Global merger and acquisition deals with a combined value of £2.7 trillion ($4.06 trillion) have taken place so far this year (1 Jan to 3 Nov). This is a 38% increase on the same period in 2014 ($2.94 trillion) and even surpasses the previous record high for the same period in 2007 ($3.93 trillion) (see the chart from the Dealogic article linked below).
Measured by dollar value, October was the fifth biggest month in Mergers and Acquisitions (M&As) history with the announcement of $514bn of actual or proposed deals. These included:
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the proposed £71 billion deal to acquire SABMiller (the world’s second largest brewer) by AB InBev (the world’s largest brewer); |
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the $67bn takeover of network storage provider EMC by Dell (the world’s third largest computer supplier); |
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the proposed deal to acquire Allergan (producer of Botox) by Pfizer (the producer of Viagra). |
Although the dollar value of M&As was extremely large in October the actual number of deals, 2177, was significantly lower than the average of 3521 over the previous 9 months.
Are these large M&As in the interests of the consumer? One advantage is that the newly combined firms may have lower average costs. Reports in the press, following the announcement of most M&As, often discuss the potential for reductions in duplicate resources and rationalisation. After the successful completion of a takeover two previously separate departments, such as finance, law or HRM, may be combined into one office. If the newly integrated department is (i) smaller than the previous two departments added together and (ii) can operate just as effectively, then average costs will fall. This is simply an example of an economy of scale.
Average costs will also decrease if x-inefficiency within the acquired business can be reduced or eliminated. X-inefficiency exists when an organisation incurs higher costs than are necessary to produce any given output. In other words it is not producing in the cheapest possible way. In a number of takeovers in the brewing industry, AB InBev has gained a fearsome reputation for minimising costs and removing any waste or slack in acquired organisations. In an interview with the Financial Times, its chief executive, Carlos Brito, stated that:
“In any company, there’s 20 per cent that lead, 70 per cent that follow and 10 per cent that do nothing. So the 10 per cent, of course, you need to get rid of.”
If any reduction in costs results in lower prices without any lessening in the quality of the good or service, then of course the customer will benefit. However, when two relatively large organisations combine, it may result in a newly merged business with considerable market power. With a fall in the price elasticity of demand for its goods and services, this bigger company may be able to increase its prices and make greater revenues.
An important responsibility of a taxpayer-funded competition authority is to make judgements about whether or not large M&As are in the public interest. For example, the Competition and Markets Authority in the UK investigates deals if the target company has a UK turnover that exceeds £70 million, or if the newly combined business has a market share that is equal to or exceeds 25 per cent. If the CMA concludes that an M&A would lead to a substantial lessening of competition in the market, then it could prohibit the deal from taking place. This has only happened on 9 occasions in the last 12 years. If competition concerns are identified, it is far more likely that CMA will allow the deal to go ahead but with certain conditions attached. This has happened 29 times in the last 12 years and the conditions are referred to as remedies.
The CMA has recently published a report (Understanding past merger remedies) that attempts to evaluate the relative success of the various remedies it has used in 13 M&A cases.
Articles
Are big mergers bad for consumers? BBC News, Daniel Thomas (30/10/15)
Mergers and acquisitions madness may be about to stop The Guardian (11/10/15)
M&A deal activity on pace for record year The Wall Street Journal, Dana Mattioli and Dan Strumpf (10/08/15) [Note: if you can’t see the full article, try clearing cookies (Ctrl+Shift+Delete)]
Global M&A Volume Surpasses $4tr in 2015 YTD Dealogic, Anthony Read (04/11/15)
M&A Volumes Weaken in October despite Megadeals Financial Times, James Fontanella-Khan and Arash Massoudi (01/11/15)
The merger of Dell and EMC is further proof that the IT industry is remaking itself The Economist (12/10/15)
Questions
- Using a cost curve diagram, explain the difference between economies of scale and x-efficiency.
- Explain why a takeover or merger might reduce the price elasticity of demand for the goods or services produced by the newly combined firm.
- Explain how the CMA determines the size of the appropriate market when calculating a firm’s market share.
