UK: Who's messing with my merger?

UK: Who's messing with my merger? - Companies grudgingly accept the need for the OFT and MMC to regulate competition. Their main gripe is that, in the end, it all comes down to a political lottery.

by Steve Bevan.
Last Updated: 31 Aug 2010

Companies grudgingly accept the need for the OFT and MMC to regulate competition. Their main gripe is that, in the end, it all comes down to a political lottery.

Large or small, bids and mergers have one thing in common - the likelihood of a brush with Britain's competition regulators. For smaller companies without battalions of legal advisers, it can be a daunting prospect. But even for large companies, the UK's system of regulating competition can sometimes seem something of a lottery with the final decision on whether to pass or block a bid or merger very often down to a politician - the president of the board of trade, currently Margaret Beckett. Since her appointment in May, Beckett has confounded expectations on a number of deals - referring some for further investigation by the Monopolies and Mergers Commission (MMC) which were thought likely to escape, like the Pacificorp bid for Energy Group, blocking others such as the £200 million Carlsberg Tetley/Bass deal, and refusing to take a decision on another, the P&O/Stena merger, until the European Commission has reached its conclusion on the deal.

A lot of ink has since been used up by commentators trying to understand Beckett's thinking. Has she moved to a situation where the burden of proof is on the companies concerned to show that the merger is actively in the public interest rather than simply not against it as before? Such indeed was the line Beckett suggested when she was still in Opposition. Once in office she publicly dropped the idea, although her actions indicate otherwise. Or is she - as one lobbyist specialising in bids and mergers claims - driven by PR considerations, determined to come down hard on anything that is 'big and sexy' or sensitive, like a foreign takeover of an electricity company, or beer and ferries?

Evidence that Labour is taking a tough line on anti-competitive behaviour came with its new Competition Bill introduced in October. The bill provides the Office of Fair Trading (OFT) with tough, new investigatory powers and the clout to impose penalties. On the subject of mergers, however, the bill had nothing to say.

Yet a number of companies which have been through the regulatory mangle complain bitterly about a system they see as slow, costly and lacking in transparency. For most companies the first point of contact is the OFT. It is the main competition watchdog responsible for monitoring the workings of markets, carrying out initial enquiries into mergers and recommending to the secretary of state what action should be taken. There is no obligation to inform the OFT about a merger, although companies which merge before the OFT has had a chance to look at the deal run the danger that they may be forced to demerge, as FirstBus found out earlier in January when it was told to sell off a large part of Strathclyde Buses, six months after the deal was announced (although this is currently being reviewed).

According to a director of one company which has recently had dealings with it, the OFT is 'hopelessly overworked, the quality of the staff is not brilliant - I'm not sure that they are able to do more than take a cursory glance at cases'.

Margaret Bloom, the OFT's director of competition policy, admits that 'the volume and complexity of work has been considerable over recent years', but insists that all cases have been treated professionally and that the OFT's staff is held 'in high regard by the business community'.

Businesses involved in merger negotiations can get an indication of how it will be viewed by the authorities in the form of 'confidential guidance ' from the OFT. But this can, in itself be a lengthy process.

The worst-case scenario for any business contemplating a merger is that the OFT will recommend that it be referred to the MMC, a powerful yet obscure quasi-governmental body whose job it is to carry out more detailed investigations of mergers. If you believe some reports, it was the prospect of an MMC investigation which caused Safeway and Asda to call off their merger talks. Under the Competition Bill the MMC will be renamed the Competition Commission and will have the additional function of hearing appeals against the new prohibitions imposed by the OFT.

Although the MMC is only involved in a tiny minority of cases - five out of 83 mergers since May 1997 - the costs when it is are enormous.

The mere fact that a bid has been referred to the MMC can add millions of pounds to the cost of a deal and can jeopardise it altogether. The average MMC investigation takes around three months - 'call it six months when you add on the time it takes for the DTI to look at it and make a decision', says one disgruntled company director. Once referred, a merger enters into a kind of limbo. In the case of a hostile bid, this means the bid lapses, giving plenty of time for other bidders to make their move. Often the uncertainty will hit a company's share price, which could scupper the deal altogether if it is a paper bid. And then there are the costs of the legal advisers and the time put in by senior management.

'I'd say, depending on the scale of the business, you're looking at a minimum of £300,000,' says a source at National Express, which is currently involved in two MMC investigations. 'And if it's a big enquiry it may cost many millions.'

Denise Kingsmill, a consultant at City law firm Denton Hall, and the newcomer among the MMC's three deputy chairmen, admits there is a certain amount of resentment among companies subject to an MMC investigation.

'It costs them a lot of money, it delays what they want to do, it takes a lot of management time, and then there are the lawyers' fees to be paid ...

