August is usually a quiet month for mergers and acquisitions. But not this August! As the linked Independent article below states:
Korea National Oil Corporation’s £1.87bn hostile bid for Dana Petroleum yesterday was just the latest in a surge of activity taking merger and acquisition (M&A) levels to a nine-month high.
Despite edgy economic data from the US, global deal-making has already topped $197bn (£127bn) so far this month, and is on course to beat the August record of $260bn set in 2006, according to Thomson Reuters. This week’s $89.8bn total is the highest weekly total since early November.
During the global recession of 2008/9, M&A activity slumped. In 2007, global M&As were worth $4162bn. In 2009 they were worth only $2059bn. Not only were companies cautious of acquiring other companies in a period of great economic uncertainty, but finance for deals was hard to obtain. Now, with many companies having cut costs and having much healthier balance sheets, they are in a position to bid for other companies. And banks too are much more able and willing to provide the finance to support takeovers.
So does this signify a continuing surge in M&A activity? Or are the August figures likely to be a ‘blip’, with fears of a double-dip recession dampening any renewed takeover fever? The articles below look at the recent cases and at the factors influencing current M&A activity.
Articles
Stock markets catch deal fever as M&A booms again Independent, Sarah Arnott (21/8/10)
BHP, Intel, RSA shatter usual August M&A lull Reuters, Quentin Webb (20/8/10)
Global M&A volume could be highest in August International Business Times, Surojit Chatterjee (21/8/10)
Mergers and acquisitions mania disrupts bankers’ summer breaks Guardian, Elena Moya (21/8/10)
Merger mania predicted as cash-rich firms stalk takeover targets Observer, Richard Wachman (22/8/10)
M&A Signal Higher Stock Prices Ahead Minyanville, Terry Woo (20/8/10)
From slowest to busiest TodayOnline (21/8/10)
Data and Reports
International
The era of globalized M&A: Winds of change Thomson Retuers and J.P.Morgan (June 2009)
Preliminary M&A Financial Press Release 2Q10 Thomson Reuters (25/6/10)
World Investment Report 2010: Annex Tables United Nations Conference on Trade and Development (UNCTAD) (see tables 9–16)
UK data
Mergers and Acquisitions involving UK companies Office for National Statistics
Mergers & Acquisitions data Office for National Statistics
Mergers and acquisitions involving UK companies: 1st Quarter 2010 Office for National Statistics (2/6/10)
Mergers and Acquisitions Tables Office for National Statistics
Questions
- Identify the reasons why firms want to take over other firms.
- Why does M&A activity tend to increase during a period of economic boom and decline during a recession?
- What is likely to happen to M&A activity over the coming months?
- Exmamine two recent mergers or acquistions and explain why the acquiring company was keen to take over the other company, or why the two companies were keen to merge. Were there any economies of scale to be gained? Would the merger increase the acquiring company’s market power?
‘eBay has declared that Britain’s small businesses have “come of age” online, after reporting that the number of its traders who are turning over £1m a year had nearly doubled over the last 12 months.’
So begins the linked article below from the Guardian. Unlike other small and medium-sized businesses (SMEs), many of which did not survive the recession, the number of successful online SMEs is increasing and their survival rates are generally high. According to eBay, some 25,000 people have set up business on its site since the recession and it is predicted that 127 will have a turnover of over £1 million in 2010 (up from 66 in 2009).
So what is it about the online environment that helps small business to develop and thrive? Does going down the e-commerce route avoid many of the pitfalls of traditional business models? And does it have any specific pitfalls of its own? Read the articles below and then attempt the questions that follow.
eBay doubles number of traders with turnover above £1m Guardian, Graeme Wearden (21/8/10)
Why e-commerce IPOs will soon be the smarter buy VentureBeat, Owen Thomas (18/8/10)
Small businesses prosper in eBay’s millionaires’ club InternetRetailing, Chloe Rigby (21/8/10)
Ecommerce technology is retail investment priority: report InternetRetailing, Chloe Rigby (13/8/10)
Move into ecommerce could transform the Scottish economy Sunday Herald, Colin Donald (22/8/10)
Small businesses ‘tend to be a risk’ to lenders BBC Today Programme (23/8/10)
Questions
- What advantages does e-commerce have for SMEs: (a) in the startup phase; (b) over the long term?
- What are meant by ‘network economies’? Does eBay offer such economies to SMEs?
- Follow the links in the above articles to study the experience of two specific online SMEs and identify the strengths and weaknesses of their business strategies.
- What considerations might an SME take into account that is currently trading on eBay or Amazon in deciding whether to set up its own website and trade directly from that?
- Why may a move into e-commerce prove particularly beneficial to the Scottish economy? Would this apply to all online SMEs or only certain types?
As the news from the Gulf of Mexico goes from very bad to even worse, so BP is increasingly coming under the international spotlight for its approach to risk management and safety. Was it sufficiently cautious? Could the accident on April 20 that killed 11 men and has been gushing some 800,000 gallons per day of crude oil into the sea have been averted? When the consequences of a pipe rupture are so catastrophic, is ‘catastrophic risk’ appropriately priced? As Tony Hayward, BP’s Chief Executive, told the Financial Times (see links below): “It was ‘an entirely fair criticism’ to say the company had not been fully prepared for a deep-water oil leak.”
One insight into BP’s approach to risk has come to light with the leaking of a 2002 memo from BP on how human life ought to be valued in any cost–benefit analysis of a project. As the Chicagoist summarises the memo:
A two page document prepared by risk managers in 2002 titled “Cost benefit analysis of three little pigs” shows the type of thinking BP put into risk assessment. The memo shows, in cartoonish fashion, that blast resistant trailers for BP’s workers weren’t necessary, because the cost was too high. In 2005, a refinery caught fire, killing 15 and injuring 170 people.
