access to refrigeration and coolers in retail stores where there is only one fridge or cooler which may prevent smaller rivals from competing effectively with the merged entity post-merger. TCCC being the dominant firm in the coolers did not make space available for competitors’ products in its own coolers and/or refrigeration equipment. During the investigation the Commission received numerous complaints from small players in the market about the lack of access to fridge space as well as the high cost associated with acquiring coolers and refrigeration equipment. Therefore, the Commission imposed the remedy of opening up fridge space due to the fact that the merging parties would practise anti-competitive behaviour such as exclusionary conduct in relation to fridge space.
• Research problems and research questions (the below is still a description of the case and findings. Please have it all in one place and it needs to flow better)During the investigation phase there were numerous concerns that were raised which were public interest and competition dynamics such as employment issues, localization of the supply chain, empowerment and access for smaller suppliers to fridge space in the retail units that utilize fridge facilities of the merging parties (Competition Tribunal of South Africa, Case No:LM243Mar15). The Commission Tribunal and the merging parties agreed on a number of remedies in order for the merger to be approved. The study will discuss the remedies in brief, however it focuses on one of the imposed conditions which is the access to fridge space for small suppliers.
• The first remedy that was imposed was that the head office of CCBSA would be located, managed and directed in South Africa. This remedy was imposed to calve any negative impact that the merger can have to employment and localisation. Another remedy was that the merging parties were imposed to acquire a minimum of 80% of local input for the production of Appletiser, the merging parties also agreed to invest R400 million into Small Medium and Micro-sized Enterprises (“SMME’s”), the merging parties also undertook not to retrench any bargaining unit employees and will limit non bargaining unit employee retrenchments to 250 employees (Competition Tribunal of South Africa, Case No: LM243Mar15).

• As discussed above the study will focus on only one condition that was put by the Competition Tribunal which is the access of fridge space for small players in the market. This came as one of the concerns to the Tribunal due to the fact that TCCC did not make space available for competitors’ products in its own coolers and/or refrigeration equipment. Coolers and refrigerators are deemed to be essential in the market and are a barrier to entry. The lack of access to coolers and refrigerators potentially prevents small players in the market from effectively competing. As part of the evidence, the competitors such as Soft Beverages Proprietary Limited, Kingsley Beverages Proprietary Limited and Pioneer Foods International Proprietary Limited did attested that acquiring coolers and refrigeration equipment was associated with high costs. In protecting the interest of the consumers the Competition Commission initially raised that to ensure that small retail outlets who are supplied with fridges by Coca-Cola do not sell only Coca-Cola products but instead should be free to sell competing products.
• The Competition Commission then imposed a condition that Coca-Cola must allow small and medium sized retailers to also stock 20% of competing products in Coca-Cola refrigerators. However, that condition was reviewed and both parties, the Commission and TCCC, agreed that small retailers can stock up to 10% of competing products at all times in Coca-Cola refrigerators.
• Research problems and research questions This study seeks to evaluate whether the condition imposed on the merging parties of opening up 10% of Coca- Cola fridge space to competitors has resulted in the growth of rival CSD producers.
• The following research questions will be evaluated as part of addressing this research problem.
• Is the condition of opening up 10% of fridge space being put into practice?
• Has there been an impact on the prices for soft drinks after the merger was approved with conditions? What role has the condition played in this regard?
• Has there been growth in terms of market shares for the CSD rivals in the market post-merger?
• Have there been new players in the market post-merger?

Section 1: Introduction should include an intro to the case, the competition findings and the remedy imposed to address the concerns. The case needs to be explained more clearly in the introduction, with a focus on the key competition issues and the conditions imposed to address the key issues.
The research problem and research questions should be part of the introduction so that the reader knows what the study is all about by just reading the introduction.It should also set out the contribution of the research and a brief description of the methodology. The structure of the paper needs to be set out in the introduction at the end:

Section 2: Literature review – theoretical framework and empirical literature review.

