Welcome to Mergers and Acquisitions uk

Plan of Topic Definitions Importance Patterns in Mergers and Acquisitions –Merger and Acquisition Activity in UK Different types of Merger Characteristics of Merging Firms Implications –Market Structure/Concentration –Market Power Policy

Definitions Merger – Formation of new firm, by mutual agreement, comprising two or more existing firms. The name of the new entity often reflects both/all firms concerned. Acquisition (Takeovers) – The purchase of a controlling interest which leads to the identity of the acquired firm being subsumed.

Importance of Mergers Growth of the Firm Profits Market Structure Degree of Market Dominance New Technology

Reasons for Mergers Scale Economies Market Power Managerial motives Evidence (Mueller (1989), Newbold (1970), Ravenscraft and Scherer (1987))

Patterns in Mergers and Acquisitions Cyclical Behaviour –Booms & Slumps Similar trends worldwide Recent trends in the UK

Different types of Merger Horizontal Merger –Same stage of productive process Vertical Integration –Different stage of the same productive process Conglomerate Merger –Across different ‘product areas’

Relative importance of Merger Types Conglomerate merger increased significantly from 1970s through to 1990s. Horizontal mergers are now once again dominant form merger Figures may be difficult to interpret –The degree of diversification General international trends

Characteristics of Merging Firms Firm size Profitability Growth International comparisons

Implications of changes in Merger Activity Changes in Market Structure and Concentration Changes in Market Power –Efficiency Economies of Scale –Dominance Maintenance and/or increase of market power –Innovation Development of new technology Changes in Firms’ Profits

Merger Policy Rationale for Policy UK Competition Policy –1973 Fair Trading Act –1980 Competition Act –1998 Competition Act Merger Regulation Effectiveness of Policy

Fair Trading Act (1973) Office Fair Trading (OFT) and D.G.F.T. established Monopolies and Mergers Commission (MMC) Monopoly pricing –Monopoly=25% market share –Price discrimination –Vertical restraints –Predation Mergers Public Interest –Promoted or maintained competition –Overall interest of Consumers/other market participants –Reduction of costs –Innovative activity OFT referred cases to MMC. MMC reported back to DGFT

Competition Act (1980) Anti-Competitive Practices –Price Fixing, Discrimination and Predation –Exclusive dealings –Tie-ins Nationalised Industries

Current UK policy Competition Act (1998) DG Fair Trading + Competition Commission Chapter I Prohibition (“Prevent distort or otherwise affect trade”) Price fixing Minimum resale prices Share markets Limiting output Collusive tendering Chapter II Prohibition (Abuse of Dominant Positions) –is firm dominant? –is it abusing its position?

EU Competition Directorate-General - DGIV Articles 81(85) and 82(86) Treaty of Rome –Aim to integrate EU markets 81: Anti-competitive Practices –Prevention, reduction or distortion of competition in the EU –Restrictive agreements, collusion, vertical restraints –Exemptions 82: Abuse of dominant position –40% market share –Pricing, supply restrictions,technology –No exemptions

EU: Mergers European Council Merger Regulation 1989 –Each firm World sales Ecu 2.5bn EU sales Ecu 250 m. –Combined sales Ecu 100m. in at least three member states –If either/any firm Ecu 25m. In same three states –One firm alone 2/3 of single states market

Merger Regulation Competition Policy in the U.K. and throughout Europe has become increasingly concerned with mergers since the 1970s. Effectiveness of policy –Number of referrals and % of mergers ‘blocked’ Between 1950 and 1995 MMC investigated 171 merger cases (91 between 1987 and 1995) and approx. 3% were disallowed. –Problems of interpretation