It's difficult for the parties to appreciate the volume of paperwork at the MMC and what's required to help keep track of what's being investigated.'

Some company executives complain of a lack of transparency. They say that they are given little chance to challenge information provided to the MMC by third parties such as competitors and consumer groups. A director of one company still waiting to learn whether his deal has been cleared says: 'You don't get a dialogue with them, it's not an open debate. It's an inquisitorial system rather than a resolution system - that comes out particularly in the area of conditions. You don't debate the merits of doing something and I don't think that helps.'

Kingsmill is adamant that such criticism is unfounded. 'On the things I've been involved in, there is a considerable degree of rigour with which staff send information back to the parties, and to make sure that their views are accommodated within it.' And she adds: 'It's difficult to figure out how we can be more transparent - a lot of the information given is confidential, particularly the financial information. It's the holy grail ... that the parties know the scope of the enquiry, know what's being said. The point is not to get to the party in question, the point is to get to the truth.'

Another criticism often levelled at the MMC is that many of its members (of which there are currently 31) are academics and lawyers, far removed from the realities of business life. As our anonymous company director says: 'I really think that getting businessmen to look at cases would have a lot of advantages. Academics looking at it in isolation haven't got the expertise or acumen to understand it. You need a real world element to it.'

Far from it, says the MMC, producing a list showing that over a third of its current members have a business background. Sir Graeme Odgers, the MMC chairman, who is himself due to return to a business career at the end of the year, says he sees no advantage in having a commission drawn exclusively from business. 'I'm very much against putting only business people into the MMC. You have to have people with strong experience of the commercial world, but it's wrong to put the emphasis on a business background.'

Under the present system, once a case is referred to the MMC, the chairman allocates it to one of the three deputy chairmen and also picks between four and six of the members to work on the case. Much can depend on who is in the group, although there is also a full-time staff of economists, lawyers and other professionals. One of the strengths (or weaknesses) of the system, depending on how you look at it, is that it defies prediction - cases within the same industry are considered entirely separately, and often by a completely different group of people. Every fortnight the chairman and deputy chairmen meet with the head of staff and the senior legal adviser to discuss the ongoing enquiries to, in Odger's words, 'get a consistency of thinking'. But he is adamant that each individual case is decided by the group of members.

The process starts with the collection of written and oral evidence from which the staff prepare an 'issues letter' outlining to the companies the main areas of concern so they can prepare their case. This will then be followed by closed hearings during which the companies can make their submissions. Some have suggested that these be opened to the public, although Odgers is adamant that to do so would make those giving evidence more cautious. All the parties receive a transcript of the evidence and have a chance to object to any inaccuracies. For the companies involved, it can be an exacting process - the MMC can insist on seeing everything, from the minutes of board meetings to idle jottings. Indeed, for Kingsmill this is one of the attractions of the job of deputy chairperson. 'It's fascinating to get right into the heart of a company,' she says.

The aim of any MMC investigation is to decide whether or not a merger is against the public interest. It is competition which, says Odgers, is 'at the heart of the investigation'. Obviously the definition of what market the companies are operating in is crucial - a small regional bus company may be insignificant in terms of its share of the national market yet have a virtual monopoly on bus services in a particular town. In the past companies have argued successfully that their market position should be judged on an international level and that they should be allowed to merge in order to safeguard Britain's competitive position - the so-called 'national champions' argument so beloved of Michael Heseltine, when president of the board of trade under the last government. Odgers himself, a Heseltine appointment, is thought to be fairly sympathetic to this line although his Labour-appointed successor may be expected to be tougher. But as a DTI source puts it: 'When you're in a market dominated by very big firms, you've got to think big; and when a market's global, you've got to think global.'

The increasing number of cross-border mergers bring their own problems as the proposed merger of the cross-Channel ferry operations of P&O and Stena Line demonstrates. The deal was subject to investigation by no less than three competition authorities in France, the UK and Brussels - each with a different process. In fact both the French and UK authorities reported back in April but Beckett's office is now waiting until the European Commission has completed its own investigation. In one sense P&O and Stena Line were unlucky - the deal fell below the threshold for the fast-track procedure introduced by the EU in 1990 under which there is just one investigation by the European Commission. The turnover threshold was recently reduced from 5 billion ecu to 2.5 billion ecu. However, given the time the Commission has taken to reach a verdict on this and the British Airways/ American Airlines merger, it will be scant comfort for businesses considering future deals.

The main gripe about competition policy, whether it be in Europe or the UK, is that it in the end it comes down to politics. Only if the MMC finds that the merger isn't against the public interest, is the secretary of state obliged to accept its recommendation. Any reservations on the part of the MMC and she can do what she likes: ban it, clear it, set her own conditions. As a director of one large transport group, which has had a number of dealings with the MMC, put it: 'There's not a lot of point having experienced and professional people spend weeks, even months, looking at something, preparing a report and giving their recommendations, only for somebody else who, quite frankly, has not had time to consider all the issues, who probably has just read a summary of the report, overrule all that without having to give any explanation.'