Section 3: MethodologyWhat are you doing?Why are you doing it? How are you going to do it? What methods are you using (e.g. before-after? Assessment of market shares and prices? Entry and growth?)Where are you getting the data and what types of data are you analysing?

Section 4: Evaluation of the economic impact of merger conditions in the Coca-Cola and SAB merger. This is your main analytical chapter. It needs to incorporate points raised in your literature review under theoretical framework and insights from empirical literature, and have a detailed analysis of your data and findings in the South African context.

Section 5: ConclusionsRelevant Literature[An introduction to what this whole section is looking at]Theoretical Framework[An introduction to what this sub-section specifically is looking at]A merger occurs when one or more firms directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another firm. It can materialise in two ways such as it may be achieved through the purchase or lease of the shares, an interest or assets of the other firm in question and amalgamation or other combination with the other firm in question. So, the motives behind each deal differ one from the other. Thus, a single theory is not enough to explain the motives for mergers and acquisitions (Leepsa and Mishra, 2016).

• How vertical mergers affect competition has been a big debate in the history of antitrust. The Chicago School in the 1970’s supported brought a perspective that vertical mergers offer the merging parties an opportunity to reap efficiencies, which may ultimately translate into more livelygreater competition in terms of prices and service for final consumers (Saggers, 2008). When firms are vertically integrated, that allows for the merged entities canto align the profit-maximising incentives of producers at different production levels. Efficiencies are likely to occur through improved coordination of production. This is as a result of improved information flow and rdeduced uncertainty. The merged entities are likely to realise cost savings by planning more predictable supply of essential inputs and enhance product innovations due to synchronised research and development spending. Another efficiency arising from a vertical merger is one othe elimination of f a double marginalisation (Motta, 2004). In this case it is when a firm chooses an output level and mark-up over costs, it does this in order to maximise its own profits.

However, due to the firm’s profit-maximising behaviour it then affects the profit-maximisation decisions of the other firms in the vertical chain. Furthermore, with both the upstream and the downstream firms adding their own margin, it then negatively affect the consumers since the final price they pay is higher than the price that would have been set had both firms jointly profit maximised and chosen a single mark-up.

• [the above are all benefits of vertical mergers. From the paragraph below onwards, you are going into the anticompetitive effects. Make this clear]In the approved merger when assessing the anti-competitiveness, Post-Chicago theories of anticompetitive harm from a vertical merger focus on how foreclosure either raises rivals‘ costs or reduces rivals‘ revenues and how these negative effects on rivals result in anticompetitive harm, i.e., harm to consumers or a reduction in efficiency (OECD, 2007).

The Post Chicago School emphasises that vertical mergers allows a monopolist to extend its monopoly power into other levels of the value chain. The merged entity can foreclose in two ways input foreclosure and customer foreclosure. It said that during the assessment three questions must be taken into account (Saggers, 2008) i.e:
does the merged entity have the ability to foreclose?
is there an incentive in foreclosing? And
what anti-competitive effects does foreclosing have?

