Andile Nikani is the Executive Director of the Takeover Regulation Panel, an independent institution that regulates mergers and acquisitions (M&As) in South Africa and reports to the Minister of the Department of Trade, Industry and Competition. Nikani holds a BA and LLB from the University of Cape Town, a LLM from the University of Liverpool, and a MPhil from the Gordon Institute of Business Science at the University of Pretoria.
In your recently published case titled “Government Intervention in Cross-Border Mergers and Acquisitions and its Impact on M&A institutions: A case of South Africa” you mention that a lack of rules for cross-border M&As means that government objectives drive intervention in M&A transactions. How have you seen the effect of the South African government's objective and the country’s national identity play out around you?
Firstly, I suppose you're right, there are no international rules that govern how each country must deal with M&As, particularly cross-border M&As, which means that each country adopts its own strategy. Some countries are deliberate in their strategic focus, others, they just wing it so to speak; they intervene as and when they deem [it] necessary.
In South Africa, the primary drivers of intervention are unclear because even the ones that we say we know are not always applied in all cases where the circumstances are almost similar. For instance, there's a general [belief] that in South Africa, every large transaction would most likely trigger some kind of government intervention. But, we've seen large transactions actually go by without government intervention at all. So, the hypothesis doesn't always hold that size is the issue.
Then, the question becomes what is the real issue, and how has that real issue shaped how South Africa sees itself in relation to cross-border transactions. What I think, and partly what the research has sort of indicated so far, [is that] it's often the publicity associated with a transaction that triggers government intervention. Sometimes that publicity is driven by domestic issues [and other times] by the identity of the company that will be acquiring [another]. If it's a company that is known to have a bad track record at home in its domestic market, then it's most likely going to attract attention.
Often in South Africa, the biggest thing is unemployment. We have a high unemployment rate in general, and a [high] youth unemployment [rate that] sits at around 66 percent, which is massive. And, the government is trying to find ways of dealing with it. If [a company] in a cross-border transaction is known to have a total disregard for unemployment issues, then obviously, if it comes to South Africa, that will pick the interest of the media and of the government and intervention is almost certain. [The intervention will] probably be driven by trade unions with government support. Unlike in most jurisdictions, we find trade unions here to be strong [and], as a result, we have incredibly strong labor laws in South Africa. It's very difficult to dismiss a person because there's so much protection. [This is] also a consequence of history. Under the apartheid regime, people were treated unfairly and badly, and so on, so strong rules that tried to redress the injustices created by apartheid and the dignity that was stripped of people as a result of apartheid [were necessary]. So, the whole idea of having these strong laws was to try and re-establish that you can't just walk into your [place of] employment and [have] someone say, “You've been fired;” there has to be a process, there [have] to be reasons. So, employment is one of the most critical issues.
In terms of how the identity of South Africa has been shaped in relation to these M&As, you'll find the identity to be that of protectiveness, or seeking to protect local markets, particularly employment. You will find that the identities [are] probably embedded quite strongly [in] issues relating to sectors that are highly sensitive and that require general protection.
Have there been any important trends in the M&A space in the past few years with regard to South Africa? For example, have South African conglomerates been aggressively acquiring smaller companies, or have the biggest players been larger multinational companies?
Yes, in fact when COVID-19 occurred, we noticed, not just in South Africa but globally, a significant depression in the share price of many listed entities. In South Africa, as the regulator, we watched, not with concern but more with anticipation, [if] prime companies in South Africa [were] going to be targeted by wealthier companies from overseas.
We expected an increase in cross-border M&As because the share price [of major companies] in South Africa was significantly depressed. [But], that didn't happen, not to the degree that we expected. So, I suppose that’s great, if you like, because every country likes having its own national champions and you don't want your national champions being acquired by foreign companies. That is certainly not something that we dream about, but it's not something that we can prevent either because commerce is commerce and these are open markets, and people are free to buy and sell as they wish.
What we have seen [are] significant delistings of companies from [stock] exchanges in South Africa. But, it appears that the delistings impacted mainly what we refer to as small to medium market capitalization companies, not the larger companies. There's a whole host of reasons as to why that happened [and it] doesn't seem to be limited or related to the market conditions themselves, rather [than to] the structure of the companies and their visibility in the market, i.e., the liquidity of their shares, because they're just way too small for investors to see.
So, to answer the question [of] do we see significant M&As taking place? Yes. The ones that we see are less cross-border, [and] are more local companies that are buying each other. Alternatively, companies themselves are buying back their own stock for the purpose of delisting themselves from stock exchanges in South Africa. So those are the vast majority of transactions taking place in that space.
Regarding the small and medium-sized enterprises (SME) delistings and the M&As that you’ve been mentioning, have you seen them in a single industry, or across multiple industries?
Why are delistings an important subject in an M&A discussion? Probably, that's where we should start to give color to the question. In South Africa, in order to delist, a company must create a liquidity event. In other words, it must make an offer to the existing shareholders, for those shareholders to have an option to exit before the company goes private. That triggers an M&A transaction. [And], because an offer is made [. . .] the delisting will typically fall under my purview and I must consent to [it] before [it’s] actually implemented.