So how should catastrophic risk be taken into account? What does a company do when the probability of a disaster is extremely low and yet the costs of such a disaster, were it to occur, are extremely high?
BP’s Shocking Memo The Daily Beast, Rick Outzen (25/5/10)
Old BP document calculates worth of human life with “Three Little Pigs” diagram Yahoo News, Brett Michael Dykes (25/5/10)
Industry can cut accident risks, says BP chief Financial Times, Ed Crooks and Edward Luce (2/6/10)
BP ‘not prepared’ for deep-water spill Financial Times, Ed Crooks (2/6/10)
The BP Oil Spill’s Lessons for Regulation Project Syndicate, Kenneth Rogoff (1/6/10)
US oil firms ‘unprepared’ for major offshore disaster BBC News (15/6/10)
Questions
- What is meant by catastrophic risk?
- Why is it difficult to put an accurate valuation on outcomes with a very low probability of occurrence?
- Explain the table entitled “Cost benefit analysis of three little pigs” in the Rick Outzen blog.
- How should human life be valued?
- What value should be put on a serious injury (of a particular type)?
- Should BP (or any other company, for that matter) ever conduct operations that risk human life? Explain your answer.
- On what basis should BP have decided whether or not to install a $500,000 acoustic trigger that could have shut off the well when the blowout protector failed?
- How is the existence of environmental externalities relevant to BP’s decisions on safety?
Whilst a new version of Windows may make the headlines, it’s not Windows that is the main source of profit for Microsoft: it’s Office, with it’s suite of appplications – Word for word processing, Excel for spreadsheets, PowerPoint for presentations, Access for databases, FrontPage for web pages and Outlook for e-mail. But Office is under threat from two sources.
First, despite that fact that Microsoft’s share of the office applications market has remained fairly constant at around 94%, it is facing increased competition from free alternatives, such as Google docs and Google Apps, and OpenOffice from Oracle (see also).
Second, the demands of users are changing. With the growing use of social networking and file sharing, and with a more mobile and dispersed workforce, Microsoft Office needs to adapt to this new environment.
With the launch of Office 2010, these issues are being addressed. The following articles examine what Microsoft has done and whether it is a good business model
Microsoft Office 2010 takes aim at Google Docs BBC News (11/5/10)
Office 2010: banking on Apps Sydney Morning Herald, David Flynn (11/5/10)
Microsoft’s two-pronged strategy for Office 2010 BBC News, Tim Weber (12/5/10)
Revamped Microsoft Office Will Be Free on the Web New York Times, Ashlee Vance (11/5/10)
Microsoft Predicts Fastest-Ever Adoption of New Office Software Bloomberg Businessweek, Dina Bass (12/5/10)
Questions
- Discuss the business logic of giving away products free.
- Discuss the likely success of Microsoft’s response to the changing market conditions for office applications software.
- Explain what is meant by ‘cloud computing’. What opportunities does this provide to Microsoft and what are the threats?
- What is meant by ‘network economies’? How do these benefit Microsoft? How is Sharepoint relevant here?
- Are network economies likely to increase or decrease for Microsoft in the future?
Ofcom, the communications regulator, is keen to encourage the spread of super-fast broadband through investment in fibre-optic cabling. So far, super-fast broadband is available to around 46 per cent of the UK population. Both Virgin Media (formerly Telewest and NTL) and BT have invested in fibre optic cables, but Ofcom is keen to extend the use to rival companies.
It proposes two methods: the first is to give competitors access to BT’s cables; the second is to allow competitors to install their own cables using BT’s ducts and telegraph poles. In both cases BT would charge companies to use its infrastructure and would be free to set prices so as to ensure a ‘fair rate of return’.
The articles below consider this ‘solution’ and its likely success in developing competition in the super-fast broadband market through competition, or whether BT’s and Virgin’s market dominance will continue to the detriment of consumers. You can also find links below to the Ofcom report and summaries
Articles
BT welcomes Ofcom’s fibre access plans Reuters, Kate Holton (23/3/10)
Ofcom to encourage super-fast broadband Business Financial Newswire (23/3/10)
Ofcom tells BT to open its fibre network ShareCast (23/3/10)
Ofcom wants BT to open up infrastructure Financial Times, Philip Stafford (23/3/10)
Ofcom push to give broadband rivals access to BT tunnels Financial Times, Tim Bradshaw and Andrew Parker (23/3/10)
BT UK Pushes Ofcom to Open Virgin Medias Broadband Cable Ducts SamKnows, Phil Thompson (23/3/10)
BT welcomes Ofcom’s fibre access plans ISPreview, MarkJ (8/3/10)
Report and summaries
Summary: Enabling a super-fast broadband Britain Ofcom (23/3/10)
Review of the wholesale local access market: full document Ofcom (23/3/10)
Review of the wholesale local access market: summary Ofcom (23/3/10)
Questions
- What forms does competition take in the broadband market?
- What are the barriers to entry to the super-fast broadband market?
- Are fibre-optic networks a natural monopoly? Explain the significance of your answer for competition in the super-fast broadband market.
- Will Ofcom’s desire for BT to get a fair return on its wholesale pricing of access to its cabling, ducts and telegraph poles be sufficient to ensure effective competition and that profits are not excessive?
- Explain whether it would be in consumers’ interests for competitors to be given access to Virgin’s cables and ducts.
