What do we call the combining of 2 or more firms competing in the same market with the same good or service?

The term chosen to describe the merger depends on the purpose of the business transaction and the competitive relationship between the merging parties. Generally, competition laws have categorised mergers into three types. These are horizontal, conglomerate and vertical mergers. Some mergers may have two or all the aspects of the three types of mergers.

Horizontal mergers are those that involve actual or potential competitors. They are most likely to raise competition concerns than other types of mergers because they directly reduce number of competitors in the market. Vertical mergers are not mergers among competitors but between firms situated at different levels of the value chain e.g. supplier of a computer software and manufacturer of computers. They usually result in efficiency enhancing gains. Nevertheless, they may also raise competition concerns especially through foreclosure effects. On the other hand, Conglomerate mergers involve transactions where the merging parties are not in direct actual or potential competition and they are not in the same value chain e.g. cement company and supplier of livestock. They rarely raise competition concerns. However, competition concerns may arise if the merged entity engages in mixed bundling.

Mergers are an important area of corporate restructuring, an avenue for growth and for consolidation. This allows firms to acquire market share, expand into new territories, add to their product range and to meet global demand among others. However, sometimes firms may merge with the anticompetitive motives, such as to eliminate effective competition that threatens their own survival in the market.

Though the term merger is defined in most competition laws, its application to transactions has not been free from dispute and controversy between competition authorities on the one hand and the merging parties on the other.

In the European Union, problems in establishing the existence of a merger situation have arisen with regard to sole control and minority rights acquisition. Some minority rights acquisitions may confer sole control. The minority rights acquisition may be so large compared to the other right holders that it may be able to exert significant influence in shareholder meetings for example. This is supported by the decision in the Electrabel/Compagnie Nationale du Rhone (CNR) merger, where the European Commission determined that Electrabel had acquired sole control over CNR despite being a minority shareholder, on the basis of a number of different considerations, including that it was assured of a de-facto majority at CNR’s General Meeting. This position was affirmed by the General Court and the Court of Justice on appeal.

Another controversy over the notion of merger was highlighted in the United Kingdom in the decision Société Coopérative de Production Seafrance SA v Competition and Markets Authority and anor. SeaFrance, a cross-channel ferry operator, had gone into liquidation and could not be sold as going concern. Eurotunnel proposed to operate as a cross-channel ferry business and in partnership with another party bought three ferries and various other assets from SeaFrance. The UK Competition Commission concluded that there was a “relevant merger situation” for the purpose of the merger control provisions of the Enterprise Act. The UK’s Competition Commission considered that the collection of assets bought by Eurotunnel amounted to an enterprise.

An appeal against the decision of the Competition Commission was brought before the Court of Appeal which ruled that an enterprise required the transfer of both vessels and crew and given that the crew had been terminated when they were acquired, there was no relevant merger situation to which the Enterprise Act should have been applied.

In December 2015, the Supreme Court, unanimously overturned the decision of the Court of Appeal. It was highlighted that the underlying principle was to distinguish bare asset acquisitions –assets that could have been acquired on the open market – from acquisitions where the purchaser also acquired something over and above what might have been so acquired and which was attributable to the fact that those assets had previously been used in the activities of the target enterprise. It ruled that the test to establish what constitutes an enterprise is an economic one and requires carrying out a wide economic analysis of the operation. In this sense, even when an entity has been dissolved, if the means to continue its activity live on, an enterprise may be found to exist.

Finally, in the Common Market for Eastern and Southern Africa (COMESA), CFAO and Compagnie Financière Michelin SCMA ("Michelin") announced on March 21 2018, the conclusion of an agreement for the distribution and retail of multi-brand tyres, tyre-related accessories and providing tyre-related services (the JV Business) in Kenya and Uganda, through a joint venture company. The transaction was not notified to the COMESA Competition Commission (the CCC) and the parties contended that:

– the joint venture (JV) did not involve the integration of parts of the business of the undertakings to the joint venture as neither Michelin nor CFAO undertook the JV Business in Kenya and Uganda and as a result there was no reduction or elimination of competition between the parties to the JV;

– the JV Business was auxiliary to the principal business activities of Michelin and CFAO;

– the JV’s commercial policy (the business plan and budget) was based and represented the commercial aspirations of Michelin and CFAO;

– the JV Business largely relied on distribution of its shareholders products and service network/outlets;

– the JV’s existence relied heavily on involvement of a management team granted to the JV by its shareholders which would typically run the JV Company’s day-to-day operations within Kenya and Uganda; and

– the JV agreement was for a five (5) year period and was to be automatically renewed for another successive five (5) year period.

The COMESA Merger Assessment Guidelines provides that for a joint venture to constitute a ‘merger’ within the meaning of Article 23(1) of the Regulations, it must be a ‘full-function’ joint venture, i.e. it must perform, for a long duration (typically 5 or more years) all the functions of an autonomous economic entity, including: (a) operating on a market and performing the functions normally carried out by undertakings operating on the same market; and (b) having a management dedicated to its day-to-day operations and access to sufficient resources including finance, staff and assets (tangible and intangible) in order to conduct for a long duration its business activities within the area provided for in the joint-venture agreement.

The CCC observed that the joint venture company would have its own management, operationally independent from that of the parent companies, and the joint venture agreement provided that administrative services provided by a parent company to the JV Company would be conducted at arm’s length, on the basis of normal commercial conditions.

In assessing the full-function character of the JV, the CCC also had regard, to the extent of commercial relationship between the joint venture and its parents. In the case at hand, the CCC observed that the JV was expected to market both Michelin Group brands and non-Michelin Group brands and would thus be sourcing supplies not only from Michelin but also from competing manufacturers or distributors. Further, while the JV Company would have access to CFAO’s distribution channels in Kenya and Uganda, it was intended for the JV Company to also market its products through other channels including. The CCC further noted that there was a specific market for the distribution of tyres, as tyre manufacturers often appoint independent distributors or agents to carry out this function. The JV Company would compete in this market with other full-function entities.

The CCC was satisfied that the JV Company met the requirements of a full-function joint venture having regard to the fact that the JV Company would have the financial and other resources to perform its activities as an autonomous economic entity on the market on a lasting basis (minimum 5 years), and therefore constituted a ‘merger’ within the meaning of Article 23 of the Regulations. The CCC rejected the parties’ justifications that the joint venture did not amount to a merger. The transaction was subsequently notified on 11th July 2019.

What do we call the combining of 2 or more firms involved in different stages of producing the same good or service?

When two or more companies combined together it is called?

When two or more companies of the same line or business combine together it is called as which merger?