Analysis of merger of Coca-Cola and SAB

This literature review is mainly focused on the subject of merger and their economic impact. The case selected in the research is of Coca-Cola and SABMiller merger. A merger is basically defined as a strategic process where two or more existing firms operating in the same industry combine their business operations and form an entirely new business entity (Rozen-Bakher, 2018). The firms getting merged can be in the same country or can have different countries of origin. There are mainly two types of mergers, namely, horizontal merger and a vertical merger. The case of Coca-Cola and SABMiller merger was a kind of horizontal merger. A horizontal merger is a process where there is a consolidation between two or more organisations having an equal level of production and distribution of goods and services in the same market. The case of Coca-Cola and SABMiller merger is also a horizontal merger because Coca-Cola and SABMiller both operate in the beverage and drink industry and seeking to have the same kind of growth prospects through adopting any new strategic initiative. In this regard, the literature review provides a detailed understanding of the concept of mergers and their significance. It further discusses the economic impact of merger conditions and has put light on the overall case of merger between Coca-Cola and SABMiller. The literature review has also provided a brief account of the gap evident in the existing works of literature.

Concept of Merger and its Significance

In the overall strategic process, different kind of strategic measures is adopted by the business organisation in order to secure their competitive business position and survival in the longer run. Different strategies are adopted by businesses with different motives and purposes. Among the key strategic measures that commonly adopted by business organisations at the global level, one is merger (Akbar et al., 2018). According to Greenfield, Kwoka and Gu (2015), a merger is referred to as an agreement that tends to unite two or more existing companies into a whole new corporation or company.

Scott and Lewis (2017) also explored that in corporate finance, mergers are known as transactions, where the possession of business organisations, companies or even their operational departments are consolidated or transferred to other organisations. As per the definition of Malik et al.(2014), a merger is referred to as a legal activity, where usually two or more than two organisations approach together and only one organisation survive in terms of a legal entity. Similarly, Gropp (2012) highlighted the traditional merger theory, which stipulates that merger is known as the transfer of limited business resources from a company having lesser capability to another company that is able to function in a more effective manner while putting those limited resources to better use. All the above studies by different scholarly authors have shared their viewpoints and provided a detailed definition for the concept of merger.

In the viewpoints of Georgios and Georgios(2011), the main purpose of various organisations to go into the agreement of merger is mainly to work together with other organisations, which proves to be more beneficial for them as compared to organisations who work alone in the market. It is examined that the wealth of shareholders and return on equity mostly increases and tends to minimise any associated expenditures such as operating cost for organisations as well. In this way, the concept of merger is a crucial tool for the growth of businesses in various parts of the world. 

On the other hand, Andriuskevicius(2017) illuminated the conventional economic theory, which states that the deal of merger between organisations tends to increase the level of monopoly power. This ultimately decreases the competition level in the market and has positive effects on economic efficacy. However, mergers tend to increase the operational level of competition in a monopolistic world where the size of the organisation matters.

            According to Malinauskaite (2010), a horizontal merger is referred to as a business consolidation among organisations who are rivals and constitutes to have an equal level of production and distribution of goods and services in the same market. It is examined that when two or more competitive organisations merge, there is usually elimination of rivalry among the coinciding activities of all organisations merging, which may result in the loss of competition in the market. A horizontal merger makes it profitable for the merged organisations to unilaterally increase their prices or decrease their production post-merger. Moreover, a horizontal merger usually makes it easier for the organisations remaining in the same market to coordinate well, either explicitly or tacitly.

In support of the above viewpoints, Federico (2017) highlighted in his study about the innovation theory of harm. This theory postulates that an agreement of merger between two innovative organisations who are rivals may decrease competition not just because of a decline in static competition on existing products but also due to a decrease of dynamic competition on forthcoming products. Thus, according to the theory of harm, it is observed that the decline in future competition may somewhere come from a decrease in innovation.

Robertson (2020) elucidated another important theory that defines related aspects of mergers is the innovation theory of harm. The main foundational viewpoint of this theory is competition as a key element under merger control process. In the process of merger control, the innovation theory of harm affirms that when a merger takes place, the rivalry level between the two competitor firms operating in the same industry reduces to a significant level and as a result of it a good number of benefits are generated for the respective society and the consumer living in it. The theory highlights some major benefits of merger control such as improvement in the static efficiency of the business, which provides a particular set of products to the customer at lower prices; enhancement of productive efficiency through making the production process efficient for particular kind of products and improvement in dynamic efficiency which is helpful for developing new products with the use of newer technologies.

