Commentary: Mergers and acquisitions in Jamaica - The antitrust debate
In 1993, Jamaica became the first territory in CARICOM to enact antitrust legislation when it passed the Fair Competition Act, which established the Fair Trading Commission (FTC).
The primary mandate of the FTC is to promote competition. The Jamaican law differs significantly from antitrust legislation enacted in other countries around the world in that it does not include explicit provisions for the FTC to review proposed mergers and acquisitions (M&As).
Entities engage in M&A agreements for a variety of reasons. While it is true that some M&As place the parties to the agreement in a better position to compete, it is also true that M&As can be used as a vehicle to substantially lessen competitive constraints and thereby harm consumers.
Globally, the antitrust debate has long since moved past whether M&As should be included in antitrust legislation. The answer is overwhelmingly in the affirmative as objections to introducing M&A provisions have been discredited.
The more prominent arguments and counterarguments for excluding M&A provisions are documented in a position paper prepared by the FTC in May 2006.
The underlying concerns in arguments against the introduction of M&A provisions can be adequately addressed in how the provisions are to be administered; and, therefore, excluding merger provisions to resolve the underlying concerns is akin to throwing out the baby with the bath water.
A report in the Financial Gleaner, April 10, 2015, 'Paulwell revives antitrust debate', written by Avia Collinder, indicates that the minister of science, technology, energy and mining is prepared to revisit the issue of introducing antitrust legislation in relation to M&As. This is a step in the right direction to the extent that some M&As will have anticompetitive effects, and, therefore, business transactions which result in M&As represent a significant blind spot in antitrust enforcement in Jamaica.
The report indicates that merger provisions were excluded from the Fair Competition Act because the Private Sector Organisation of Jamaica (PSOJ) was not in favour of such a move. The PSOJ argued that "Jamaica was too small, and needed to position itself to tackle the global market place".
In response to the concerns of the PSOJ, it would be instructive to note that the need to police M&As arise from the nature of economics. To the extent that the laws of economics which operate in large economies are the same laws which operate in small economies, it is by no means obvious that M&A provisions are less relevant in small economies.
In fact, Barbados included M&A provisions when it enacted its antitrust legislation some 13 years ago and there is no compelling reason to believe that the significantly smaller island economy is any worse off for doing so.
The underlying economic principle guiding M&As are described below.
UNDERLYING ECONOMIC PRINCIPLES
The Structure-Conduct-Performance (SCP) paradigm was developed by economists specialising in industrial organisation. It shows that the structure of the market influences the conduct of actual and potential suppliers, which in turn influences the performance - that is, competitiveness - of the market.
Since M&As alter the structure of the market, competition authorities must be given the opportunity to assess whether the structural changes are sufficient to significantly lessen the incentives and opportunity for suppliers to engage in procompetitive conduct. If the proposed transaction is likely to substantially lessen the incentives, then the competition authority would block the merger outright, or approve the merger subject to remedial structural changes which would be sufficient to restore the incentives.
Accordingly, if entities seek to merge to exploit, say, greater economies of scale and put the resulting entity in a position to compete in the 'global market-place', for example, then those M&As are likely to be approved. The PSOJ would have nothing to be concerned about. But if the M&A so altered the structure and eliminated rivalry between significant competitors thereby harming consumers, then such M&A will be blocked.
Another argument about the size of the economy is attributed to Dr Derrick McKoy, who asserts that "regulating mergers ... is a cardinal example of burdensome and unnecessary regulation in a small economy". Dr McKoy's instincts are correct in the sense that mergers impose considerable regulatory and financial burden on the private sector, since a review could take up to three months before approval is given.
Excluding merger provisions will not remove the burden associated with M&As from society - it merely transfers the incidence from private sector to consumers. In particular, if the state excludes mergers to save the private sector the burden associated with merger review, then the state runs the risk of imposing an even greater burden on consumers should the merger significantly lessen competition.
The point is that the burden associated with merger review can be managed to some extent, but it nonetheless represents an unavoidable 'transaction cost' to the private sector to protect consumers from anticompetitive M&As.
The matter is not trivial. To get an idea of the magnitude of the potential burden faced by consumers, we need only consider Digicel's acquisition of Claro in 2011. The FTC challenged the transaction on the basis that, among other things, consumers would be deprived of approximately $4 billion annually in benefits because the acquisition eliminated competition between the two aggressive rivals.
It is difficult to make an argument that the burden imposed on the private sector, pursuant to a merger review, would be anywhere in the ball park of the estimated cost to consumers.
More could be said, more should be said. The important thing is to keep the matter alive as the issue of introducing merger provisions in Jamaica's antitrust legislation is impatient of debate.
n Dr Kevin Harriott is the competition bureau chief at the Fair Trading Commission. The views expressed are those of the author and not necessarily that of the commission.