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Proposed mergers must not create monopolies

"Balisacan and his colleagues deserve commendation and thanks."

 

The Philippine Competition Commission was created to perform a two-part function. One part was correctional in nature: put an end to business structures destructive of, or inimical to, competition. The other part was preventive: disapprove or prohibit the rise of business situations—especially merger proposals—likely to bring about a deterioration in competitive conditions. Under the law creating PCC, proposed mergers involving a combined value of P2 billion or more are required to undergo review by, and obtain the approval of, the Commission.

PCC had occasion to display its competition-safeguarding authority in the recent case involving two major sugar industry players, Universal Robina Corporation (URC) and Roxas Holdings Inc. (RHI), owner of Central Azucarera de Don Pedro Inc. (CADPI). Gokongwei-owned URC is one of the largest producers of processed-food products in this country of ethanol, a by-product of the sugar milling process. What PCC had to pass upon was a proposed merger between URC and RHI, whose sugar mills are both in Batangas.

In a decision dated February 12 PCC prohibited the URC-RHI plan on the basis that it was a merger-to-monopoly deal. The problem with the proposed merger, in PCC’s eyes, was that the URC mill in Balayan and the RHI mill in Nasugbu were the only two sugar mills in the whole of Southern Luzon. If the merger had been approved, the resulting company would have a monopoly of sugar milling in the southern half of Luzon; the rest of Luzon’s sugar mills are located in Central and Northern Luzon. Because sugar mills do not operate with the same level of sugar-crunching efficiency, sugar planters in the Cabalag (Cavite-Batangas-Laguna) area have been choosing between entering into milling contracts with URC and entering into milling contracts with CADPI. Having their sugar cane milled by mills in Tarlac and Pampanga is not a realistic possibility because those mills are—in the words of PCC chairman Arsenio Balisacan and his colleagues—“too far.”

I have first-hand familiarity with the concept of milling efficiency. This familiarity stems from my being a son of a province with three sugar mills and from my late father’s having been the secretary-treasurer of the Philippine Sugar Association—since renamed the Philippine Sugar Manufacturers Association—for a long time. In order to obtain the highest yield, or promedio, from their cane, some planters from my province have been willing to invest in trucking service to bring the cane from one mill to another distant mill. The planters did the math and found it worth their financial while to engage in that practice.

Explaining PCC’s decision to disapprove the proposed URC-RHI merger, chairman Balisacan said this: “A merger-to-monopoly deal is among the most detrimental types of business transactions. The URC takeover (would remove) the only competitor, erode the benefits of competition for the sugarcane planters and leave market power in the hands of a single provider in the area. Dr. Balisacan went on to say: “The (PCC) prohibition prevents this deal from creating a monopoly in the relevant market that could harm the welfare of the sugar cane planters.”

It would have been easy for the PCC to accept the URC-RHI justification for their merger plan. But Dr. Balisacan and his fellow-commissioners, true to their institution’s mandate, saw the proposed merger’s harmful consequences for the other sugar industry players.

The PCC’s decision is the correct economic decision and Dr. Balisacan and his colleagues deserve commendation and thanks. Other companies planning something similar to the aborted URC-RHI merger proposal should take note.

Topics: Philippine Competition Commission , Universal Robina Corporation , Roxas Holdings Inc , Central Azucarera de Don Pedro Inc , Arsenio Balisacan , Philippine Sugar Association
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