The Philippine Competition Commission (PCC) has set new thresholds for merger and acquisition (M&A) deals that it will review, following careful evaluation of the notifications it has received and to keep pace with developments in the domestic economy.
This was immediately welcomed by the business sector, as the move allowed companies more elbow room in transacting with each other.
In its Memorandum Circular 18-001 released on Monday, the PCC adjusted the new thresholds to P5 billion for the Size of Person and P2 billion for the Size of Transaction.
This is the first time that the PCC recalibrated the thresholds since the Philippine Competition Act was enacted with the P1-billion default threshold.
The thresholds are used to determine if a transaction triggers pre-merger requirements to the PCC.
Under Section 3 of the implementing rules and regulations, parties to a transaction must notify the commission if they reach thresholds relative to two areas: Size of Person and Size of Transaction.
The Size of Person refers to the value of assets or revenues of the Ultimate Parent Entity of at least one of the parties, while Size of Transaction refers to the value of assets or revenues of the acquired entity.
In February 2017, the PCC initiated a preliminary review of the threshold, but concluded that “there is a sound basis to maintain the P1-billion threshold.”
The agency received comments that its threshold was too low and that it could mean additional delays for companies engaged in M&A transactions while, at the same,“overburdening”the competition agency.
The PCC said it finds it “reasonable to increase the initial threshold provided by the Philippine Competition Act and its implementing rules and regulations.”
“The adjustment stems from various considerations, including the size of actual notifications to date, the country’s economic growth, overall inflation and efficient use of the commission’s limited resources,” PCC Chairman Arsenio M. Balisacan said in a statement.
The memorandum circular also establishes the automatic adjustment of the threshold every year beginning March 1, 2019, based on the official estimate of the nominal GDP growth of the previous calendar year rounded up to the nearest hundred millions.
“The annual adjustment based on nominal GDP growth ensures that the thresholds maintain their real value over time and relative to the size of the economy,” he added.
The PCC said it will continue conducting regular monitoring of the M&A notifications and will revisit the threshold level periodically to make sure it is responsive to changes in the markets and the economy.
“Adjusting the thresholds requires a delicate balance to make sure that it’s not too low as to create an undue burden on business, and that it’s not too high that transactions with potential anticompetitive effects in the market evade the scope of antitrust reviews,” Balisacan said.
The new thresholds will be effective 15 days after its publication. The revised thresholds will apply to M&A transactions with definitive agreements executed after the effectivity of the memorandum circular.
They do not apply to mergers or acqui-sitions pending review by the commission, notifiable transactions consummated before the effectivity of the memorandum circular, and transactions already subject of a decision by the PCC.
To date, the PCC has received 152 notifications (equivalent to 134 transactions). It approved 125 transactions worth a total of P2.25 trillion, while the others are in different stages of review. The majority of these came from the manufacturing, financial, electricity, real estate and transportation sectors.
For the Philippine Chamber of Commerce and Industry (PCCI), the recalibration will benefit small and medium enterprises (SMEs) aiming to grow with giant firms. PCCI Chairman George T. Barcelon said raising the thresholds “is a proper thing to do” to give businesses the room to transact freely with each other.
“I think that is a proper thing to do because if you look at the P1-billion [threshold] before, it is only equivalent to $20 million. You don’t want an acquisition of $20 million and [then] go to the PCC. Going through the PCC is a very tedious process. There are a lot of things that they have to comply with and things like that,” Barcelon told the BusinessMirror.
He explained the adjusted thresholds will entice investors to merge with SMEs. “We would like to encourage more investors [to come in] and [look] at the SMEs,” Barcelon said.
“SMEs would be in the vicinity of, say, anything between P1 billion and P2 billion. Now that they put it at P2 billion, I think that is better. A lot of acquisition below P2 billion would not have to go to the PCC. That would be more attractive to foreign investors or even local [businessmen],” he added.
Barcelon also said as part of rationalizing the local industry, giant firms are inclined to acquire marginal players. He noted, though, with the former P1-billion threshold, both parties become disinterested to merge because they still have to get the PCC’s nod.
Sought if the amended thresholds might erode competition in the market, the business leader was quick to dismiss that possibility. He claimed most medium-sized businesses are now valued at P1 billion or even higher.
“When you talk about [a] P1-billion acquisition [in relation to] competition, I don’t think that would be a very big factor. A lot of companies now, if you look at their assets…[are] very easily P1 billion,” Barcelon said.
It is when banks take over banks that the PCC should intervene and play the regulator role, he pointed out, because these are the acquisitions amounting to as much as P100 billion. “I would not think [the recalibration will affect competition in the market], unless the buying company is, like, P50 billion, like when banks are taking over banks,” Barcelon said.