Transcript of "Government Intervention in Takeovers and Mergers"
The reasons why governmentsmight support or intervene in takeovers and mergers
Key points• The UK has a “light-touch” towards Govt involvement in M&A• Two key bodies: Competition Commission & Office of Fair Trading• European Union competition policy also applies to M&A involving UK firms• Most takeovers and mergers referred to competition regulators are ultimately cleared – although sometimes with conditions
Key definitions• Competition policy: Government policies to prevent and reduce the abuse of monopoly power• Enterprise Act 2002: major reform of the control of mergers and takeovers in the UK, removing the decision-making powers of government, other than exceptional cases, and passing responsibility to Office of Fair Trading and the Competition Commission.• Monopoly: where a firm has a dominant position in an industry or market – e.g. is able to control supply and pricing
Key theory & concepts• Abuse of monopoly power: Abuse of monopoly power can lead to market failure and be against the public interest. Therefore Governments are concerned to intervene and protect the interests of the consumers• Cadbury’s Law: a suggested change to UK legislation to make it harder for UK firms to accept takeovers (60% vote rather than 50% & only long-term shareholders may vote); not yet implemented.• Laissez-faire: an approach to market regulation which largely leaves the market to look after itself
Reasons for government intervention or support• Where a takeover / merger might be considered likely to result in one firm having undue market power (typically market share of 40% or more)• Specific situations in which the public interest might be threatened: e.g. Competition Act 2002 allows the Secretary of State to intervene in the media market to ensure there is a sufficient plurality of persons with control of media enterprises.• To support (or waive through) a takeover that might be in public interest – e.g. partial nationalisation (Lloyds HBOS)
UK Competition Policy• Competition Commission – an independent public body which conducts in- depth inquiries into mergers, markets and the regulation of the major regulated industries• Office of Fair Trading – Wide-ranging activities, including mergers – The OFT is responsible for reviewing merger situations, and where they may lead to a lessening of competition, refers them to the Competition Commission for further investigation.
Examples of UK Govt InterventionTakeover / Government / regulator responsemergerKraft / No specific response – other than raising possibility of Cadbury’sCadbury LawNews Corp / Important case – UK Govt pressurised to refer the takeover bid toSky TV the Competition Commission as a result of phone-hacking scandal & concerns over media plurality; eventually News Corp withdrew bid as scale of public opposition became clearLloyds TSB / Government decided not to refer the Lloyds emergency rescue ofHBOS HBOS (despite obvious concerns over potential market dominance) because of the need to protect the viability of the UK banking systemFerrovial / BAA Competition Commission ruled that BAA had to sell Gatwick, Stansted and a Scottish airport as a condition of is takeover by Ferrovial – in the interests of passengers
European Union Competition Policy• Main criteria used for evaluating a takeover / merger: – The market position of the merged firm (market share and other competitive advantages) – Strength of the remaining competitors – Customers’ buying power – Potential competition from new entrants
UK regulation – arguments for a “light touch” • Encourages inward investment to help develop successful UK firms (e.g. HP & Autonomy; Tata and JLR) • UK firms have shareholders from around the world • Not the business of government to decide who owns a business (laissez- faire)
UK regulation – arguments against a “light touch”• Some firms are strategic assets for the UK economy (energy, transport, utilities) - they need to be protected• Increased risk that UK jobs will be lost• Resist takeovers by short-termist investors who don’t have the long-term interests of the business at heart
Depends on factors• How significant is the takeover or merger in terms of size or potential impact?• Does the takeover or merger take place in a market in which the government wants to exert greater control / regulation? E.g. financial services, media or of national interest?• The geographical reach of the businesses involved: e.g. determines whether competition regulation in the US and Europe applies.
Evaluation opportunities• UK competition policy – often described as having a “light touch” towards regulation. Consensus is that it is relatively easy for firms to be bought and sold in the UK.• A key benefit of relatively relaxed laws about takeovers and mergers is that inward investment in UK firms is encouraged.• Counter-argument: light-touch regulation leaves UK firms exposed to hostile takeovers that are not in the long-term interests of the UK and its economy.
Key case studies – News Corp & Sky (2011)• Sky News – important UK broadcaster, owned by BSkyB• News Corp has a 39.1% stake in BSkyB – wanted to complete a takeover• Govt initially prepared to allow the transaction to proceed• Widespread concerns over media plurality & News Corp ethics (phone hacking) led to eventual withdrawal of the bid• No formal involvement of the competition regulators
Key case studies – Lloyds TSB & Abbey National (2001)• Lloyds TSB made a £18bn bid for Abbey National in 2001• Govt Minister (Patricia Hewitt) blocked the deal saying it was "against the public interest"• Competition Commission had recommended the deal be blocked after a 4 month investigation• They believed the deal would reduce competition in the current account market, in which the combined Lloyds/Abbey group would have a 27% share.• In 2004 Abbey was sold to Santander for £8bn
Key case studies – Merger of Ryanair and Aer Lingus (2010)• Ryanair launched a £1,5bn hostile bid for Aer Lingus after building a stake after it was privatised in 2006• 2007: European Commission declared takeover was incompatible with EU competition rules• EU reason; two airlines controlled more than 80% of all European flights to and from Dublin airport• European Court of Justice finally blocked the takeover in 2010 but allowed Ryanair to keep its 29.9% stake• The Irish Govt retains a 25% stake in Aer Lingus
Key case studies – Takeover of HP by Heinz (2006)• In 2006 US conglomerate Heinz announced the takeover of UK sauce producer HP for £470m• Together, the two brands would have over 80% of the branded sauce and ketchup market• The Competition Commission reviewed the deal, fearing higher prices for brown sauce and tomato ketchup.• Shortly after the deal was cleared to proceed• In 2007 Heinz closed the HP factory in Birmingham, moving production to Holland with the loss of 125 jobs
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