Down-payment required to curb bid fever

199

We would be better off if executives involved spent more time minding the store, rather than negotiating to buy each other’s stores – so here is a proposal to put sand in the wheels of the takeover machine.

It has been easy to fill the news columns of the FT these last few weeks. Who will win the battle between BET and Rentokil? Will BT buy Cable and Wireless? Or is it better for Cable and Wireless to buy BT? National Power has bid for Southern Electric. Or then Southern Corporation might buy National Power.

With Ian Lang’s welcome reassertion of the primacy of competition, we have a new chance to take stock. Some of these bids make sense. But mostly they result from managerial self aggrandisement. Companies with too much money are itching to hand it to merchant bankers or the shareholders of target firms.

The folks in Washington make lots of calls to New York, and the residents of New York often call the good people down in Washington. Perhaps that makes it logical that the same company should provide the phones at both ends. And perhaps Nynex, which owns all the lines in New York and quite a lot else besides, isn’t big enough to compete with all those other telecoms companies which are frantically making alliances with each other. Or maybe Bell Atlantic just loves a deal.

Mostly, we would be better off if the executives involved spent more time minding the store, rather than negotiating to buy each other’s stores. There is now a wide range of academic studies of post merger performance which points to the conclusion that, taken as a whole, merger activity adds little or no value. Indeed this management preoccupation with changing the boundaries of the business, rather than improving its operating performance, may have become a real competitive disadvantage for British and American companies.

We need to put sand in the wheels of the take-over mechanism. Not to bring it to a halt, since some bids are necessary and justified. More than that, the threat of take-over at present is the only important mechanism of managerial accountability that exists.

The main proposal extant to put that sand in the wheels is to reverse the burden of proof in Monopolies and Mergers Commission investigations. Today the MMC can only reject a merger if it finds damage to the public interest. Better to make the parties show that there are positive benefits to the public interest.

But that wouldn’t be enough. It is easy to envisage the resulting eloquent submissions to the MMC. I know, I’ve written them. The clichés are all already on my word processor. There is the need for critical mass: the ever increasing intensity of global competition: that convergence of technologies which demands fresh thinking about industrial structure. It’s no easy task for the MMC to determine whether there is anything in these assertions. Look at how the commisssioners disagreed over, but basically fell for, the vacuous claims of National Power and Power Gen about the need for national champions.

The way forward is to force companies which make these assertions to put their money where their mouth is. When a merger has a potential anti-competitive effect – and that is true of virtually all those which are currently under discussion – we should require that the parties demonstrate a specific benefit from the take-over to UK consumers. And the bidder should be required to put up a cash deposit – say 5% of the acquisition cost – against subsequent demonstration to the Office of Fair Trading that the claimed benefits have actually been realised.

This idea is not as novel as it sounds. It is essentially the formula which OFWAT and the MMC have applied in the recent water mergers. They have exacted specific and identifiable reductions in charges to water company customers as the price for the reductions in comparative competition which that consolidation implies. That concept has wider application.

The 5% figure is small in the context of the sums which changes hands in take-overs. It is less than the typical difference between the sighting shot and the second bid in a contested battle like Granada/Forte or BET/Rentokil. It compares with a level of take-over premium which has historically averaged around 25%, implying that consumers might anticipate a fifth of the gains which the acquirer expects to obtain from the take-over. Hardly an unreasonable share. If market forces could not ensure that customers got at least this fraction of the gains anyway, competition in the market is already inadequate.

But while small in the context of the overall consideration, 5% is large enough to imply big absolute sums of money, Rentokil would need to put down £100m or so: for Southern to get National Power they would need to find the best part of half a billion. At the current pace of merger frenzy, the Chancellor might expect to receive enough this year to knock a penny off income tax.

The Chancellor might, of course, have to give that money back when the companies concerned proved the advantages which their customers had derived from the acquisitions. Granada, which celebrated its acquisition of Forte by raising hotel prices, would begin from some way behind the starting line, but others might find it easier. If companies used the argument that it would be too difficult to identify specific benefits, that would tell us everything we need to know about the real merits of their proposals.

And if they claim it would be too costly to provide the necessary information, then I am willing to undertake the investigations required for a fixed fee which would look very small by the standards of remuneration which professional advisers apply to take-over bids. Companies themselves would be forced to look very carefully at whether mergers had yielded the gains they expected, and the results of their self-examination would be on public record. That process might in itself be the greatest check on deal mania.

Print Friendly, PDF & Email