            In contrast to the above viewpoints, ERICKSON (2018) explored that a vertical merger is a union that mostly takes place between organisations in the same industry but functions at different but complementary stages in the chain of the production process. The main reason behind the agreement of vertical merger is to increase collaborations in terms of financial, managerial and operational, as well as be more efficient functioning as one single entity.

            In support of the above standpoints, Galloway (2017) stated that one of the principal advantages of a vertical merger is that companies no longer have to be dependent on suppliers and reduce the chances of unpredictability and costs that may come with them. This helps the organisation or firm to increase their productivity levels by modernising and streamlining the process of acquiring supplies for the product, producing it and finally selling it. In addition, Galloway (2017) also explored that another major advantage of a vertical merger is that it helps an organisation to gain market control when vertically merging.

            On the other hand, Norman, Pepall and Richards (2014) argued that one of the shortcomings of vertical mergers is that it increases the expenses in the supply chain process. Organisations usually require a large amount of capital to construct, maintain and retain factories or manufacturers profitable. In addition to the expenses, vertical mergers tend to make organisations less resilientto fluctuations in market trends. Moreover, it is examined that vertical merger largely disintegrates specialisation besides;, it is extremely difficult to manage as well because of the different types of organisations or moving shares within the principal organisation.

Economic Impact of Merger Condition

In the viewpoints of Boulware (2014), the condition of merger tends to create a positive as well as negative impact on the economy. In the past years, many economists have supported merger condition by arguing that the newly established larger organisation will be more efficient. This means that organisations will be able to distribute goods and services of identical quality at lower prices than earlier or could even offer fresh and superior products to the customers. However, merger conditions increase the size of organisations, which gives them more dominant power and position in the market. As a result, an increase in the market power leads to higher prices of products and services rather than lowering the prices for the same quality as earlier.

In addition, Patel, Thakkar and Nagar (2016) explored that the economies of scale from the condition of merger helps the organisations to compete in the international markets having large organisations as their competitors in an effective way. In such international markets, it usually takes large organisations to create and sustain their competitive superiority in terms of production, innovation and marketing. Without the condition of merger, many organisations would be at a higher risk of breaking down, which tends to decrease the competition level in the market.

In support of the above viewpoints, Blume and Durlauf (2016) illuminated about the traditional economic theory, which posits that higher the level of competition among the rivals in the industry, there are better chances of increase in the economy as a whole. In particular, it is examined that consumers tend to benefit greatly from the increased level of competition as it puts downward pressure on prices of products, upward pressure on the quality of products and also encourages the required level of innovation among organisations in order to drive an economy forward.

On the other hand, Beamish and Boeh (2007) firstly pointed out that a merger condition allows organisations to take benefit from the economies of scale that directs prices down. Secondly, an increase in earnings lead to improved investment and retirement accounts. A secondary advantage of merger conditions is that it helps to create more wealth for shareholders. Moreover, a tertiary advantage of merger condition is that it helps to boost the real gross domestic product (GDP) with the help of wealth effect. It is observed that for any particular level of income in the cumulative economy, an increase in wealth will foster spending on consumption, which plays an important role in the GDP of the country.

In addition to the above viewpoints, Welch and Welch (2009) elucidated that the merger condition decreases the pressure of inflation by making the economy of a country more proficient. A decrease in inflation makes the price signals much clearer and allocation of resources enhances throughout the economy. In this way, any particular level of wages and income tends to help in generating more real demand for final products and services with less inflation. Hence, it will create more demand for jobs, which in turn generates more income. As a result, the real GDP of the country will greatly benefit from this virtuous disinflation cycle.

In the viewpoint of Davenport and Barrow (2017), when any foreign company comes to a new country and merge with an existing company, it brings its talented pool of employees along with it. This talented pool of employees hence contributes to the overall productivity of the newly merged company. The increase in the productivity of the firms hence directly contributes to the economic growth and development of the related country. This is a significant economic benefit of merger in terms of gaining the indirect benefit of the talented workforce that is employed in the foreign company that was not available to the company which merged with the foreign company. This significant economic impact of the merger has been availed by several companies in the recent past and hence can be considered as a good example of the positive economic impact of merger on any country and its economy.