• So there are unilateral effects and coordinated effects of vertical mergers. Foreclosure is around unilateral effects. Input foreclosure (this is not a major heading)You have to be clear about the ability, incentive and effect of both input and customer foreclosure.Input foreclosure states that post-merger the acquiring firm mayis likely to raise the costs of downstream rivals by restricting their access to an important input that is owned by the merged entity (O’Donoghue & Parker, 2007). It is stated that post-merger the integrated firm has an incentive to change the behaviour of its upstream market due to the fact that it will internalise the effect on downstream prices when setting its high price in the market for the input in order to protect its market position upstream. (OECD, 2007). The vertically-integrated entity’s ability to foreclose depends on whether it has appreciable market power upstream after the merger giving it the ability to influence upstream trading conditions and, therefore, downstream price and supply (Saggers, 2008). It is also noted that Iinput foreclosure raises competition concerns only if the foreclosed product is an important and irreplaceable input for the downstream market (being either a critical component or an input that has significant cost relative to the price of the downstream product). In many cases, even a dominant upstream supplier will have no incentive to foreclose downstream rivals, especially if they are more efficient downstream producers, if they sell differentiated products, or if the downstream market is larger and more profitable than the upstream market (O’Donoghue & Parker, 2007).
• However, the increase in prices has been identified to be ambiguous in a sense that for a merger to be anti-competitive it show that it will result to complete foreclosure not partial foreclosure (OECD, 2007). The impact of a vertical merger on downstream market prices has been identified to be difficult to assess even when the integrated firms can commit not to participate in the upstream market. Furthermore, foreclosure is likely to occur in the case of vertical mergers through increased barriers to entry. When downstream rivals are worried about refusals to deal or discriminatory treatment by a vertically-integrated input supplier, this might require them to enter at both the upstream and downstream levels, which will stipulate increased entry costs and risks. (this is not clear. Keep the wording simple and convey the key points)Customer foreclosure
• Customer foreclosure occurs when post-merger, the downstream market of the integrated firm no longer sources supply from independent upstream firms (OECD, 2007). This depends on whether there are sufficient economic alternatives in the downstream market for the upstream rivals to sell their products. If there is a sufficiently large customer base that is likely to turn to independent suppliers, competition concerns are unlikely to arise (O’Donoghue & Parker, 2007). Upstream rivals’ ability to compete can only be impaired if there are significant economies of scale or scope in the input market. If there is a reduction in sales volume leading to an increase in the average cost or marginal cost of upstream competitors, then, to the extent there is exit because of higher average costs or reduced competitive effectiveness the competitive constraint these firms exert on the upstream division of the integrated firm will be reduced, leading to greater market power upstream and higher input prices (Saggers, 2008). It can reduce competition of rival upstream suppliers if the merger removes an important customer from their customer base, as that buyer now deals only with its own upstream suppliers. Customer foreclosure is deemed to be of concern when after the merger there are few remaining downstream firms to which upstream rivals can sell. The degree of market power is also identified as a driving force for the merged entity to disadvantage rivals and obstruct entry (European Commission Guidelines, 2007).
• Facilitate Collusion? This is coordinated effects. Your sub-headings (remove numbering) should be appropriate.A merger has the ability to facilitate collusion between firms who are active in the downstream and upstream markets. There are generally three ways in which vertical integration may facilitate collusion in either the upstream or downstream market (Riordan, 2008, 160 -161). Firstly, in a market in which the downstream market is supplied on a contract basis, the vertically integrated entity may maintain a collusive state in the upstream market, and can discourage upstream rivals to compete vigorously by threatening to increase competition downstream to discipline these rivals. Secondly, the vertically integrated entity may use its presence in the upstream and downstream markets to obtain information to monitor collusion in either level of the market. Thirdly, a vertically integrated firm may enter into exclusive contacts with downstream firms to facilitate collusion in the output market.
