As the Times Online article below states, “Barely a year ago, The Co-operative Group was selling itself as an antidote to big business, an ethical alternative to the ruthlessness of mammon, but now it has decided to take on the Big Four supermarkets at their own game.”
So just what is the business strategy of the Co-op? Is ethical business consistent with profit maximisation? Does the takeover of Somerfield make the new Co-op a very different type of supermarket from that of a few months ago? The following articles look at the Co-op’s business strategy.
Co-op hits back with its own triple whammy Times Online, Marcus Leroux (30/11/09)
Christmas battle has started but the real test will be 2010 Telegraph, James Hall (5/12/09)
Co-op supermarket chain enjoys Somerfield boost BBC News, Will Smale (11/12/09)
See also the Co-operative group site:
The Co-operative
Questions
- What do you understand by ‘ethical business’? Would you describe the Co-op as an ethical business?
- What type of merger is the one between the Co-op and Somerfield?
- What economies of scale are likely be realised by Co-op’s takeover of Somerfield?
- What type of growth strategy is the Co-operative group pursuing?
- Is being ethical likely to slow or accelerate the expansion of the Co-op?
It’s one of a declining number of UK-owned industries still left in the UK: Cadbury. However, over the past few years, mergers have become the norm and Cadbury looks set to become the next. Kraft, an American food giant, has been interested in taking over Cadbury for some time and this topic was covered on the Sloman Economics News Site at the beginning of September, when we considered Kraft’s bid of £10.2 billion. (see Cadbury: Chocolate all change). Since then Kraft shares have dropped in value and so Kraft’s current bid is now worth less: a hostile bid of £9.8 billion. This has been refused by Cadbury’s Board of Directors, calling it ‘derisory’.
From the time that Kraft’s bid was formally submitted, the stopwatch begins to tick. A 60-day period is allowed under the ‘takeover code’ which is in place to protect shareholders without resorting to a date in court. Following Kraft’s bid, Cadbury share prices immediately fell, but then began to recover as the implications became clearer. Other companies mentioned as potential rivals include Nestlé and Unilever, although, given Cadbury’s recent boost in sales, Unilever has said that it is no longer interested. So, what does the future hold for Cadbury? Will it be the latest in a long line of British companies to leave their UK owners?
Kraft’s Cadbury takeover bid will set 60-day timetabling ticking Guardian, Jill Treanor (9/11/09)
Kraft plays long game in Cadbury pursuit Reuters (9/11/09)
Cadbury rejects hostile Kraft bid BBC News (9/11/09)
Kraft facing 5pm deadline in battle for Cadbury Guardian, Julia Kollewa and Elena Moya (9/11/09)
Strong sales rise boosts Cadbury BBC News (21/10/09)
Cadbury rejects £9.8bn hostile bid from Kraft Guardian, Julia Kollewe (9/11/09)
Kraft may offer more cash in bid for Cadbury Telegraph, Amy Wilson (4/11/09)
Paulson raises Cadbury stake Guardian, Nick Fletcher(11/11/09)
Unilever rule out Cadbury bid as sales beat forecasts Telegraph, Amy Wilson (5/11/09)
Cadbury’s fight for independence BBC News, Edwin Lane (24/12/09)
Questions
- Kraft is looking to expand by taking over Cadbury. What type of takeover would you classify this as and what do you think Kraft’s motives are for this takeover bid?
- If Kraft is successful, what are the likely advantages and disadvantages for (a) consumers of Cadbury chocolate; (b) shareholders of Kraft; (c) shareholders of Cadbury; (d) competitiors?
- Cadbury has said that the £9.8bn bid was ‘derisory’. How will Kraft have decided on the price it’s willing to offer and what factors are likely to influence this?
- John Paulson has raised his stake in Cadbury by purchasing another 6.3m shares. What effect do you think this will have on Cadbury’s share price and why? Does this make the takeover by Kraft more or less likely?
- Is there a role for the Competition Commission in this possible takeover? If so, why; and if not, why not?
- Cadbury has reported a boost in sales. What effect will this have on the takeover bid from Kraft? Why has this sales boost caused Unilever to pull out?
Northern Rock seems to have had a fixed place in the news for the past year or so. Unfortunately, the advertising it’s been getting hasn’t been positive. The usual picture was one of a Northern Rock branch and a few hundred people queuing outside, ready to withdraw their savings.
In the financial crisis, the banking sector has been at the forefront of economic policy and billions of pounds of public money have been invested in banks simply to keep them afloat and encourage them to keep lending. But now the government, in a measure approved by the European Commission, is considering selliing part of Northern Rock, by splitting it into a ‘good bank’, which will be returned to the private sector, and a ‘bad bank’, which will have to remain nationalised. This bad bank would gradually run down its assets and eventually be liquidated. Similar plans are being considered for the part-nationalised Royal Bank of Scotland and Lloyds Banking Group.
Northern Rock’s loan book will be cut from £100bn pre-crisis to just £20bn to ensure that a bank which enjoyed state support should not have “an unfair competitive advantage”. Savers with Northern Rock will find themselves in the ‘good’ bank, while mortgage customers with arrears and those who are regarded as risky, will be seen as ‘bad’ bank clients.
