Legal Misnomer Breeds Business Buzz

Addis Fortune (Addis Ababa)

12 July 2011

opinion

With the promulgation of the Trade Practice and Consumer Protection Proclamation in August 2010, the legal loopholes of unfair trade practice seem redressed. The story headlined “BGI Acquires 25pc of Raya Brewery,” shows that the loopholes might have continued.

Cognisant that many lawyers, myself included, were arguing for a law regulating unfair trade practices and consumer protection, the enactment of the proclamation could partially be taken as a heed to these concerns. Yet, there were also lawyers who used to argue that the country has enough legal instruments to properly cover all such practices. The recent BGI acquisition, however, proves that their case was not true.

Though aimed at creating a more fair trade environment, the new law has two major shortcomings. Misnomer is its principal shortfall. In a rather convoluted way, it was entitled as a trade practice law. Under a free market economy, at least in rhetoric, regulating trade practices is not expected. Instead, it is unfair trade practice, in its totality, that calls for state intervention.

The law also completely fails to deal with matters of acquisitions. Even if it aims at avoiding the abuses of dominant positions in the market, it does not heed the emergence of monopolies in the market. In hindsight, it might fall under the category of a European nature than that of the US.

To make matters worse, the law also amalgamated competition matters with trade practice issues under a single proclamation. Hence, the continued technical confusion of naming deals as Joint Ventures or Mergers.

For the era is all about supporting free trade in all its forms, including the free movement of capital, and trade practice laws should provide clear definitions of business deals. High bidders are manifestations of either overvalued assets resulting in the “winners curse,” as it is called in Takeover Theory, or someone over there is proven to be an efficient manager.

Whichever way it goes, the winning company benefits for it is encouraged by overall productivity. It also sets a pivotal example for competitors. However, the outcomes of such mergers can endanger the market.

The authorities responsible for approving mergers must avoid the temptation to be left out on the big issues without knowing which way the overreaching evidence is leaning. As the benefit to the companies is easily decipherable from their intentions, the big issue here is a reference to the interest of the society at large.

Love the arrangement of the law or loath it, or perhaps both, its intention is reducing or possibly eliminating any restrictions on competition. In light of this, the proposed merger between BGI and Raya is seen as stunning. After all, the proposed venture is directly or indirectly geared towards fending off possible challenges from Heineken, the world’s third largest brewer.

It would not be outlandish to imagine how disastrous things might be if Heineken moves towards merging with any another brewery with the same intention. Understandably, this would not fall into free competition. It is just a monopoly in the name of a free market.

A high concentration of competitors in the market share diminishes the chance for not abusing dominance in one way or another. When that happens, it will be known only post facto. Whatever measure actions are taken after the fact costs a lot in mending fences. Not to mention it happens amid confusion and loss of resources-the opportunity cost.

The tendency of companies in merger and acquisitions is solely geared towards maximising profit or alternatively minimising costs. That is unlikely to be overwhelmingly popular with society at large.

Of course some people may like to argue alternatively by referring to the pseudo state-led economy of South Korea. Comparing a well established and densely populated South Korea with the toddling Ethiopian economy would, however, be just like taking apples for pears. What we see in South Korea is the imputed good merger, not the bad merger. The overall economy there, is high ended and mighty.

The actual market situation in Ethiopia does not warrant any good or real merger. It is rather at the stage of rapid company formations and friendly takeovers by way of the privatisations of state owned enterprises.

Liku Damtew (PhD) is a private client consultant at LDH Consult.

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