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Government Intervention in Takeovers and Mergers
1. The reasons why governments
might support or intervene in
takeovers and mergers
2. 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
3. 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
4. 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
5. 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)
6. 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.
7. Examples of UK Govt Intervention
Takeover / Government / regulator response
merger
Kraft / No specific response – other than raising possibility of Cadbury’s
Cadbury Law
News Corp / Important case – UK Govt pressurised to refer the takeover bid to
Sky 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 clear
Lloyds TSB / Government decided not to refer the Lloyds emergency rescue of
HBOS HBOS (despite obvious concerns over potential market dominance)
because of the need to protect the viability of the UK banking
system
Ferrovial / 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
8. 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
9. 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)
10. 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
11. 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.
12. 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.
13. 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
14. 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
15. 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
16. 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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