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?
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?
Cadbury is arguably the producer of the best Easter eggs and also one of the best known adverts – who can forget the guerrilla playing the drums! If you think there is no substitute for Cadbury chocolate, then you’ll find this story especially interesting.
In early September, Kraft Foods made a £10.2 billion bid for the maker of Dairy Milk. This was duly rejected by Cadbury, whose Chairman said that the offer ‘fundamentally undervalued’ the business. This initial bid, although rejected, has sparked interest in the corporate world and Cadbury shareholders have seen their shares rise in value by almost 40%, closing at 775.5p on Friday 11th September.
Following this bid, other potential buyers have entered the picture, including Nestlé and Hershey’s. There is also the likelihood that Kraft Foods will make a higher bid, financed through a bridging loan. Despite this interest, Cadbury still wants to remain independent, hoping that its investors will be buoyed by the company’s rising profits in recent months.
Take a look at the following articles that consider these possible take-overs of Cadbury and how the corporate world has been, and will continue to be, affected.
Cadbury snubs £10.2bn Kraft move BBC News (7/0/09)
Hershey’s and Nestlé in running to buy Cadbury Telegraph (10/9/09)
Kraft races to prepare new Cadbury bid Guardian (9/9/09)
Return of the Deal? BBC News (7/9/09)
Hershey considers Cadbury counterbid Times Online (9/9/09)
Cadbury spurns ‘low growth’ Kraft BBC News (13/9/09)
Long Cadbury shares? Cash out! Khaleej Times Online (United Arab Emirates) (14/9/09)
Hedge fund Eton Park stakes £180m on Cadbury bid Telegraph (10/9/09)
Cadbury vision is to stay single Financial Times (11/9/09)
Questions
- In the 13th September BBC News article, an extract from a letter to the Kraft Chief Executive from the Chairman of Cadbury stated that under Kraft’s offer “Cadbury would be absorbed into Kraft’s low growth, conglomerate business model, an unappealing prospect.” What does he mean by a ‘conglomerate business model?’
- Eton Park has bought £180 million worth of shares. In what ways do you think this will affect the future of Cadbury? Is Cadbury more or less likely to sell now?
- How would you explain the rise in Cadbury’s share price when it looked as though the company might be taken over?
- Cadbury’s Chief Executive hopes that investors will continue to support the company given the positive profit margin growth. What does this actually mean?
- If the take-over were to go ahead, what do you think would be the impact on the (a) the Cadbury factory in Birmingham; (b) Cadbury’s workers; (c) Cadbury’s shareholders; and (d) the price of Cadbury chocolate?
In October 2004, the USA brought a complaint to the WTO that Airbus had received illegal subsidies from the UK, French, German and Spanish governments. One of these subsidies was the so-called ‘launch aid’, which the US government argued was a form of export subsidy. In a counter-complaint to the WTO made on the same day, the EU maintained that the US government had provided illegal support to Boeing in the form of subsidies, legislation, regulations and other administrative measures.
On 4 September 2009, the EU and the USA were handed the confidential preliminary findings by the WTO panel in the first of the two disputes. This found that some of the support measures by the EU countries violated WTO rules. However, some two thirds of the complaints by the USA were dismissed.
Despite some progress in its deliberations, the WTO is unlikely to give a final judgment in the first case for several months and not even a preliminary report has been issued on the second case (the EU’s complaint against the USA). But can any conclusions be drawn at this interim stage? The following videos and articles look at the findings and their implications.
Videos
Airbus violated trade laws msnbc news (4/9/09)
WTO issues report on Airbus-Boeing dispute AlJazeera (4/9/09)
Update – Boeing vs. Airbus Bloomberg (4/9/09)
Articles
Airbus Loans Toward A380 Jumbo Faulted in WTO Ruling Bloomberg (4/9/09)
World trade body ruling reflects pre-crisis time Boston Globe (Associated Press report) (5/9/09)
WTO rules that Airbus benefited from E.U. subsidies MarketWatch (4/9/09)
Boeing wins first round in trade battle with Airbus Independent (5/9/09)
WTO rules on huge plane dispute BBC News (4/9/09)
Boeing and Airbus: Round one to Boeing The Economist (4/9/09)
Partial US victory on Airbus funds Financial Times (5/9/09)
Questions
- What sanctions does the WTO have to enforce its rulings? (see the WTO site.)
- What sanctions do individual governments have for ensuring that countries abide by the WTO rulings?
- How could strategic trade theory be used to justify support to aircraft manufacturers? Do such arguments apply to Airbus and Boeing?
- Do airlines and airline passengers gain or lose from the behaviour of Airbus and Boeing? Should the WTO take this into account?
In an attempt to revive the fortunes of the French restaurant industry, where demand has been flagging during the recession, the French government slashed VAT on restaurant meals from the standard 19.6 per cent to 5.5 per cent from 1 July 2009. But how much of the tax cut will be passed on to customers; will there be an equal percentage price cut for all items on any particular restaurant’s menu; what will be the impact on consumer demand; and what will be the impact on the government’s tax revenue? The following articles look at the issues.
VAT cut paves way for cheaper restaurant bills France 24 (1/7/09)
Restaurants’ VAT cut from today The Connexion (1/7/09)
French diners feast on benefits after generous cut in restaurant tax Guardian (1/7/09)
France Whacks Food Tax The Wall Street Journal (2/7/09)
Questions
- Using a demand and supply diagram, demonstrate the effect of a VAT cut on the price of a particular item on a menu.
- Examine the factors that will determine (a) the average percentage price cut made by a particular restaurant and (b) the percentage price cut on a particular item on the menu.
- “One third of the VAT cut is supposed to help pay for price cuts with another third going to increase staffing. The final third should go to improving restaurant facilities.” Consider the likelihood of this occurring.
- “The measure will cost the French state 2.38 billion euros a year.” How, do you think, this figure was arrived at and how accurate is the figure likely to be? Are there any circumstance under which the tax cut could increase tax revenues?