The buyers of these banks remain unknown. Tesco was considered to be a possible buyer of Northern Rock but has pulled out, with plans to build a new full-service bank itself. Established banks, such as Barclays, will not be allowed to make a purchase and the FSA has stated that standards will not be dropped to allow new competitors to enter the market, especially given that much of the banking crisis is due to poor standards and insufficient regulation. National Australia Bank, the owners of Yorkshire and Clydesdale, is a possible buyer, as too is Virgin Money, even though it would require new finance and possibly new partners. Some potential bidders may be ruled out by competition considerations. So let the games begin!
The following articles look at the banking situation and the possible developments.
Where Gordon Brown feared to tread, Kroes is ready to trample Telegraph, Alistair Osborne (28/10/09)
Lloyds eyes capital raising plans BBC News (29/10/09)
Tesco rules out Northern Rock takeover Guardian, Julia Finch (28/10/09)
EU approves Northern Rock split BBC News (28/10/09)
The Business Podcast: The break-up of Northern Rock Guardian (28/10/09)
Lloyds Banking share price could scupper offer SME Web, Roberta Murray (29/10/09)
Roll up, roll up, for the great bank sell off Independent, Richard Northedge (8/11/09)
Treasury says Northern Rock may lose savers as Government pulls out The Times, Francis Elliott and Suzy Jagger (5/11/09)
Union fears for 25,000 jobs as EU insists Lloyds and RBS must shed branches Guardian, Jill Treanor (3/11/09)
Decision time for Lloyds shareholders BBC News, Money Talk, Justin Urquhart Stewart (11/11/09)
The Business podcast: The break-up of Northern Rock Guardian (28/10/09)
Details of the European Commission ruling on the restructuring of Northern Rock can be found at:
State aid: Commission approves restructuring package for Northern Rock
Questions
- What started all the trouble at Northern Rock?
- What are the arguments (a) for and (b) against the break up of Northern Rock and the other banks that received state aid? Do you think the right decision has been made?
- The BBC News article ‘Lloyds eyes capital raising plans’ refers to 43% of Lloyds being owned by the tax payer. What does this mean and how has it happened?
- Why do you think Tesco has decided not to put in a bid to take over Northern Rock?
- Consider the potential bidders for these new ‘good’ and ‘bad’ banks. In each case, consider the (a) advantages and (b) disadvantages. Then, explain the type of take-over or merger this would be and whether there could be any competition considerations.
- One of the aims of recent developments in the banking sector is to increase competition. Why is this so important and how will it affect consumers and businesses?
Elinor Ostrom and Oliver Williamson shared the 2009 Nobel Prize for Economics (and a prize of $1.4m) on Monday for their work on how economic transactions operate outside markets in common spaces and within companies. Their work includes topics such as the free-rider problem and how this can lead to a sub-optimal over-consumption of a resource. Their work also considers economic governance and how this has led to the increasing popularity of outsourcing for companies.
Despite the prestige of a Nobel Prize, there have been suggestions that a Nobel Prize in Economics should not have been awarded this year, given the inability of economists to predict the financial crisis and mixed opinions about how to prevent another one in the future. What do you think?
US duo wins Nobel for economics Financial Times, Chris Giles (12/10/09)
Two Americans win Nobel economics prize MSNBC, Associated Press (14/10/09)
What this year’s Nobel Prize in Economics says about the Nobel Prize in Economics The New York Times, Steven Levitt (12/10/09)
Humbling year for bickering economists Financial Times, Alan Beattie (11/10/09)
Questions
- What is market failure and how does the free-rider problem fit in?
- Do you think economists were at fault for not foreseeing the financial crisis?
- Do you think that the research of Elinor Ostrom and Oliver Williamson was deserving of the Nobel Prize and how important is their research in the context of economic theory?
In February 2009, the world’s largest concert ticket agency, Ticketmaster, and the world’s largest concert promoter, Live Nation, announced that they intended to merge. The deal would have been worth around £550 million. This immediately sparked concerns that the new company would have such power in the market that ticket prices would rise. On 10 June 2009, the Office of Fair Trading, in line with the 2002 Enterprise Act, referred the proposed merger to the Competition Commission.
On 8 October 2009, the Competition Commission published its preliminary findings that “the creation of that situation may be expected to result in a substantial lessening of competition (SLC) in the UK market for the primary retailing of tickets for live music events”. The following articles look at the findings and the competition issues. You will also find links below to the Competition Commission press release and the Provisional Findings Report.
Competition body opposes Ticketmaster and Live Nation merger Guardian (8/10/09)
Competition watchdog vetoes Ticketmaster deal Times Online (8/10/09)
The Competition Commission has ruled against the proposed Ticketmaster / Live Nation merger MusicWeek (8/10/09)
British Regulator Objects to Ticketmaster Merger New York Times (8/10/09)
See also the following documents from the Competition Commission:
Press Release
Provisional findings report
Questions
- How would the proposed merger benefit the two companies concerned?
- How would it affect CTS (the second largest ticket agent in the world)?
- From the consumer’s perspective, what would be the potential advantages and disadvantages of the merger?
- What additional evidence would the Competition Commission require to make its final judgment?