• Even in the literature review, you have to link it back to the case you are looking at. How is the above theoretical framework relevant to the case you are looking at? Importantly, how is it relevant to the conditions that you are evaluating? The body of literature that is relevant to the literature also extends to restrictive vertical restraints.Empirical Literature[An introduction to what this sub-section is looking at]In 2015 the COMESA Competition Commission has assessed the merger between SAB Miller Plc and Coca-Cola Sabco Proprietary Limited (Sabco”) (COMESA, 2015). The Commission assessed whether the proposed merger would likely have anti-competitive effects in the market such as lessening or preventing competition or would it have a detriment effect on public interest. In the investigation phase it was discovered that Bboth parties operate in two or more COMESA Member States such as Ethiopia, Comoros, Kenya, Mauritius, Uganda, Zambia and Zimbabwe. The SAB Miller submitted that it was going to establish a subsidiary called Coca-Cola Beverages Africa Limited (“CCBA”) and it was directly or indirectly hold 57% of the shares in the CCBA and exercise its control. The Commission approved the merger without conditions on the basis that it was unlikely to affect the pattern of trade and structure of competition in the Common Market , it was also unlikely to engage in market foreclosure or influence any other conditions of trade in the Common Market to the benefit of its market position and countervailing power. [a bit more on why these findings were made- based on what evidence]In the European jurisdiction there was a Coca-Cola merger where Coca-Cola which is The Coca-Cola Company (TCCC) and Cobega (Spain) wanted to acquire Coca-Cola European Partners (“CCEP”) (located where?). In this merger TCCC is said to be thewas the brand owner, trademark licensor and producer of soft concentrates, syrups, soft drink syrup and finished beverages. TCCC sells its products to bottlers., whereas Cobega wasis only active in bottling and distributing beverages. (what does the target firm, CCEP do?)TCCC already controls one of the four bottlers, Coca-Cola Iberian Partners and Vilfilfell. It was reported that. Tthe merger would create the world’s largest independent Coca-Cola bottler in terms of net revenues. During the investigation it was found that Tthe acquiring firm had exclusive agreements with distributors and marketing. In theose agreements in the distribution level they were not allowed to offer competing brands. In addition, Also rivals to Coca- Cola were denied access to outlets due to the effects of Coca-Cola’s financing agreements and technical sales equipment arrangements on beverage coolers and fountain dispensers. The European Commission reached an agreement with Coca-Cola whereby the Commissionwhere the merger was approved the merger but onwith conditicondition thatons such as Coca-Cola must free up 20% of space in its coolers. (this case is directly relevant so you have to explain it clearly and in more detail).There are many other directly relevant cases involving Coca-Cola and other cases around fridge space:Competition Commission of Mauritius, 2013. Investigation into the supply of coolers to retailers by Phoenix Beverages Limited and Quality Beverages Limited CCM/INV/019. Available at HYPERLINK "http://www.ccm.mu/English/Documents/Investigations/INV019-Final%20Report%20of%20Undertaking-NC.pdf" http://www.ccm.mu/English/Documents/Investigations/INV019-Final%20Report%20of%20Undertaking-NC.pdf, accessed in February 2019.Competition Commission of Singapore, 2013. Coca-Cola Singapore Beverages changes business practices in local soft drinks market following enquiry by CCS, Media Release, available at HYPERLINK "https://www.cccs.gov.sg/media-and-consultation/newsroom/media-releases/cocacola-singapore-beverages-changes-business-practices-in-local-soft-drinks-market-following-enquiry-by-ccs" https://www.cccs.gov.sg/media-and-consultation/newsroom/media-releases/cocacola-singapore-beverages-changes-business-practices-in-local-soft-drinks-market-following-enquiry-by-ccs, accessed in March 2017.The South African Competition Authorities have dealt with a number of other vertical mergers applications. For instance, the Tribunal has prohibited a proposed merger in 2002 in which Mondi Limited (“Mondi”) wanted to acquire a downstream customer Kohler Cores and Tubes (KC&T). The Tribunal prohibited the merger because it was likely to prevent or lessen competition in both the upstream and downstream market through exclusionary foreclosure and it increased the possibility of facilitating collusion. The Tribunal reached its decision to prohibit on the basis that both merging parties had market which would cause harm to competition should the merger be approved. The Tribunal was also concerned that the merged entity would self-deal as a strategy to weaken downstream rivals and the costs of rivals in the downstream market would be high and KC&T was the only firm with the potential to attract an international supplier for core-board. Further, having the merged entities would have resulted to a block of entry into the upstream market. Furthermore, the Tribunal concluded that the transactions net effect, competition and welfare were negative. (explain in terms of ability, incentive, effect).The Tribunal also handled a casIn the casee between Bayne Investments (Pty) Ltd (“Bayne”) and Clidet 451 (Pty) Ltd (“Clidet”) XXXXXXX.. (the tribunal approved with conditions…)In the merger transaction Woodchem, the target, had a long term supply agreement with PG Bison Limited (“PG Bison”) which is another a subsidiary of Steinhoff International, to supply it with formaldehyde resin. Ultimately the The transaction would have resulted in the vertical integration of Steinhoff International/P G Bison and Woodchem.
