(6) Reasons why government might support or
intervene in takeovers and mergers
Mergers
and Takeovers refers to the aspect of corporate strategy, corporate finance and management dealing
with the buying, selling and combining of different companies that can
aid, finance, or help a growing company in a given industry grow rapidly
without having to create another business entity, two companies together are
more valuable than two separate companies strong companies will act to buy
other companies to create a more competitive, cost-efficient company. Because
of these potential benefits, target companies will often agree to be purchased
when they know they cannot survive alone. And it often has a big impact on the
business market, economies and affect the society.
On the other hand, the government is
expected to be concerned the impacts of business
decisions on the wider community, UK is an economic systtem that allows supply and demand to regulate prices, wages, etc. rather than government policy. However, if the mergers would disrupt
the market to produces an unsatisfactory outcome(market failure), then
governments should step in to correct the failure. Market failures
remain one of the best reasons for government intervention within an economy on
moral and economic grounds, arguably, in the best interest of the public. Intervention can take two opposing form; the government might
encourage or promote a takeovers or merger, or in some cases, the intervention
is to prevent a takeover or merger going through. This essay is to discuss the
reasons why the government intervenes either promoting or preventing a Mergers
and takeovers.
Firstly, one of the reason
government supports for takeovers and mergers is to prevent a business failure
that would harm the UK economy and society. An example to demonstrate this
point is the recent year takeover, on 19th January 2009 Lloyds Bank
takeover of HBOS. Lloyds TSB has
agreed to pay £9.8bn for HBOS which only was worth £6.4bn. Initially, HBOS’s
level of bad debts on mortgages and unsecured lending has risen in just two
months. Since September2008, the charge for mortgage customers has risen from
£400m to £700m and for customers with unsecured loans arrears reached £1bn, up
from £800m. HBOS’s Mortgage losses were running at £50m
per month to September 2008 but this jumped to £150m per month in Oct and Nov
08, HBOS corporate division losses of £6.7bn in 2008. With the profit warning, this has draws the
government concerns, HBOS has occupied a recognized presence in the UK banking
market, the UK government could not have let HBOS collapse, labeling the merger
as in public interest’ for ensuring stability
in the UK financial system and UK economy, otherwise would damage the economy
lead to further increase unemployment during the slump in the Economy cycle at
that time. If HBOS alone fails UK banking will sizeably suffer, by creation of this
exceptionally gigantic bank, the government would be compelled to protect it at
any cost if an unaffordable mass run on this finance giant occurs. In other
words, the government will be irrevocably tied to this banking mammoth. The
consequence being that the entity will have ascendancy or pre-eminence even in
political matters with the government.
This doesn’t
happen often, very rare indeed a government intervene as support for a
potentially lessen competitive company, according to the Enterprise Act 2002,
Office of Fair Trading can review mergers and takeovers to investigate whether
there is a realistic prospect that they will lead to a substantial lessening in
competition with the criteria; the value of the UK turnover of the enterprise
acquired (or to be acquired) exceeds £70 million (the turnover test); or the
share of supply of goods or services in the UK or in a substantial part of the
UK held (or to be held) by the merged enterprise is at least 25 %(the share of
supply test). With HBOS combined with Lloyds, the
new group's branch network will jump to 3,000 and its mortgage market share
will jump to 28%. The group would run a third of all the current accounts in
the UK, have 140,000 staff and retail deposits worth £321bn. One of the reason
this takeover is allowed is under the Enterprise Act 2002 to detrimental
effect on consumers’ is an important factor, as the Act main concerns is the
consumers’ whether the combined company would uses its market power to control
the prices, evaluate this takeover, this takeover would save HBOS hence its
customers and future, it was designed to shore
up HBOS and protect the millions of savers who hold a combined total of £243bn
in their accounts.
On the other hand, government could
also intervene to stop a merger or takeovers. I would use the News
Corporation-BSkyB as an example, the main reason is because abuse of
monopolistic powers. Firstly, the impact of monopolistic powers is the danger
and harm to the economy and customers, while the business can raise prices due
to the power of price leader, no competition leads to a reduction in efficiency
hence higher prices, and neglect of innovation, which is all negative impact on
the consumers and the suppliers as well because of the exploitation; A mergers
or takeovers of large company likely to produce a dominant firm situation and
lead to above consequences, therefore the state – in the form of the
competition authorities might act to prevent a mergers or takeover, if it is
considered harmful to the economy and to consumers such as The Office of Fair
Trading (OFT) and Competition commission (CC).
Looking at the News Corporation-BSkyB
takeovers, News Corporation had already owned 39.1% of BSkyB, in early June
2010, News Corporation for offers 675p for the 69% of BSkyB that it doesn’t own.
the combined might of the company – the
largest media group ever seen in British history, hence an alliance of media companies opposed to the News
Corp/Sky merger – including BT, Channel 4 and the publishers of the Guardian,
Daily Mirror, Daily Mail and Daily Telegraph said it could have serious and
far-reaching consequences for media plurality. Yet, although on 21 Dec 2010 has
the European Commission to approve the takeovers, it still need the approval
from the UK Competitor Commission.
However, a
scandal of British journalists working for Rupert Murdoch's News of the World
are accused of hiring private detectives to hack illegally into the voice mails
of thousands of people, ranging from top politicians and celebrities to murder
victims and the families of fallen troops. There are also allegations that
journalists bribed police to get private details about people, including
members of the royal family. This scandal has concerned by the government, and
it has triggered the intervene from the government to start investigating the
takeovers, for the reason that if the takeovers went through this would give a
fear News Corp would abuse the monopolistic power based on the grounds of the
scandal, as a result, CC has given a more strict test and investigation on this
mergers, which created a negative media attention for the News Corp, leads to fall
in value of shares and unsettle shareholders, eventually, News Corp withdraw
the offers.
In
Conclusion, Government and Business have different views and goals; from
Lloyds-HBOS takeovers, the only reason government encouraged Lloyds-HBOS
because of it would save the economies of UK, even though it would breach the
competition law, to prevent the chain of bad debt which would require
government to further cover, nevertheless, a business normally do Mergers or
takeovers because of growth to lead to generating more revenue and profit.
After the takeovers, Lloyds realized it was a bad move for them, not only it
worth a lot less than it paid, also came with problem of HBOS such as the bad
debt levels because they didn’t do a full investigation of what HBOS worth and
bad debt they had. Therefore, we can see that having the government support
doesn’t necessary having a perfect good impact on the Business, as least in the
view of the government, they did save the economies and customers of HBOS in a
short term, however for Lloyds not necessary having a good impact in short term
and long term as they need to resolve and cover all the losses because of taken
over of HBOS. As for the News Corporation-BSkyB, if it was taken over, News
Corporation in 2011 will see a jump of
about £200m (24% increase) in operating profits as the investments wash through
and BSkyB embarks on a high growth trajectory expected to yield a further
increase in profits in the order of £650m between 2011 and 2015, the takeover
will make News Corp easily the most powerful single media owner in the UK in modern
times, enjoying almost double the income of the BBC, However these are all
numbers and hypnosis if it would happen. In the view of Business, not only has
lose the opportunity cost, but with all the scandal that negative media
attention goes along leads to fall in value of shares and unsettle
shareholders.
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