July 11, 2017    4 minute read

Competition and Markets Authority: What Goes Into Managing Mergers?

Winners and Losers    July 11, 2017    4 minute read

Competition and Markets Authority: What Goes Into Managing Mergers?

The Competition and Markets Authority (CMA) is a non-ministerial government department that ensures markets function well for consumers, businesses and the economy. The CMA’s mission is to observe situations where there is a chance of unfair treatment or market problems.

One of its key responsibilities is to investigate mergers in the UK. Note that the CMA does not assess all mergers; some are assessed by the European Commission, particularly mergers of businesses within the EU or ones with global revenues above a certain threshold.

A More Focused Change

The CMA is reducing the number of mergers it investigates in smaller markets. Only important enough merger references will be warranted;  the figure for markets has been raised to over £15m from over £10m. Also, the figure for markets considered not important enough to warrant a merger reference has been raised from below £3m to below £5m.

What Does This Mean?

Sheldon Mills, Senior Director of Mergers at the CMA, said:

“It’s important that we focus our resources on those mergers with the most potential to harm customers.”

The number of investigations will particularly reduce mergers where the cost is not worth the effect it has on the market. This means the CMA will become more cost and time effective, placing more focus on the mergers of larger businesses, which bear more risk.

Smaller businesses will merge more easily, without losing a lot of revenue, paying legal fees. The larger combined company should deliver a better financial performance for the shareholders and greater performance in the markets through synergy & economies of scale.

However, there is always a risk of failure when considering the culture clash and the integration the operations of two businesses; which is why only around 50% of M&A deals are successful overall. Despite this, by allowing smaller businesses to merge, the CMA will give them the opportunity to dominate their sector and have fewer rivals.

A Promising Merger

The CMA investigated the desired merger on 22 May 2017. It cleared it’s Phase 1 investigation on 22 June 2017 but has yet to clear the Phase 2 investigation by 18 July 2017. Once the deal is completed, Standard Life Aberdeen Plc is set to trade on LSE (14th August 2017).

Speculation was rife, on the 19th of June after it was released that 98.6% of Standard Life and 95.8% of Aberdeen Asset Management shareholders voted to approve the merger. This caused Aberdeen Asset Management’s stock price to fall, which indicated uncertainty amongst investors despite the approval of shareholders. A possible reason for this is that Standard Life shareholders would own 66.7 percent of the combined firm; this means that Aberdeen shareholders’ stock, is worth significantly less, hence the plummet in stock price.

After the deal closes, investor confidence should increase and so the share price of the combined entity should subsequently increase, particularly after Simon Troughton, chairman of Aberdeen said:

“This deal opens up significant opportunities across all facets of Aberdeen’s business and is an important step towards realising the company’s ambition of creating a world-class investment business with a truly global footprint.”

The above quote highlights the main reason why mergers occur: it allows two companies to combine their strengths, have a larger market share and greater dominance in the investment sector. The merger between Standard Life and Aberdeen Asset Management is an instance where this will hopefully hold.

Conclusion

Mergers are made to please shareholders and generate more revenue. Many mergers have succeeded like (Orange & T-Mobile, 2010), while others have failed (AOL & Time Warner, 2009).

The CMA is the first hurdle that merging companies must pass. The CMA’s assessment ensures that mergers do not gravely decrease competition and lead to worse outcomes for consumers. Later, further complications may arise such as a culture clash & failure to integrate operations.  However, if these problems are resolved, the merged business should have a brighter future in the financial market.

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