The world experienced a large increase in merger activity from 2003 to 2007. The merger boom came to an end, however, in 2007/8 with the credit crunch and the ensuing recession. For example, the value of acqusitions of UK companies by overseas companies fell from £82.1 billion in 2007 to £52.6 billion in 2008, while the value of acquisitions of overseas companies by UK companies fell from £57.8 billion in 2007 to £29.7 billion in 2008 (see Mergers & Acquisitions data (National Statistics)). The decline continued in the first part of 2009.
Recent evidence, however, suggests that the beginnings of recovery in the world economy, a greater availability of credit and a substatial rise in share prices since March (see for example the FTSE 100 and Dow Jones indices) are leading to a new wave of mergers. Recent weeks have seen, amongst others, the takeover of Marvel Entertainment by Disney (see Disney is ‘Marvel’lous), the proposed merger of T-Mobile and Orange, and Kraft’s bid for Cadbury (see Cadbury: Chocolate All Change). So what has stimulated this new merger wave? How do mergers relate to the business cycle and to the stock market? Should they be welcomed? The following articles look at some recent mergers and at the issues they raise.
The return of the deal The Economist (10/9/09)
The revival of M&A is better than a poke in the eye Guardian (8/9/09)
Hovering Kraft The Economist (7/9/09)
Orange and T-Mobile to create UK’s largest mobile phone company Guardian (8/9/09)
Watchdog urged to investigate T-Mobile and Orange merger Guardian (8/9/09)
Questions
- Why has there been a recent rise in M&A activity? Discuss whether the revival in activity is likely to continue.
- Discuss whether an increase in M&A activity is ‘better than a poke in the eye’?
- To what extent will mobile phone users in the UK benefit or lose from a merger between Orange and T-Mobile?
- Will Cadbury’s consumers and workers benefit from a takeover by Kraft?
From October 2007 to March 2009, stock markets around the world fell massively. In the UK, the FTSE 100 fell from a peak of 6752 on 15 October 2007 to a trough of 3461 on 9 March 2009 (a fall of 49 per cent). By the end of August 2009 it had reached 4944 (a rise since March of 43 per cent). Does this mean that the March value represented an over-correction downwards? Did the subsequent rise represent an over-correction upwards? Are stock markets about to plummet? The following two articles reflect on the past and look into the future!
World Wide Stock Market Crash on Pause The Market Oracle (3/9/09)
Are shares about to fall off a cliff? BBC News (4/9/09)
Questions
- What is meant by the ‘efficient (capital) market hypothesis’?
- If stock markets are overvalued, does this mean that they are inefficient?
- Why might (a) stock markets plummet in the near future; (b) carry on rising? Why don’t the ‘experts’ know which will happen?
- Explain why markets may over-shoot their long-term equilibrium value?
Both business and consumer confidence are affected by the state of the economy. A recession, or even a slowdown in the economy, will make people worried for their jobs and future incomes and hence cut back on spending and either save more or reduce their debts. Similarly firms are likely to cut back on investment if they are pessimistic about the future. But both consumer demand and investment are components of aggregate demand. A cut in aggregate demand will drive the economy further into recession and cause even greater pessimism. In other words, there is a feedback loop. Recession causes pessimism and hence a fall in aggregate demand, which, in turn, worsens the recession.
A similar process of feedback occurs in times of optimism. If the economy recovers, or is thought to be about to do so, the resulting optimism will cause people and firms to spend more. This rise in aggregate demand will help the process of recovery (see Accelerating the recession and Animal Spirits).
The following article by Robert Shiller, co-author of Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, looks at the swing from pessimism to optimism over the past few months.
An Echo Chamber of Boom and Bust: Robert Schiller New York Times (29/8/09)
Efficient Market Hypothesis: True “Villain” of the Financial Crisis? The Market Oracle (26/8/09)
Monthly confidence indicators for the EU can be found at:
Business and Consumer Surveys: Time Series European Commission Directorate-General for Economic and Financial Affairs. (Each of the ‘en’ cells links to a zipped Excel file.)
Questions
- Explain why “confidence has rebounded so quickly in so many places” in recent weeks.
- Is Robert Shiller’s explanation of feedback loops consistent with the accelerator theory?