- Draw a diagram to illustrate the simultaneous impact of greater market power and lower average costs that might result from a horizontal merger. Consider the impact on consumer, producer and total surplus.
- What is the difference between a structural and a behavioural remedy?
The proposed $100 billion takeover of SABMiller by AB InBev is the third largest in history. It provides a good example of how the UK Panel on Takeovers and Mergers operates.
Economics textbooks often discuss competition authorities such as the Competition and Markets Authority but they rarely mention the UK Panel on Takeovers and Mergers (The Panel).The Panel is an independent body that was established in 1968. It has up to 35 members who all have professional expertise on the subject of takeovers i.e. they are usually employees of or have been seconded from (i) law and accountancy firms (ii) corporate brokers (iii) investment banks.
The Panel’s main responsibility is to implement the City Code on Takeovers and Mergers. This code sets out a number of ground-rules that companies must follow if they are involved in a merger or takeover. These rules became statutory in 2006 following the Companies Act of that year. The following objectives underpin the code:
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To ensure that the shareholders of the target company in a proposed takeover are treated fairly and are given the opportunity to make an informed decision about the relative merits of the takeover. |
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To ensure that the whole takeover/merger process operates in a structured and systematic manner. |
The Panel does not make any judgements on the commercial case for the takeover or merger. This is left to the management and shareholders of the companies involved. It also does not get involved with competition issues such as whether the newly established firm would have significant market power. These decisions in the UK are left to the Competition and Markets Authority. If the merger has a European element/dimension to it then it is investigated by the European Commission.
The rules that made up the code remained largely unchanged from 1968 until some important changes were made in September 2011. This followed the controversial takeover of Cadbury by the US food company Kraft. Kraft had first announced its intention to make an offer to acquire Cadbury in September 2009 but a deal was not agreed by the management of Cadbury until January 2010. Concerns were expressed at the time that this long and protracted takeover had made it very difficult for Cadbury to run its business effectively because of the uncertainty it created. It was also argued that the rules gave the acquiring company a significant tactical advantage in the takeover process and made it too easy for them to succeed.
One important change is that a targeted company must publicly announce the name of any companies that have made an approach about a possible deal. This announcement then activates a 28 day bid deadline period known as ‘pusu’ which stands for ‘put up’ (the money: i.e. make a formal bid) or ‘shut up’ (and walk away). This means that if the potential acquirer has not made a formal bid by the end of this 28-day period it is prohibited from making a bid for another 6 months. A request can be made to the Takeover Panel for an extension to this initial 28-day period, but this can only be done with the agreement of the target company.
Therefore SABMiller was obliged to announce on 15th September 2015 that
“Anheuser-Busch InBev SA/NV (AB InBev) has informed SABMiller that it intends to make a proposal to acquire SABMiller. No proposal has yet been received and the Board of SABMiller has no further details about the terms of any such proposal.”
The timing of this announcement made 14th October the official deadline by which AB InBev had to make a formal offer. After rejecting five bids, an offer of £44 a share by AB InBev was agreed in principle by the SABMiller management team on 13th October. 
Given the size and complexity of the deal (i.e. AB InBev is financing the deal by borrowing over $70 billion from 21 different banks), an initial two-week extension until 28th October was granted by the Takeover Panel. This could only have been granted with the agreement of SABMiller. Another one-week extension was agreed and then, on 4th November, SABMiller management made the following announcement.
“In order to allow SABMiller and AB InBev to finalise their discussions and satisfy the pre-conditions to the announcement of a formal transaction, the board of SABMiller has requested that the Panel on Takeovers and Mergers further extends the relevant deadline until 5pm November 11, 2015.”
One major issue has been the potential impact of the takeover on the level of competition in the US market. AB InBev and SABMiller already have market shares of 46% and 27% respectively. SABMiller’s strong presence in this market is a result of its joint venture, MillerCoors, with Molson Coors. One reason behind the last request for an extension is to grant enough time for a deal to be finalised for the sale of SABMiller’s 58% stake in MillerCoors to Molson Coors. Without this sale the US competition authorities would not approve the takeover.
Most observers believe that it will take a year for the deal to be completed and it will be interesting to chart its progress over the next 12 months.
