THE Zimbabwean economy has been going through a number of challenges affecting various spheres of the industry including competition. This week our senior business reporter Melody Chikono (MC) interviewed Competition and Tariff Commission director Ellen Ruparanganda (ER) on various issues around competition mergers and acquisitions. Below are the excerpts of the interview:
MC: What can you say about the state of competition of Zimbabwean companies in relation to economic challenges and the way they conduct business?
ER: Promoting and maintaining competition in all sectors of the economy of Zimbabwe is at the heart of the Competition and Tariff Commission’s mission. However, understanding the state of competition of Zimbabwean companies in relation to economic challenges is limited.While the commission collects valuable information on competition, in particular markets through merger examinations, restrictive business practices investigations and market assessments, there is no agreed way to measure and monitor the state of competition across the whole economy.
However, it suffices to note that the Study of the Monopolies and Competition Policy in Zimbabwe in 1992, which culminated in the adoption of competition law in Zimbabwe established that the manufacturing sector was highly concentrated, with half of the over 7 000 products in the economy then, being produced by one producer, and approximately 80% of all industrial production being produced by only three firms or less.
While there are limitations in accessing data to assess the current status, it can be argued that there has not been much significant improvement in this position, given that the economy has undergone a period of deindustrialisation and a number of economic challenges, which saw many firms exiting the market, with fewer firms entering the market. Resultantly, economic challenges that the country has faced also seem to have favoured large companies.
MC: Last year you probed pricing cartels, raising fears over a possibility of some producers colluding to increase the cost of goods and services under the disguise of setting recommended price ranges. What could be promoting these cartels in Zimbabwe?
ER: Trade associations have various benefits to their members, but the commission has also realised that such associations have become a fertile ground and a conduit for sensitive information sharing and price fixing arrangements in violation of competition law.
Economic theory postulates that the main reason why firms engage into price fixing arrangements is to maximise their profits.
MC: What was the outcome of the probe?
ER: The commission has referred the cases to the Zimbabwe Republic Police for it to initiate the prosecution process for engaging in collusive practices. Details of the cases will be shared in due course.
MC: May I have an update on the mergers and acquisitions that you approved and rejected in the year 2020?
ER: The commission approved 12 mergers which were found not to lessen competition and disapproved two mergers, which were found to lessen competition in the relevant markets.
MC: What has been the value of mergers and acquisitions that you approved in the last two years and how have they brought value to the economy?
ER: It is difficult to quantify the value of mergers and acquisition since in many instances the purchase consideration value does not reflect the actual value of the company being acquired.However, the commission carries out impact assessments of its operations in the economy. The latest impact assessment on mergers and acquisitions covering the period 2009-2018, established that mergers were found to have recapitalised companies, created new markets, resulted in job creation and saved job losses, as potentially failing firms were rescued.
The commission, in accordance with the provisions in the Competition Act [ Chapter 14:28], disapproves the merger transactions that have the effect of substantially lessening competition and or creation of monopoly situations that are contrary to public interest, which substantially lessen competition and create a monopoly.
In such instances, such deals lead to a highly concentrated market post-merger, as the merged entities acquire market power detrimental to both competitors and customers.
MC: What can you say about the state of corporate governance in some of these deals?
ER: Given that some of the deals handled involve firms listed on the stock exchange this promotes good corporate governance, as companies have to comply with certain standards.
However, in some of the mergers, there are instances of interlocking directorship — a type of multi-firm conduct, which, though, not anti-competitive in itself, gives rise to the potential for collusion or coordination through exchange of competitively sensitive information through the common director. Common directors sitting on high levels of the ownership chain have a possibility of coordinative effect over a vast number of markets.
MC: How has the change in currencies affected mergers and acquisitions in Zimbabwe?
ER: There is limited evidence to really ascertain the link between change in currencies and how it affects mergers and acquisitions in Zimbabwe. Change in currencies is linked to the state of the macro-economic environment.
An economic upturn is viewed to boost deal volumes, as boards and company management choose to conduct big investments when the economy is strong.
However, it is also important to note that even when the economy is weak, acquirers see the potential of higher returns, as they target failing firms having lower valuations.
Mergers and acquisitions in Zimbabwe tend to be present in all economic cycles and tend to be affected more with what’s happening in a specific industry or sector at a particular time, whether commodities in that sector are in demand. There are also instances where acquiring parties target export oriented companies which may highlight the company’s desire to grow foreign cash inflows.
MC: The country has been going through a number of challenges. How has it affected operations of companies and their bids to merge or acquire some entities?
ER: The challenges that companies are facing affect firms’ production levels, as they will be operating at low capacity levels. In addition to that, low incomes among the general citizenry affect the demand for firms’ products and services. It is vital to note that the challenges have encouraged some big companies to pursue their growth strategies through acquiring struggling firms.
The challenges also present an opportunity for foreign firms to acquire cheap assets in Zimbabwe through mergers and acquisitions. Recently, the commission has also seen some local companies acquiring export-oriented businesses, which can be viewed as a strategy to boast foreign currency inflows and tape into the huge export market.