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?
Anyone who lives in the South West can argue that they get a raw deal. Not only are the average salaries in this region lower than in the rest of the United Kingdom, but their water bills are 40% higher than those elsewhere in England and Wales. South West Water is the only provider of water in the South West and hence there are no other competitors that households or businesses can switch to, despite the extortionate prices.
Many households and businesses in the region are struggling to cope with the unfair bills, as people are forced to sacrifice other things in order to find the money. Furthermore, it can be argued that these higher bills are actually used for the benefit of everyone else in the United Kingdom. Since privatisation, South West Water are responsible for cleaning and maintaining over one third of the UK’s beaches and the prices they are charged by SW Water reflect this £2 billion cost. Moreover, with a relatively low population, this large cost cannot be spread across many people. Instead, the small population has to pay larger bills. A hairdresser, who does use a lot of water, is finding herself crippled by water bills of some £2,500. And this bill will pay to clean the beaches in the South West so that people living elsewhere can benefit from the beautiful surroundings.
There is now wide recognition of how unfair this scenario is and proposals have been suggested, ranging from a government grant (hardly likely given the state of public finances) to a levy on other regions’ bills to compensate SW Water for their clean-up costs. However, no decision has been made about how to progress and so for now, residents of the region must just simply grin and bear it, while sacrificing expenditure on other areas and seeing residents from across the UK benefit from their sacrifice.
P.S. If you hadn’t guessed it, yes I do live in the South West!
Why is water so expensive in the South West? BBC News (13/7/10)
North Devon MP Nick Harvey tackles unfair South West Water charges Barnstaple People (14/7/10)
Questions
- What is privatisation? Assess the advantages and disadvantages of the privatisation of water some 20 years ago.
- Does South West Water have a monopoly?
- Which of the 3 proposals is the most beneficial to those a) living in the South West, b) businesses in the South West c) the government and d) the rest of the country?
- Which proposal would you recommend and why?
- Is it fair that those in the South West should pay disproportionately more to clean and maintain beaches, which are used by everyone?
- Is the concept of market failure relevant in this case? Explain your answer.
I hardly need to say that the title is no reflection on England’s World Cup performance – or lack thereof. Instead, it relates to the opportunity for more people to watch the Premier League, which I’m sure most of you’ll agree is good news!
In 2007, BT, Virgin, Top up TV and Setanta complained about Sky’s dominance within the pay-TV industry. We considered Sky’s dominance and the subsequent investigation by Ofcom in a posting in March: Is the sky falling in?. Ofcom ruled that Sky would have to reduce the price it charged to other broadcasters to show its premium sports channels.
In more recent developments, there has now been a deal signed between Sky and BT, which will allow BT Vision customers to view Sky Sports 1 and Sky Sports 2 from August 1st 2010 (just in time for the start of the new football season, for those that are interested!) There are still ongoing debates about how much BT will charge for these new channels and it will depend largely on the outcome of the Sky’s appeal against Ofcom’s decision about the prices Sky has set. Although this may be good news to BT Vision viewers (excluding the fact that the deal does not include Sky Sports 3 and 4), there are many who agree on just one point: the regulator got it wrong. The Premier League could lose millions due to a loss of exclusivity and BSkyB argues that Ofcom didn’t even have the right to make the ruling.
These mini disputes are likely to go on for some time, but at least we can be certain about one thing: Ofcom’s decision can’t be any worse than Capello’s decisions in South Africa! Bring on the Premier League!!
Articles
Sky Sports 1 and 2 available to BT vision customers BBC News (28/6/10)
BT to offer Sky Sports in time for soccer season Reuters (28/6/10)
BT signs BSkyB deal to show Sky Sports channels BusinessWeek, Simon Thiel (28/6/10)
Sky forced to cut price of sports channels Telegraph (31/3/10)
New ruling lets fans see Premier League on TV for just £15 a month London Evening Standard, Jonathan Prynn (31/3/10)
Virgin media cuts Sky Channels prices Digital Spy, Andrew Laughlin (11/6/10)
BSkyB, BT and FAPL join Ofcom appeal Broadband TV News (11/6/10)
Sky wrongfoots rival BT by raising prices Guardian, Richard Wray (30/6/10)
BT charges £16.99 for Sports 1 and 2 BBC News (1/7/10)
BT launches cheap package to view Sky Sports Guardian, Lisa Bachelor (1/7/10)
BT Wades Into Pay-TV Sports Market Sky News, Nick Phipps and Emma Rowley (1/7/10)
Sky Sports broadcast costs set to rise BBC News, John Moylan (1/7/10)
Ofcom report
Delivering consumer benefits in Pay TV Ofcom Press Release (31/3/10)
Questions
- Ofcom’s initial ruling forced Sky to reduce prices. What will be the impact on a demand curve? How might this affect consumer choice?
- Sky has 85% of the market. Would you class it as a monopoly? Explain your answer. Is this agreement between Sky and BT likely to reduce or increase Sky’s market power?
- How might other Pay-TV providers be affected by this decision?
- What are the disputes surrounding Ofcom’s decision? Why might the Premier League lose so much revenue?
The EU competition acuthorities have just fined ten producers of memory chips a total of €331 million for operating a cartel. One of the ten, Micron, will pay no fine because it blew the whistle on the other nine. They, in turn, have had their fines reduced by 10% for co-operating with the authorities. According to the EU Press Release:
The overall cartel was in operation between 1 July 1998 and 15 June 2002. It involved a network of contacts and sharing of secret information, mostly on a bilateral basis, through which they coordinated the price levels and quotations for DRAMs (Dynamic Random Access Memory), sold to major PC or server original equipment manufacturers (OEMs) in the EEA.
“This first settlement decision is another milestone in the Commission’s anti-cartel enforcement. By acknowledging their participation in a cartel the companies have allowed the Commission to bring this long-running investigation to a close and to free up resources to investigate other suspected cartels. As the procedure is applied to new cases it is expected to speed up investigations significantly”, said Commission Vice President and Competition Commissioner Joaquín Almunia.
Articles
Chipmakers to pay fines of €330m over cartel Financial Times, Nikki Tait (20/5/10)
Chipmakers fined by EU for price-fixing BBC News (19/5/10)
European Commission douments and findings
Antitrust: Commission introduces settlement procedure for cartels Europa Press Release (3/6/08)
Antitrust: Commission introduces settlement procedure for cartels – frequently asked questions Europa Memo (30/6/08)
Antitrust: Commission fines DRAM producers € 331 million for price cartel; reaches first settlement in a cartel case Europa Press Release (19/5/10)
Antitrust: Commission adopts first cartel settlement decision – questions & answers Europa Memo (19/5/10)
Questions
- Explain how the new fast-track cartel settlement procedure works.
- Are the incentives built into the procedure appropriate for reducing oligopolistic collusion?
- Are the any reasons why the chip cartel might have been in consumers’ interests?
- Why does EU competition legislation apply in this case given than all but one of the companies are non-EU businesses?