Postscript: AB InBev announced on 11th November that it had made a formal offer of £71 billion to acquire SABMiller and SABMiller’s share in MillerCoors had been sold to Molson Coors for $12 billion.
SABMiller to seek another Takeover Panel extension for AB InBev takeover The Telegraph, Ben Martin (04/11/15)
AB InBev and SABMiller allay concerns about 68bn MegaBrew deal The Telegraph, Ben Martin (28/10/15)
AB InBev, SABMiller extend takeover deadline to Nov.4 Reuters, Philip Blenkinsop (28/10/15)
SABMiller agrees AB Inbev takeover deal of £68bn The Guardian, Sean Farrell (13/10/15)
SABMiller is AB Inbev’s toughest takeover yet. It may not be its last The Economist (14/10/15)
Brewery Battle: AB Inbev and the Craft Beer Challenge BBC News, Peter Shadbolt (13/10/15)
Beer Giants AB Inbev and SABMiller Agree Takeover Terms BBC News (13/10/15)
Questions
- The proposed takeover of SABMiller by AB InBev would be the third largest in history. What are the two biggest deals?
- The European Commission investigates ‘large’ mergers that have an ‘EU dimension’. On what basis does the European Commission judge if a merger is large or has an EU dimension?
- On what basis are mergers judged by the Competition and Markets Authority in the UK?
- What is a ‘virtual bid’ period? How did the ‘pusu’ bid deadline operate before the changes were introduced in 2011?
- Pfizer’s bid for Astrazeneca did not succeed in May 2014. Some people blamed the collapse of the deal on the 28-day ‘pusu’ deadline and rule 2.5 (i) of the code. What is rule 2.5 (i) and how did it contribute towards the failure of this deal?
In December, most of the countries of the world will meet in Paris at the 21st annual United Nations Conference of the Parties (COP) on climate change. COP21 ‘will, for the first time in over 20 years of UN negotiations, aim to achieve a legally binding and universal agreement on climate, with the aim of keeping global warming below 2°C.’
When the Copenhagen conference (COP15) ended in disagreement in 2009, few people thought that the increase in renewable energy would be anything like sufficient to prevent global temperatures rising more than 2°C. But things have dramatically changed in the intervening six years.
Solar power and other renewables have increased dramatically and the technology for the cleaner burning of fossil fuels, including carbon capture and storage, has developed rapidly.
But perhaps the most important change has been the attitudes of governments. No longer is it a case of Europe and other developed countries moving in the direction of renewables, while developing countries, and, in particular, China and India, argue that their economic development requires a rapid expansion of coal-fired power stations. Now China, India and many other emerging countries are rapidly developing their renewable sectors. This is partly driven by the fall in the costs of renewables and partly by worries that climate change will directly effect them. Now the ‘pro-coal’ countries are in a minority.
And industry is realising that significant profit is to be made from the development and installation of power plants using renewable energy. This is driving both R&D and investment. As the Telegraph article, linked below, points out, in 2009 ‘the International Energy Agency (IEA) was still predicting that solar power would struggle to reach 20 gigawatts by now. Few could have foretold that it would in fact explode to 180 gigawatts – over three times Britain’s total power output – as costs plummeted, and that almost half of all new electricity installed in the US in 2013 and 2014 would come from solar’.
So is this a good news story? Will real progress be made at COP21 in Paris? The articles explore the issues.
Articles
Paris climate deal to ignite a $90 trillion energy revolution The Telegraph, Ambrose Evans-Pritchard (28/10/15)
OP21 deal critical for low-carbon economy Japan Times, Carlos Ghosn (29/10/15)
Is Solar Without Subsidies Now Viable? Oilprice.com, Michael McDonald (22/10/15)
Policy Paper
The road to Paris and beyond Centre for Climate Change Economics and Policy, Grantham Research Institute on Climate Change and the Environment (LSE), Rodney Boyd, Fergus Green and Nicholas Stern (August 2015)
Report
Energy and Climate Change International Energy Agency (October 2015)
Questions
- What are the drivers for a move from fossil fuels to renewables? Are they similar dirvers in both developed and developing countries?
- What externalities are involved in energy production (a) from fossil fuels; (b) from renewables?