• However, Tthe Tribunal approved the merger with conditions due to the fact it wasas it found that input foreclosure would not be profitable for the merged entity in the medium density fibre board (“MDF”) market because the level of imports were relatively high in this market and exercised a constraint on the price of domestic MDF. However, in the event of an increase in resin prices or a refusal to supply by the merged entity to its downstream competitors, the manufacturers of MDF could turn to cheaper imports of MDF. It was also found that in the case of particle board it would be profitable for the merged entity to engage in input foreclosure by raising the costs of formaldehyde resin to PG Bison’s rivals. Further, barriers to entry in the downstream market were also relatively high, characterised by high capital costs and long lead times due to the need for environmental impact assessments. Hence the Commission found that a structural remedy, such as requiring a divestiture or separation of the resin production business was not feasible and imposed conditions for a time period of 10 years.
• [NB*** what about empirical literature on how impact assessments have been conducted in SA and other jurisdictions in the past? This will be critical for your methodology]Contribution of the proposed researchThis mini dissertation aims to evaluate whether the condition imposed on the merging parties of opening up 10% of Coca- Cola fridge space to competitors has resulted in the growth of rival CSD producers. This assessment is intended to establish the market effects of the decision taken by the Authorities. This study will provide an opportunity to check whether the conditions or remedies imposed were sound taking into account the information that was available at that time.
• Methodology and data sources (needs to move up as noted in the structure outline. A summary of the methodology also needs to go into the intro)The research question that the study wants to investigate has to be answered through using a methodology. There are various approaches of how the methodology can be done.
• The three questions: What, Why and How need to be re-stated here.How will you undertake the impact assessment to answer these three questions?What variables will you measure and why? This can be drawn from the empirical examples you give in the literature review in terms of what has been done internationally and in SA in past impact assessment studies.However, theThe study will utilise employ both qualitative and quantitative data. methods Qualitative data is which is often used utilised to create a deeper understanding and to undertakea more detailed analysis of specific competition outcomes. phenomena such as competition in the commercial world, which is the objective of this study. The study will make uses of primary qualitative data by using surveys andcollected from conducting interviews with the retailers, small wholesalers such as general traders or spaza shops, garage shops. Interviews will also be undertaken with and so as the competitors of Coca-Cola such as Minute maid, Pepsi, Kingsley, Jive, Coo.ee and Schweppes. [and what types of qualitative data will you collect? For what period? For instance, are you going to collect data on how many stores the condition applies to? Of this, how many will you interview?]The study willalso gathers information such as market shares from the merged parties in order to determine their dominance in the market, assess entry and exit and closeness of competition in the CSD market.
• The study will also make use of secondaryany data sources such as Who Owns Whom cite
• and the data that will be collected will be pre and post-merger. The study will collect data of sales and volumes made by the merged parties as well as sales data of the small manufactures of CSD. In terms of pricing the study will analyse whether there has been changes in prices by observing pre and post-merger prices of CSD taking into account different components that make up prices such as packaging, sugar tax (sugar production).
• [and after describing the data to be collected, what types of analysis are you doing? How will you measure the impact? Which metrics/measurements will you use?]Chapter OutlineChapter one will be the introduction which will give a background of the merger transaction. Chapter two will undertake a literature review. The literature review will focus on the theoretical framework discussing theories of foreclosure such as input foreclosure and customer foreclosure and cover the empirical literature whereby it will assess what and how other jurisdictions have dealt with the SABMiller and Coca Cola merger. Chapter three discusses the methodology and sources of data used in this study. Chapter four will consist of the results and interpretation of the results. Chapter five will present a conclusion and recommendations of the study. ReferencesBayne Investments (Pty) Ltd and Clidet 451 (Pty) Ltd. Competition Tribunal of South Africa. Reasons for decision. Case No.: 90/LM/Aug07.
   

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