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?
“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.
There are seven Indian airlines: state-owned Air India and six private carriers. Since the onset of recession they have all been making losses and were considering a one-day ‘strike’ when services would be removed. The aim was to force the Indian government to reduce fuel and airport taxes.
Do the losses suggest that there is overcapacity in the Indian airline market? Does it matter if, during the current recession, some airlines go out of business? Are bankruptcies necessary if the surviving carriers are to be stimulated to make cost savings and are to achieve sufficient economies of scale? Or should governments offer support to struggling airlines? Is oligopoly the best market structure for such an industry and, if so, how can collusion be avoided? The following articles consider these questions.
How many airlines do we need? Business Line (The Hindu) (4/8/09)
Indian airlines call off Aug 18 strike Forbes (3/8/09)
When corporations capture the state Rediff Business (7/8/09) (see middle part of article)
Blaming everyone else Indian Express (3/8/09)
India’s air carriers spin loss riddle Asia Times Online (8/8/09)
A strategic vision for Indian aviation The Economic Times (8/8/09)
Flight to value The Economist (6/8/09)
Federation of Indian Airlines
Questions
- Describe the features of the market structure in which Indian airlines operate.
- Is the Federation of Indian Airlines a cartel?
- Should (a) any; (b) all Indian airlines be given government support, and, if so, what form should the support take? Should Air India be treated differently from the other Indian airlines? Explain your answer.
- Is it in Air India’s long-term interests to embark on a price war with the other Indian airlines?
- Is oligopoly necessarily the optimal market structure for a capital-intensive industry?
The large bonuses received by bankers, often amounting to more than a million pounds, have been contentious for many years. With the banking crisis and subsequent recession, and with both public and government outrage at the size of the bonuses, many thought that the days of such bonuses were over. But such is not the case. “There has been public disquiet that leading banks – which have been seen as a major cause of the financial crisis – have been receiving taxpayer funds, but are not prepared to change their traditional culture of awarding big bonuses to key staff.”
The following articles look at what has been happening to senior bankers’ remuneration in recent months. But what are the market conditions that allow such rewards to continue? Are they a reflection of the marginal productivity of bankers or of their market power, or what?
RBS to keep paying bonuses despite 1bn first-half loss Telegraph (7/8/09)
Lloyds chief plans bonuses for ‘spectacular job’ in making £4bn loss Telegraph (6/8/09)
CS toxic bonuses are up 17%, but gains can’t be realised for four years eFinancial Careers (7/8/09)
Banks: Look, don’t touch Guardian (8/8/09)
Analysis: The plan’s the thing Times Online (7/8/09)
Cutting our bonuses would hit the taxpayer, says RBS Citywire (7/8/09)
France targets bankers’ bonuses BBC News (7/8/09)
Sarkozy weighs into debate over banker bonuses after BNP Paribas compensation sparks anger Los Angeles Times (7/8/09)
Knotting the purse-strings The Economist (6/8/09)
Pay and politics The Economist (6/8/09)
Questions
- Explain why many senior bankers have continued to receive huge bonuses. To what extent is oligopoly theory relevant to your explanation?
- To what extent do the size of the bonuses reflect senior bankers’ contributions to (a) the productivity and (b) the profits of their bank?
- If bankers are to be paid bonuses, what is the best form for these bonuses to take? Consider the incentive effects in your answer.
- Should bankers’ bonuses be regulated and, if so, what criteria should regulators use for determining the acceptable size of bonuses?
The first linked article below is from the American business magazine Forbes. It looks at the economics of football (‘soccer’) signings and, in particular, that of Robinho by Manchester City. In September 2008 the club was bought by an Abu Dhabi investment fund, controlled by Sheikh Mansour bin Zayed Al Nahyan, for £210 million. But does the investment in new players make good business sense?
Also, what should determine whether a club sells a player? The third link below considers this issue. The link is to the Embedding Threshold Concepts (ETC) site at Staffordshire University. ETC was funded by the Higher Education Funding Council for England’s Fund for the Development of Teaching and Learning (FDTL). The site has a number of teaching and learning resources.
City of Dreams Forbes (8/4/09)
Man City beat Chelsea to Robinho BBC Sport (1/9/08)
Selling footballers: the economic viewpoint ETC reflective exercise
Questions
- Was it consistent with the goal of profit maximisation for Manchester City pay Real Madrid £32.5 million for Robinho? Was it consistent with the goal of profit maximisation for Real Madrid to sell him?
- If Real Madrid had decided to keep Robinho, how would you estimate the cost of doing so?
- What difficulties are there in developing Manchester City into a ‘global brand’?
- In what sense are the top Premier League clubs a ‘self-perpetuating oligopoly’?