- What policies can be adopted to internalise the externalities?
- What are the merits and problems of a carbon trading scheme? What determines its effectiveness in reducing CO2 emissions?
- Why are more and more investors moving into the renewable energy sector? Could this become a speculative bubble? Explain.
- How might game theory help to explain the process and outcomes of international negotiations over climate change and energy use?
After initial resistance, the brewer SAB Miller last week agreed to a merger with Anheuser-Busch InBev (AB InBev). The merging parties own over 400 brands between them. These include Budweiser, Stella Artois and Beck’s, which are owned by AB InBev, and Peroni and Grolsch by SAB Miller. Furthermore, they are currently the number one and two firms in the market respectively. If the merger goes ahead the new entity would control almost one third of global beer production.
This merger represents the continuation of AB InBev’s aggressive expansion plans through mergers and acquisitions as it follows its merger with Interbrew in 2004 and with InBev in 2008. It seems that one key attraction of a merger with SAB Miller is its dominant position in rapidly growing African markets.
A second motivation for the merger appears to be an attempt to counter the rise of small independent craft beer producers. For example, in the USA craft beer’s share of the market has grown from 5 to 11% since 2011. It has been suggested that the leading breweries combining forces represents one of several strategies being used to try to counter the threat of craft breweries. Additional strategies include creating their own craft products that are marketed as independant products and attempting to buy-up craft beer producers. For example, in 2011 AB InBev purchased the Goose Island brand.
Commenting on the planned merger between SAB Miller and AB InBev, a spokesman for the Campaign for Real Ale group expressed concern that:
independent beers may find it harder to get space in pubs and supermarkets because of the increased market presence of AB InBev.
Given the market positions of SAB Miller and AB InBev, it is likely that their merger will face considerable scrutiny by competition agencies in a number of jurisdictions. In fact it has been reported that plans have already been set in motion to sell SAB Miller’s interests in the USA to try to placate potential concerns from competition agencies in the USA and China.
Interestingly, SAB Miller has also protected itself by negotiating a clause that requires AB InBev to pay it $3bn if the deal falls through, for example on competition grounds. It remains to be seen what conditions competition authorities will require before the merger can go ahead and it is even possible they will try to completely block the deal.
Why beer drinkers lose in the SABMiller-AB InBev merger Fortune, John Colley (13/10/15)
Can craft beer survive AB InBev? The Budweiser maker’s acquisitions are unsettling the craft movement Bloomberg Business, Devin Leonard (25/06/15)
Questions
- How important do you think it is to consumers who a particular brand of beer is produced by?
- How serious a threat do you think independent craft beer producers are to the leading breweries?
- Outline some of the factors competition agencies will look at when they consider the merger between SAB Miller and AB InBev.
- Why might AB InBev have been willing to agree to pay a fee to SAB Miller in the event of the merger falling through?
Obesity is on the rise, especially in children. With all the attendant health problems, concern is growing and various policies have been proposed to try to tackle the problem. One such policy is a sugar tax. This could be either a universal tax on sugar in food products or a tax just on soft drinks, many of which are very high in sugar – typically about seven teaspoons in a can or individual bottle.
Currently the issue is being considered by the UK’s Parliamentary Health Select Committee. Jamie Oliver, the TV chef and restaurateur, argued strongly before the committee in favour of a sugar tax on fizzy drinks. He has already imposed a levy on soft drinks with added sugar in his restaurants. He maintained that it was not just the higher price from a sugar tax that would deter consumption of such drinks, but it would send out an important message that too much sugar is bad for you.
Two days later, Dr Alison Tedstone appeared before the committee. She is chief nutritionist at Public Health England. PHE has been carrying out research into obesity and ways of tackling it. It has reviewed two types of evidence: experimental data on the effects of imposing higher prices on products with added sugar; and the effects of policies pursued in other countries. She stated to the committee that ‘universally all the evidence shows that the tax does decrease consumption’ and that ‘the higher the tax increase, the greater the effect’.
The government was not planning to publish the report at this stage, but under considerable pressure agreed to its publication.