Merger Conditions in South Africa

Every country has some specific and particular regulations and conditions for approving and governing merger between two different companies. South Africa also has some specific legal regulation and acts to govern merger processes. According to Bowmans (2018), the Competition Act, 1988, controls mergers that have an influence in the continent of South Africa. This act applies to all the activities related to the economy that takes place in South Africa or under the effect of South African regulations. In view of that, transactionsbetweenalliances in a foreign administration, which has an influence in South Africa, for example, by way of trades into the country, is related to the provisions of the act for merger control. The main governing body in South Africa that works as a key interface between the business and the general public is the Competition Commission. The main role of the Competition Commission is to evaluate and investigate mergers and has the authority to approve, impose and prohibit conditions during the occasion of small and intermediate mergers. This Commission is also constrained to make necessary suggestions to the Competition Tribunal with respect to large mergers.

            In addition to the above viewpoints, Nyali et al.(2021) highlighted about the commission rules, which make sure that the target/seller firm and the acquiring firm must inform proposed mergers jointly, where both the firms have to sign the statutory forms in order to approve the accuracy of the information that is available in the notification of merger. However, if a joint notification is not conceivable, for example, during the case of a hostile merger, the firms can apply to the Competition Commission to file independent notifications.

There is aparticular condition for suspending any merger in South Africa. According to an obligation to suspend, in South Africa, the merger control regime is suspensory for having intermediation in large scale mergers; however, this is not applied in all situations for waiving the merger. Under such condition, if the implementation of any merger takes place prior to its approval, the parties involved in the merger are subjected to be liable for a particular amount of penalty for the act of implementing the merger before approval. In contrast to this, in the case of small scale mergers, there is no requirement of approval for the parties to implement any merger apart from the condition when the merging parties have a requirement to get notification of the merger by the Commission. Under these circumstances, the involved parties have a restriction that they cannot proceed to any further steps of merger implementation till it doesnot get approved or have a conditional approval under section 13(1)(b) of the Competition Act (Nyali et al., 2021).

Another major condition for executing any merger in South Africa is to follow a particular procedure and timetable. For establishing an intermediate merger, the Commission in South Africa has defined a maximum time period of 60 business days for the process of reviewing the merger application and sanctioning the final decision. The total period of 60 days is bifurcated into two segments; the initial period of review, which is 20 business days and extending period of the remaining 40 business days. In the same context, under the core procedure of approval of the large merger in South Africa, it has been explored that for the purpose of reviewing the merger and recommending it to the tribunal for the approval, the Commission has determined the time period of 40 business days. In some particular cases, there is a possibility for having an extension in this defined period of 40 business days for extending it to the next 15 business days at one instance. However, for this purpose of the extension, it is essential to meet a particular condition of either having the consent of the involved merging parties or getting the approval of the tribunal (Bowmans, 2018).

Another condition related to the merger in South Africa is related to penalties for merging organisations that fail to comply with the merger control rules. As per this, in the case of failure to notify any merger, the amount of penalty that is required to be payable cannot exceed a fixed percentage (10%) of the total annual turnover of the combined firms. This also includes the total exports of the firms from South Africa in the previous financial year. In the case of firms that are titled as repeated offenders, the amount of penalty becomes higher. If the approval on any merger is granted on the basis of any inaccurate or misleading information, the Competition Commission has a clear authority to revoke the approval of the merger (Wentzel, 2019).

When any merger results in increasing the degree of competition, or it is in the concern of public interest, there is an authority to the Commission and the Tribunal to impose two types of remedies, namely, behavioural remedies and structural remedies. It has been observed that till now, in most of the cases where mergers are approved conditionally, mainly behavioural remedies are imposed as a common practice, however; this is the prime preference of the Commissionand the Tribunal to have the imposition of structural remedies along with behavioural remedies as a common practice of conditional approval of mergers. The main reason behind this preference is that in the case of structural remedies, there is no requirement of regular monitoring and supervision of the approval by the Commission, which is required in the case of imposing behavioural remedies. It is also a case that the authorities can impose these remedies ina unilateral manner. In another case, negotiation is also possible for imposing a particularkind of remedy b between the involved parties and competition authorities (Nyali et al., 2021).

