DRAFT

6.Reasons why government might support or intervene in takeovers and mergers

The least risk option for expanding a business is the internal, organic method. However, this approach is time-consuming and requires a large amount of effort despite being low risk. A quicker option for expanding a business is the external, inorganic method. Two effective methods of growing externally are mergers and takeovers/acquisitions.When a high profile takeover/merger is discussed between two large companies, the government can analyse whether the integration will have a positive or negative impact on the economy and job availability. After analysis, the government can choose whether to support or act against a takeover/merger.  When a government allows takeovers to occur between businesses freely without intervention, this is called a ‘free market economy’.

A motive for the government to allow a takeover is to prevent either of the companies involved from failing and ultimately becoming bankrupt. These sorts of occasions only occur when a large business in a significant industry undergoes financial trouble which would in turn affect the economy negatively due to the reduction in tax received and the increased amount of people without jobs gaining unemployment benefit. Lloyds TSB takeover of Halifax Bank of Scotland (HBOS) in 2009 is an example of intervention to prevent failure in a large industry. HBOS had accumulated a significant amount of debt due to mortgages and unsecured loans. The losses made were at an all time low for a bank at about £11bn. These ultimately resulted in higher charges for mortgage customers (£400m to £700m) which in turn resulted in increased losses by the bank. Lloyds TSB bought out HBOS and took the company over with a final price of £12bn resulting in the creation banking giant which holding close to one-third of the UKs savings and mortgage market. The government chose to use the national interest clause in competition law to justify why the takeover was to continue and ultimately supported to the acquisition due to the potential economic damage that could be dealt by HBOS’s failure, whether be due to the large unemployment or the reduced amount of taxes received. A high level of unemployment will result an increased amount of people gaining employment benefits from the government which eats up the available capital resource that could be used else where. Taxes received are reduced meaning the government have less money to invest into schemes to help resolve the economic crisis and maintain societal well-being. However, the government are now heavily invested into this banking giant to the point where they would compel to protect it at any cost to prevent financial crisis. This allows Lloyds to be a position of power and influence that can easily be abused, not only due to monopolistic available to be extremely competitive (with prices, availability, etc) but Lloyds now has a large influence in political matters that they might see as damaging to their ability to make money.

A motive for the government to be against a takeover is to prevent a company from becoming too powerful with a specific industry or market by owning the majority within that market/industry. The majority hold of a market is prevented to stop the potential abuse of monopolistic power that would allow the relevant company to dominate competitively. The government sees this sort of abuse of power as damaging for the economy and customers, due to the ability of the company to have the lowest prices (price leader) which cause the survival within the market to be difficult. The high competitiveness will also increase the requirements for the barriers of entry for fledgling businesses attempting to enter the market making it almost impossible to get a foot hold. The company taking advantage of this power will have less need for high efficiency and innovation due to the decreased amount of competition which in turn affects the customer negatively as choice is reduced. An example of this sort intervention is the News Corporations takeover bid of BSkyB, which would of resulted in a large monopoly of the media sector. The government had already seen previously, with the phone hacking scandal, that News Corporation did have the potential to make controversial choices that would affect other people negatively. This caused the government to be sceptical about the takeover bid as it will allow News Corporation a large amount of influence within the media which could easily have serious long-term consequences for media plurality. The government told Ofcom to create a extensively report analysis on the takeover bid. Ofcom reported that after taking of BSkyB, News corporation would be able to reach 55% of newsreaders and could use BSkyB’s services for News Corporation’s own needs. Prices could of been easily increased if that the takeover bid had a been successful. However, it hard to say whether the acquisition would of had any affect at all prices, customer satisfaction and media plurality. The option to abuse the power would have been there but that doesn’t mean News Corporation would have used that option, especially considering that they had already under gone a lot of ‘bad press’ about another controversial choice that they had done. The takeover could have potentially opened up another option for higher flexibility in pricing and innovation through gained knowledge from BSkyB and investment from saving.

In conclusion, I believe that under certain circumstances the government intervening in a takeover/merger can be a decisive decision that could prevent a negative result for many people, as long as the decision is made after extensive analysis. The government only really considers intervening when large companies are attempting to integrate. Smaller takeover/mergers are seen as less important as they won’t necessarily have an effect on the economy. The large bidding company and the government usually have completely separate priorities, which can help determine the outcome of the takeover bid. The bidding company will always try to accumulate as much power as possible within a market to potentially increase their profits and reach to customers. The government will only concern themselves with anything that will have large positive effect on the economy. The Lloyds HBOS takeover had a certain amount of economic risk while the News Corporation and BSkyB didn’t necessarily have that risk. Takeovers that are approved by the government aren’t always successful for the companies involved, the takeover might of achieved what the government expected but that doesn’t mean that the acquiring company gained any significant profit from it. For example, Lloyds actually ended up struggling because they realised after the takeover that they had bought HBOS for more than it worth and were ultimately stuck with large debt that could have been avoided if they had investigated more previously. In this scenario, the government were able to avoid the economic crisis and Lloyds were able save HBOS customers in the short-term. However, Lloyds are now going suffer in the long-term because before they can make anything out of HBOS, they need resolve and cover all the debt acquired.

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