The articles look at the prospects for a sugar tax, its likely effects if one were introduced and at the politics of the situation, which are likely to result in such a tax being rejected.
Videos and audio podcasts
Can you be trusted to eat less sugar? BBC News, Hugh Pym (22/10/15)
‘Introduce sugar tax’, health officials tell government Channel 4 News, Victoria Macdonald (22/10/15)
Jamie Oliver: ‘Bold’ sugar tax to beat childhood obesity BBC News, Hugh Pym (19/10/15)
Be bold on sugar tax, Jamie Oliver says BBC News, Nick Triggle (19/10/15)
Health scientists’ links with sugar industry queried BBC News, Dominic Hughes (12/2/15)
Mexico’s soda tax is starting to change some habits, say health advocates PRI’s The World on YouTube, Jill Replogle (2/12/14)
Articles
Jeremy Hunt told sugar tax would cut childhood obesity as review Government tried to suppress is published Independent, Charlie Cooper (20/10/15)
Sugar tax could help solve Britain’s obesity crisis, expert tells MPs The Guardian, Ben Quinn (21/10/15)
Jamie Oliver ‘expects kicking’ over sugar tax The Guardian, Jessica Elgot (22/10/15)
Sugar tax, fat fines and gold coins: new ways cities are tackling obesity The Guardian, Sarah Johnson (22/10/15)
Sugar tax and offers ban ‘would work’ BBC News (22/10/15)
Public Health England tells UK government: Sugar taxes do work FoodNavigator.com, Niamh Michail (21/10/15)
Childhood Obesity Partially Down To The Coco Pops Monkey, Sugar Tax Report Claims Huffington Post, Sarah Ann Harris (21/10/15)
Health officials back a sugar tax – and want the Coco Pops monkey banned The Telegraph, Laura Donnelly (20/10/15)
Jeremy Hunt embroiled in row over sugar tax report The Telegraph, Laura Donnelly (11/10/15)
Revealed: ‘Sugar tax report’ which was suppressed by Government The Telegraph, Laura Donnelly (22/10/15)
Public Health England obesity report: the key points The Guardian, James Meikle (22/10/15)
Cameron says no to sugar tax Mail Online, Jason Groves and Daniel Martin (21/10/15)
Sugar tax: Former health minister backs levy to prevent NHS ‘obesity crisis’ Independent, Charlie Cooper (21/10/15)
Journal articles and reports
Sugar Reduction: The evidence for action Public Health England, Dr Alison Tedstone, Victoria Targett, Dr Rachel Allen and staff at PHE (22/10/15)
Effects of a fizzy drink tax on obesity rates estimated NHS CHoices (1/11/13)
Overall and income specific effect on prevalence of overweight and obesity of 20% sugar sweetened drink tax in UK: econometric and comparative risk assessment modelling study British Medical Journal, Adam D M Briggs, Oliver T Mytton, Ariane Kehlbacher, Richard Tiffin, Mike Rayner and Peter Scarborough (2013;347:f6189)
Perspectives: Time for a sugary drinks tax in the UK? Journal of Public Health, Oliver Mytton (29/5/14)
Sugar reduction: Responding to the challenge Public Health England, Dr Alison Tedstone, Ms Sally Anderson and Dr Rachel Allen and staff at PHE (June 2014)
Questions
- What factors are driving the current high consumption of sugar?
- How is the concept of price elasticity of demand relevant to the effectiveness of imposing a sugar tax?
- What would determine the incidence of such a tax between food and drink manufacturers and consumers?
- Would such a tax be progressive, regressive or neutral? Explain.
- What other policies could be pursued to discourage the consumption of sugar? Discuss their likely effectiveness and compare them with a sugar tax.
- What externalities are involved in sugar consumption? How would you set about measuring them? Should a sugar tax be set at a rate that internalises the estimated externalities?
- Examine the objections to imposing a sugar tax.
Global merger and acquisition deals with a combined value of £2.7 trillion ($4.06 trillion) have taken place so far this year (1 Jan to 3 Nov). This is a 38% increase on the same period in 2014 ($2.94 trillion) and even surpasses the previous record high for the same period in 2007 ($3.93 trillion) (see the chart from the Dealogic article linked below).