Critical Evaluation of Coca-Cola and SAB Merger

The incident of merger between Coca-Cola and SABMiller took place in the year 2014.According to Chaudhuri (2016), Coca-Cola made an agreement to pool the bottling assets with SABMiller and discreetly held Gutsche Family Investments in order to make a joint proposal covering 12 countries in Africa and approximately 40% of soft-drink volumes of Coke in the African region. In addition, Dludla (2016) explored that the merger between Coca-Cola Beverages Africa (CCBA) and The Coca-Cola Company (TCCC) was informed to related competition authorities across the region of Africa during the year 2016 and 2017. The incident involved the merging of activities related to bottling among TCCC, SABMiller, which is now a part of AB InBev and Gutsche Family Investments (GFI), in order to construct a new entity, known as CCBA.Although, SabMiller already had an agreement to get acquired by Anheuser-Busch InBev, however, it slated to held Coca-Cola Beverages Africa by 57% and Coke will own around 11.3%. The rest of the shares will be under the ownership of Gutsche, which was having the major position among key shareholders of Coke in the bottling operations in the African region.

The major objective behind this merger was to have a shared vision, which will be helpful to take benefit of extensive business experience in African markets. The merger was intended to take benefit of the long-term commitment of the newly merged company Coca-Cola Beverages Africa to the continent through securing a strong market position and offering greater choices of beverages to African consumers. The other motive of this merger was to provide wider availability of soft drink products to the African consumers and providing them better value. The merger for the new bottler company was aimed to make the shareholders’ commitment stronger and continued in such a way that it can have increased contribution to the overall social and economic development of the African community where it will operate its business. Along with this, the merger was aimed to support basic facilities to the community people suchas making clean water available for all, boosting overall economic empowerment of African women and promoting the physical and economic well-being of the society (The Coca-Cola Company, 2016a; The Coca-Cola Company, 2016b).

According to The Coca-Cola Company (2016a), the merger was accomplished with a firm belief to take advantage of tremendous growth prospects that the African continent provides to the new businesses. Coca-Cola bottling operations were aimed to have this benefit with the help of showing utmost commitment to the continent. Coca-Cola Beverages Africa was also aimed to leverage good economies of scale, having effective utilisation of resources and improving operational capability andefficiency, which were required to give high acceleration to the overall business growth of the company and rendering increased contribution in the African communities’’ overall economic and social development. This merger was fruitful for newly merged companies to have increased exposure in the African beverage market because soft drinks are the most vital component of the growth strategy of Coca-Cola. This was a very great and significant business opportunity for the company becausethe African market has favourable demographics and good prospects for further economic development that point to give increased growth prospects for its business.

Literature Gap

With the review of the literature, it has been examined that the previous research studies have well researched about the concept of merger and its significance aspects. The research studies have also reviewed that merger has a very positive economic impact on any company and its related country. However, the existing research studies have not explored much about the economic impact of merger in South Africa. Even no research has been conducted about the Coca Cola and SAB merger’s economic impact. This is a clear gap evident in the existing research scenario. Considering this as an opportunity, the current research study has been undertaken to bridge this gap through the exploration of this research problem.

Summary

Overall on the basis of the exploration of wider pieces of literature in the above sections, it has been summarised that merger is a very significant and supportive business initiative for any firm if it is taken with good vision and strategic measures. In the process of merger, selection of the appropriate market is also a considerable aspect. The literature has also reflected that merger has several significant aspects, among which its economic impact on the respective market is the most significant one. The literature has summarised that merger generates new employment opportunities in the new market where the merged firm will operate, acquires talented workforce with the combinationof both merged firms and taking advantage of reduces the level of competition in the market and improving the overall quality of the business operations. The research is focused on the case of merger of Coca-Cola and SABMiller in South Africa and hence, the literature has also explored the overview of this particular case of merger along with its objectives to improvise special and economic growth of Africa along with taking advantage of having a good commitment to the continent. The existing works of literature have investigated only the economic impact of merger in general, but in respect to the case of the Coca-Cola and SABMiller merger, no such research has been undertaken. Hence, this research study will explore this new phenomenon and will generate new information for future researchers.