So, do we see a sector-specific exit from the listed markets? The answer is no. We thought that would be the case. We thought that there would be [fewer] delistings or probably more delistings in the Information Technology and Communications (ITC) sector because during COVID the ICT sector and the mining sector were the sectors that were booming. We thought [that] there would be more activity there, but it wasn't the case. They were affected in the same fashion as the rest of [the] sectors, in terms of the delistings.
[The fact that] we didn’t see anything unusual in relation to the sectors that were doing very well under COVID relative to those [that were] doing badly under COVID, I think, boils down to the rationale for delisting in the first place. The rationale for delisting, which was common to all of them, related to the fact that the cost of being a listed market was just way too [high] to remain listed. And secondly, the liquidity of their shares [played a role]. Even though the underlying value of the business was big, the traded shares represented a very depressed number. Therefore, there was no alignment between the underlying asset and the share price. As a result, it just makes sense to delist because the whole purpose of going public in the first instance is so that you are visible [and] people trade your stock, and so on, and so forth. But none of that was happening because of the size of the organization.
It is my understanding that social factors are taken into account when evaluating M&A transactions and offers. Could you please share what these factors are? Also, what other factors would you like to be considered in the future?
Locally, we do have a strategy as to which transactions and which public interest aspects we prioritize in an M&A transaction, particularly in cross-border M&As. It has been regularized, i.e., it's now part of our role.
Public interest factors in South Africa, the legal ones anyways, are firstly limited to employment issues. [Secondly], they’re limited to the ability of companies that are owned by Black South Africans to be able to compete locally having due regard to the fact that Black South Africans, for all intents and purposes, are new to commerce because they were excluded by apartheid. Thirdly, we look at the ability of the so-called national champions; we look at the ability of companies in South Africa to consolidate, and [we consider] if they consolidate, can they now compete internationally with other players?
Those public interest factors are so important that even when a transaction is good for competition in general–it enhances consumer welfare, it will lead to reduced prices, it will give customers more choice, it will probably even increase innovation–even if a transaction has those good classical pro-competitive gains, it could still be prohibited on the basis that it offends the public interest factors. In other words, if it's going to lead to massive job losses, it could be prohibited. The converse applies, i.e., the transaction could be completely and utterly anti-competitive, create a monopoly that's going to raise prices, give no choice [to customers], reduce output, not care about innovation, or technology, or anything like that. But, if it's good for public interest factors, it could be approved and be allowed to continue.
So, the public interest factor in South Africa is that important. Probably that's where our real identity lies, if I'm answering the first question. I would say our real identity lies on public interest factors in M&A transactions as a country.
So would I wish for this to change? The answer is yes and no. I would wish for it to change only insofar as it is used by the Minister of Trade and Industry and Competition, to bully parties to the transaction. You see, the law says that public interest factors must be measure specific. In other words, if this merger between A and B is going to result in job losses affecting A or B, right, then deal with it in that context. Don't try to take a transaction that has nothing to do with our industrial policy and try to resolve our social problems [as it is currently being done].
So, the way in which these public interest factors are being used, as far as I see, require[s] a significant amount of change. They mustn't be used to exploit parties to transactions, particularly in instances where those public interest factors are not specific to a transaction, which is what the Minister tends to do. The Minister [currently just thinks about] what [he] can get from [the different parties]. He doesn't analyze the transaction and [doesn’t] see what the public interest factors [are] specific to that transaction that needs to be addressed.
This creates unpredictability in M&A transactions because you don't know what he's going to want, [nor] how he's going to want it. And, in the long run, it will actually compromise M&A institutions in South Africa because it creates a M&A regulatory framework that is uncertain, and that is incredibly difficult to predict. And you don't want that. You want predictability. You want certainty. You want to say when you analyze the transaction [that] the rules of the game are clear to me.
Advisors in South Africa struggle to advise because they don't know what the Minister is going to want. So that for me, is what I would like to see change. I would like to see more consistency. I would like to see the public interest factors limited to a transaction, i.e., to be measure specific.
Is this lack of measure specificity, which creates a lack of standardization across M&A transactions, one of the biggest challenges of the Takeover Regulation Panel and of your work?
It's the biggest challenge for both key regulators of M&As in South Africa: the Competition Commission and the Takeover Regulation Panel. For the reasons that I've already explained, we are enjoined by the law to be independent, [and] to apply the law without favor or prejudice. But at the same time, we have a situation where our boss for all intents and purposes, the Minister, [makes] deals that are predominantly concluded in private. And, the first time that the public becomes aware of them, it’s when they're sitting before an adjudicating body, and you as a regulator [explain that] these things are outside your purview to the adjudicator. And the adjudicator says that you can’t get involved [because] these two people are happy to be bound by these things, so we'll let them be bound by these things.
But all [of us] in the room know that this is highly improper. And obviously, the Minister is very smart; it's not like he doesn't know what he's doing is highly strategic. And politically, it probably works because he’s really safeguarding the public interest. But it's a political public interest, not a legal public interest, and unfortunately, it has [the] unintended consequence in the long run of adversely affecting the entire regulatory framework related to M&As.
Jackson spoke to Nikani on August 22, 2022. This interview has been lightly edited for length and clarity.