Indeed, it's clear that most companies accept the need for the OFT and the MMC, but are frustrated by the political element of the process. One consultant, who worked on the joint bid by French companies Generale des Eaux and Saur for the Mid Kent water company last year, says he was amazed how, while awaiting a decision on the merger, journalists would ring him up checking out information they had been given about which way the MMC enquiry was going. The journalists had not been briefed by the MMC, which he thought virtually 'leak proof', but from political sources. 'It was impossible to keep track of what was going on because you never knew who was doing all this briefing,' he says. In the end the bid was blocked by the then trade and industry secretary Ian Lang.

A Bass spokesman echoes the sentiments of many when he calls for greater 'clarity and visibility' so that companies 'have a steer to guide us as to future policy and direction'. The one concession Beckett has made so far is to provide much more detailed explanations of her decisions in cases where a merger has been blocked.

Both Odgers and Kingsmill say there is still too little evidence to say whether Beckett is taking a different line, although Kingsmill adds: 'What you can say is that she has shown herself to be independent.' With Odgers on the way out, there is bound to be some change of style, although whether this leads to a tougher approach it is difficult to say. Some observers believe this is already happening. Says one: 'It doesn't do anyone any good if the secretary of state is always overruling the OFT or the MMC so naturally they start to ask, "What will the secretary of state do with this?" and modify their recommendations accordingly.' For businesses already struggling with the unpredictability of the process, that will be an unwelcome thought.

GOVERNMENT'S ROLE

POLITICS ADD TO THE UNPREDICTABILITY

Does business have more to fear from Margaret Beckett? Not at all, say her aides, pointing out that of the 83 merger cases between the election and mid-October, just five were referred to the MMC. The evidence to the contrary rests mainly on three decisions: the blocking of the Bass/Carlsberg-Tetley deal, her decision to refer National Express Group's takeover of ScotRail and Central Trains to the MMC despite the director general of OFT's advice that they be cleared and, most significantly, the referral of the Pacificorp bid for Energy Group to the MMC against the advice of both OFT's director general and the electricity regulator Stephen Littlechild.

Given that no less than seven other mergers in the sector had been cleared and that Pacificorp doesn't have any other UK energy interests, the decision sat uneasily with Beckett's statement that competition is still the primary consideration. In fact the referral was justified on the grounds that it might not be possible to maintain adequate regulatory control of the UK business once it is subsumed into the US parent and was seen as a sharp rebuke to Littlechild's handling of previous mergers.

Jonathan Rush, of law firm Lovell White Durrant, believes there is evidence that Beckett is less keen than her predecessors to accept undertakings - such as the divestment of parts of the acquired business or promises to keep price within certain limits - given by the parties to the OFT in lieu of a reference to the MMC. Referring to the investigation of the National Express/ScotRail merger, he points out that the MMC had already accepted undertakings from National Express in a similar deal last year.

'She (Beckett) could have adopted a similar approach and accepted undertakings rather than going to the trouble and expense of referring it to the MMC.' This, says Rush, has to be seen in the 'wider context of Labour's approach to government in general - they are keen to be seen to be even-handed, keen to make use of the mechanisms for public scrutiny'.

One lobbyist who is an expert in the field believes that a clear pattern is already emerging. Describing the difference between Michael Heseltine, the most pro-merger of recent incumbents at the DTI, and Beckett, he says: 'Heseltine took the MMC's recommendations and worked down - so if it recommended that a merger be banned he would clear it, if it recommended tough conditions he would water them down. Beckett takes the MMC's recommendations as the lower limit and works up from that, adding her own conditions or banning it outright.

MMC MEMBERS

BUSINESS EXPERIENCE ISN'T THE BE-ALL AND END-ALL

The 31 members are drawn from a range of different backgrounds. Those from business include:

- chairman Sir Graeme Odgers, ex-chief executive of Alfred McAlpine plc;

- from economics, Derek Morris, tutor in economics, Oriel College, Oxford;

- from accounting, Timothy Richmond, a chartered accountant and international chairman of Pannell Kerr Forster;

- from law, Jack Beatson, professor of English law, Cambridge;

- from consumer affairs, Gill Owen, chair of the Public Utilities Access Forum;

- from public sector, Patricia Hodgson, director of policy & planning at the BBC;

- and from the unions David Jenkins, general secretary of Wales TUC.

Ordinary members are paid £14,300 for a one-and-half day week; deputy chairmen £70,000-£85,000 per year pro rata; and the chairman a princely £120,000.

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