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Until recently it was Government
policy to favour take-overs on the grounds that the bigger a
company was, the stronger and more competitive it would be
abroad, an analysis that may sometimes be justified but often
overlooks disadvantages, above all because no one has worked out
systematically why the majority of mergers take place.
What happens in simple terms is this. A company that wants to
take over another one either offers to buy its shares for cash
or offers some of its own in exchange or proposes a deal that is
a mixture of the two. Generally the shares of the company being
taken over belong to a large number of shareholders, who have
the right to sell them. Frequently the terms of the bid satisfy
the board of directors of the company bid for and in consequence
they recommend acceptance of the offer. If they resist the bid,
which may not always be because this is in the shareholders'
interests but for personal reasons – in other words, because
they are unwilling to lose their own jobs and authority – the
two companies begin a propaganda battle, in the course of which
they try to persuade shareholders either to part with their
shares or to hold on to them. The battle goes on until the take-over
company achieves its object of obtaining a controlling interest
of more than 50 per cent of the shares, or withdraws. In some
cases, where the companies involved are both very large, such
bids may be referred to the Monopolies Commission, whose
responsibility is to decide whether the merger would be in the
public interest, or would concentrate too much of the market in
the hands of a single group.
There are many reasons why a company may try to take over
another. It may genuinely want to build up a strong combination
capable of resisting foreign competition; on the other hand, it
may simply want to eliminate a rival whose presence in the home
market is embarrassing; it may see that another company, which
is in trouble, because of financial mismanagement, has employees
whose technical know-how would be valuable, or possesses
resources that could be put to more effective use, or has a
famous name that would boost the prestige of its own products.
On the whole the people who come out of such deals best are the
shareholders, especially those whose shares are bought at a
price above their market value. Those who are most likely to
suffer are the employees of the company that has been taken over,
many of whom have worked all their lives in the same place and
whose emotions, as well as pay packets, are involved. Take-over
bids almost always involve rationalisation of assets, which
means closing down branches that duplicate the bidding company's
own holdings and making many of the workers redundant.
It may be argued that if the company as a whole was inefficient,
such workers would therefore have lost their jobs in any case,
but their position is nevertheless unenviable. Unlike the
shareholders, they have no say in the decision taken, and unlike
the outgoing board of directors, they do not qualify for a "golden
handshake," which is compensation paid to executives to speed
them on their way.
The Government has now sponsored a university enquiry into the
effects of mergers, which is a very sensible step. The results,
when they are published, should indicate whether "bigger is
always better." |
