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Bytes Technology Group SA (Pty) Ltd and CS Computer Services Holdings Ltd (66/LM/Sep04) [2005] ZACT 4 (17 January 2005)
.RTF of original document
COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case no.: 66/LM/Sep04
In the large merger between:
Bytes Technology Group SA (Pty) Ltd
and
CS Computer Services Holdings Ltd ________________________________________________________________
Reasons
________________________________________________________________
Introduction
1.
On 17 November 2004 the Competition Tribunal approved the merger between Bytes Technology Group SA (Pty) Ltd and CS Computer Services
Holdings Ltd without conditions. The reasons are set out below.
The transaction
2.
Bytes Technology Group Ltd (“BTG”), which is controlled by Altron, will acquire, through its subsidiary, Bytes Technology
Group South Africa (Pty) Ltd (“BTG SA”), all the issued shares in CS Computer Services Holdings Ltd (“CSH”).
Rationale for the transaction
3.
According to BTG the proposed transaction would add a range of complementary services to BTG SA’s portfolio, including IT services
in areas in which BTG does not operate at all. The transaction would also provide economies of scale in certain areas where they
are not currently prevalent in either of the acquiring or target companies. Moreover, CSH is in dire financial straits and would
have to close down if an acceptable solution is not found soon.
Pre-hearing
4.
A pre-hearing was held on 15 November 2004. The Tribunal indicated that it would call the following witnesses:
1)
Michael Arnold, CEO of FNB: Self-Service Channel
2)
James Baird, MD of NCR International South Africa (Pty) Ltd
3)
Thomas Makoro of Diebold
4)
Peter Barclay, MD of Banking Machine Services (“BMS”)
5.
The parties indicated that they would call David Lewis Fink, Acting CEO of CSH.
Competitive assessment
The relevant market
6.
The product markets in which both parties compete on a national basis are:
1.
IT infrastructure outsourcing services;
2.
Maintenance services in respect of desktop and point-of-sale equipment;
3.
The provision of networking services and products;
4.
The provision of SAP solutions; and
5.
Maintenance services in respect of ATM equipment
7.
In none of the above markets, except the market for maintenance services in respect of ATM equipment, would the merged entity, post
the transaction, compete among the top three players, nor would its market shares in any of these markets increase above 12%. However, in the market for Maintenance services in respect of ATM equipment, the merged entity would be dominant, accounting for
almost 60% of the market. The effect of the transaction on competition within this product market, therefore, requires closer scrutiny.
The impact of the merger on the market for Maintenance services in respect of ATM equipment
8.
In South Africa, the major Banks currently use two competing brands of ATM machines, namely NCR and Diebold. The brands are represented in the market as follows:
9.
BTG SA is the sole licensed distributor for NCR products (including ATM machines and spare parts) locally, while NCR’s main
rival, Diebold, does its own distribution and maintenance of Diebold ATM’s. NCR has a market share of 60% in the ATM machines market while Diebold has 30%. The remaining 10% is supplied by a competitor known
as Wincon Nixdorf, represented locally by AST.
10.
Apart from being the sole distributor of NCR machines BTG SA is also involved in the downstream market for the maintenance of NCR
brand of ATM’s, as is CSH. Although there are five firms in South Africa that provide maintenance services for ATMs, there is only one other competitor, apart
from BTG SA and CSH, that services NCR machines, namely Banking Machines Services (“BMS”). BMS is an independent service provider that currently has no relationship with NCR South Africa although it does the maintenance
of NCR machines. It sources its parts from the UK and USA directly. Post the transaction the merged entity will have a market share
of 60%, Diebold 20% and BMS 4%.
11.
Contracts for the maintenance of ATMs are usually awarded via a tender process. Parameters that are, inter alia, taken into consideration
are the speed of repairing an ATM and the model that needs to be serviced. It is therefore important to have a national footprint.
12.
The Competition Commission reported in its recommendation that some of the entities’ customers and competitors had expressed
concern about the merger. FNB felt uncomfortable dealing with a dominant firm while Nedcor was concerned that its ability to exert
countervailing power would diminish as a result of the merger. It also indicated that switching from the NCR to the Diebold ATM machine, and vice versa, would be very costly. Concerns expressed
by BTG’s competitors, inter alia, included:
•
BTG would become stronger and the level of concentration in the market for the maintenance of ATMs would be increased; and
•
Whether competitors would be able to secure tenders because of the existence of a dominant player post the merger.
13.
We were informed that BMS has the ability to service NCR machines and that it is not dependent on BTG for sourcing spare parts, since
it imports spare parts directly from an independent manufacturer in the UK as well as the USA. Diebold has, furthermore, entered into an alliance with BMS for servicing machines which would not only give BMS national footprint
but would also make it possible for Diebold to be able to service NCR machines as well. According to Mr. Makoro, Managing Director
of Diebold South Africa, the relationship between Diebold and BMS is based on a Memorandum of Understanding - providing additional
capacity for service and maintenance of ATM’s. Although Diebold would rather supply and service its own ATMs it indicated to the Tribunal that some of its customers that use both
ATM brands might prefer to use only one service provider to do the maintenance of the machines. In such instances Diebold would then
provide the maintenance for both brands.
14.
The Commission’s investigation also revealed a possible discriminatory practice in the form of a discount given on license fees
in order to use NCR diagnostic kits, which are used to service NCR ATM machines. According to the Commission NCR appears to discriminate against firms who do not have a license to use NCR diagnostic kits by giving
them smaller discounts. This puts them at a competitive disadvantage when they tender for a contract. BTG, for instance, will get a significant “relationship”
discount compared to other South African companies because, according to NCR policy, BTG is the exclusive local distributor of NCR
machines and therefore generates a lot of revenue for NCR.
15.
According to Mr. Baird, Managing Director of NCR South Africa, the licence programme is a worldwide programme, which was introduced
to tighten security with regard to NCR ATMs. The levy is not a revenue-generating instrument but is used for research and development
in order to create and keep diagnostics up to date and improve ATM functions. When a company applies for a license to use the diagnostics
to service an ATM it will be asked by NCR to identify the individual engineers who will work on the diagnostics of each ATM machine,
so that when fraud is committed NCR can trace the engineer responsible for that specific ATM machine.
16.
FNB also raised concerns about NCR’s discount structures in licensing its diagnostic kits and says that the additional cost
will be passed on to the banks and hence the consumer. This fee would also render a new entrant such as BMS uncompetitive in the short term and the banks will be forced to use BTG to lower
maintenance costs. However, FNB has admitted that it does have a multiple vendor policy for the maintenance of ATM machines in order
to actively benchmark prices as well as encourage innovation between competitors.
17.
The merging parties operate in a concentrated industry with a small, but strong, client base where contracts are awarded via tenders.
CSH was in financial dire straits because it had lost the FNB contract. It was indeed a failing firm. The merger would thus not result
in the removal of an effective competitor. In fact, after the merger, the status quo would remain. BTG, the large player, and BMS,
a new emerging player, will remain in the market as competitors, hence competition would not be intensified but will be maintained.
FNB has also indicated to the Tribunal that it is considering awarding BMS a contract to service 600 of its NCR ATM’s while
the balance of 1600 would be serviced by BTG, an indication that banks would still be in a position to replace service providers.
18.
Finally BTG’s customers are large banking institutions with countervailing power. Makoro confirms this when he points out that Diebold tries to keep prices transparent while limiting any premiums to its customers.
19.
We therefore find that the transaction would not substantially prevent or lessen competition in the relevant market nor would it have
an adverse effect on any public interest issues.
____________
17 January 2005
D Lewis
Date
Concurring: N Manoim, Y Carrim
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