- In what circumstances do business and consumer psychology result in destabilising speculation and what causes turning points in the process? Why may such turning points be difficult to predict?
- Examine the monthly Economic Sentiment Indicator (ESI) for the UK from the ‘Business and Consumer Surveys: Time Series’ link above. You will need to refer to the final column in the Excel ESI Monthly worksheet (Column GV). Chart the movements in this indicator over the past three years. Also chart the quarterly growth in UK GDP over the same time period. You can find data from Economic and Labour Market Review (ONS), Data tables, Table 1.01, Column YBEZ. Is ESI a leading or a lagging indicator of GDP?
- What implications does Shiller’s analysis have for the management of the economy?
- Why may stock market movements not be a ‘random walk’?
Tea prices have soared in recent months. Explanations can be found on both the demand and supply side. But while this might be bad news for tea drinkers, the news is more mixed for tea growers. So just what are the causes and consequences of the price rises? The following linked articles look at the issues.
Tea prices hit record high as supplies tighten Financial Times (19/8/09)
No break for Britons as tea price set to soar Scotsman (19/5/09)
Tea prices hit record high (video) BBC News (21/8/09)
Price of cup of tea goes up (video) BBC news (17/8/09)
Africa Tea Prices Climb to a Record on Dry Weather Bloomberg (20/8/09)
Kenya Tea Prices Hit Record High Before Ramadan FlexNews (19/8/09)
African tea prices ‘to extend gains’ China People’s Daily Online (18/8/09)
Sri Lanka to revive all closed tea factories ColomboPage (24/8/09)
Land usage should be flexible: Tea panel The Economic Times of India (24/8/09)
For tea price data see:
Tea Monthly Price Index Mundi
Questions
- Identify the factors on the demand and supply sides that have led to the rise in tea prices. Draw a diagram to illustrate your answer.
- Under what circumstances will farmers benefit from a rise in tea prices? What is the relevance of the market price elasticity of demand to your explanation?
- If the price of tea in the shops rises, will this necessarily mean a rise in the price to tea growers and in the wages of workers on tea plantations? Explain using concepts of competition and market power.
- What will be the effect of using more land for growing tea on (a) the price of tea and (b) the incomes of tea growers?
“100 leading progressive figures from across the centre-left, civil society and from all corners of the UK, have today called on the government to establish a High Pay Commission to curb excessive pay.” So begins the press release from the pressure group, Compass. Calls for restraint on high pay are hardly surprising at a time of recession and falling profits. Many banks are still paying large bonuses to top executives, despite some of the banks having to be rescued by the government. Other firms too are still rewarding their senior executives with huge bonuses despite poor performance.
But are the members of Compass right to say that “the unjust rewards of a few hundred ‘masters of the universe’ exacerbated the risks we were all exposed to many times over” and that “a High Pay Commission is needed to deliver a fairer, more stable and sustainable economy for the future”? The following linked articles look at the issues.
Coalition calls on government to regulate high pay Guardian (17/8/09)
Think tank Compass says ‘masters of universe’ must be reigned in Telegraph (17/8/09)
The Big Question: Should there be a commission into high pay, and how would it operate? Independent (18/8/09)
Darling dismisses pay commission BBC news (17/8/09) (see also video)
Demands for ‘high commission’ to cut pay and bonuses of executives Scotsman (18/8/09)
It is time for action on excessive pay Guardian (17/8/09)
Top executives pocket huge bonuses despite recession Independent (518/8/09)
Investor group ABI wants guaranteed bonuses stopped Guardian (17/8/09)
It’s an unequal struggle to rein in those with the most The Herald (18/8/09)
Would a High Pay Commission solve inequality? Management Today (17/8/09)
Bankers’ pay: Coining it in Guardian (18/8/09)
Will Britain’s second dose of anti-bonus fever have a useful payoff? Telegraph (17/8/09)
Merit Pay Times Online (17/8/09)
Questions
- What are the arguments for and against establishing a High Pay Commission?
- To what extent are the rewards of senior executives a reflection of their marginal productivity?
- Discuss the extent to which the bonus system could be redesigned to align the incentives of such a system to the long-term performance of the company.