Atik Selvi Anggraeni (504115)

Summary Chapter 8
Regulating Market Power
8.1 How and why firms grow. Mergers and acquisitions. Diversification as a competitive
strategy
1. Organic Growth
As a business makes profits its directors plough them back to finance further growth,
for example by renting bigger premises, hiring more staff, updating computers
2. External funding
Trade credit is another source of external funding, when a business is allowed, say, 30
days credit before it has to pay its bills. If, long term, it does really well a business
may raise money by issue shares.
3. The nature of mergers and acquisitions: rationale
a. Mergers
A merger occurs when two companies willingly come together, normally as equal
partners, to form a new business
b. Acquisitions
Also known as take-overs, these occur when one business, the predator, seeks to
gain control of another, the victim.
4. Horizontal and vertical integration
Mergers and acquisitions may be either horizontal or vertical in nature, or
conglomerate diversification.
5. The rationale for mergers and acquisitions
a. Mergers and acquisitions are seen as ways to reduce costs.
b. Another reason for mergers and acquisitions is the desire to grow bigger and more
profitable, to compete more effectively in existing and potential markets.
c. Synergy occurs when it is beneficial to combine two or more activities rather than
undertaking them in isolation.
d. Research and Development expenditure synergies
e. A merger or acquisition may be seen as the means to restructure a business to
make it more competitive and efficient.
f. A merger or acquisition may seek to promote co-operation.
g. Diversification occurs when a business moves into new areas of activity by
acquisition or merger.
6. How effective are mergers and acquisitions?
The bulk of merger theories suggest that profits should be increased as a consequence
of the merger or acquisition. Yet analysis of US mergers finds that, for the majority,
there is a small but significant decline in profitability post merger.
7. Competitiveness and competition
The former is about the ability of a business to compete effectively with its rivals on
the grounds of price, quality of product, marketing, delivery times, after sales service
etc.
8. Joint ventures
This may be a separate business set up by say two companies, each of the founders
owning part of it. This may enable them to move into a new market, share R&D costs,
and cut distribution costs by sharing networks.
8.2 The need for legislation – monopolies, oligopolies and market failure
There are problems with measuring just how big the social costs of allocative inefficiency
are, but they are undoubtedly big enough for concern and hence for governments to adopt
policies to promote competition. These are discussed in the next section.
8.3 UK policy – the Office of Fair Trading and the Competition Commission. Regulating
privatised industries
1. The Office of Fair Trading
The DGFT also chairs a panel to gather information on proposed mergers falling
under the legal limits.
2. The Monopolies and Mergers Commission
Once the MMC completed its report the Director General then advised the Trade and
Industry Secretary as to what actions should be taken.
3. The Competition Commission
It has strengthened the OFT substantially, giving it considerable powers of
investigation and punishment, particularly where there is price fixing.
4. The privatised industry regulators
Although covered by the MMC and the OFT, when a number of the nationalised
industries were privatised, specific industry regulators were established to ensure that
these newly created private monopolies did not exploit their new positions.
8.4 The role of the EU – policies; state aid and subsidies; public procurement
Regulation 4064/89
This regulation, which supplemented the competition legislation as defined by the Treaty of
Rome, seeks to prevent the development of dominant positions by European businesses,
whether by mergers or joint ventures. It sets limits on aggregate world-wide turnover (5
billion euros) which, if exceeded, requires prior clearance from the European Commission.
8.5 Scottish Widows carried off by Lloyds–TSB
1. Scottish Widows
In mid 1999, the 184-year-old insurance company Scottish Widows. Scottish
Widows had announced that it was considering shedding its mutual status by floating
the company on the stock market or by a merger with another financial institution.
2. Lloyds–TSB
Lloyds–TSB had been looking to acquire another financial services provider for
some time and stated in its annual results earlier in 1999 that it felt share prices of
financial institutions had fallen sufficiently in value for an acquisition to be feasible.
3. The Merger
The acquisition of Scottish Widows by Lloyds–TSB created an organisation with
funds under management of £80 billion, and 17 million customers, and made
Lloyds–TSB the second largest life insurance company in the UK after the
Prudential which has £150 billion under management. It also became the UK’s
largest bancassurer