6. The reasons why government might support or intervene in takeovers and mergers

Takeovers and Mergers are common ways for company to expand. A merger is where the companies voluntarily join together to benefit from the possible advantages of working together, however a takeover is when one company will buy another company, this will be done by buying 51% or more of the company shares to gain control, this will usually be to use its expertise and assets in order to benefit their original company. Governments can either support a takeover or intervene to stop it. If the government feel that the takeover will be good for/ have no effect on the market as a whole then it will let the companies join together, this is called a free market economy where all company has complete control over what they do and how much they charge. However if the government feel that the takeover will result in a market failure, then they will intervene to stop the companies from joining.

One reason that the company would support a takeover and not intervene is if the takeover would be to prevent the failure of a company, which has a large effect on the country. This is the case for the Lloyds who took over Halifax Bank Of Scotland (HBOS). HBOS was in trouble due to their debts of around 11 billion pounds and Lloyds took over the company for a final price of 12 billion, therefore saving HBOS from failure and minimising damage to the UK banking sector. Normally this deal would not have been allowed due to it now being a monopoly in the savings and mortgage markets, Lloyds banking Group now controls nearly a third of the UK market and half of the Scottish market. However, because the government wished to help maintain the stability of the banking sector they agreed to not intervene with the takeover and decided to use the ‘National Interest’ clause in the Competition law to allow the takeover to go ahead. If HBOS was to go into liquidation then this would mean high levels of unemployment, and reduced number of tax’s that the government are receiving. Reduced tax’s will mean that the government has less  money to use and the higher unemployment rates means they will need to pay out more money than they were previously to give benefits to people that have been made redundant. In addition to this HBOS lends money to small businesses and helps to increase competition in various markets, however if the bank was to go into liquidation then they would no longer be able lend money to small business in an attempt to help to country out of the recession. However by allowing the companies to merge, the government was taking on a risk of Lloyds abusing the monopoly power that they now have.  Lloyds now has a large share of the UK markets and they could abuse this power by setting mortgage repayment as higher than they were before the merge, and because of the lack of choice in the market, the customers will need to pay this price to get the mortgage that they want.

On the other hand, one reason that government might intervene with a takeover is to prevent a company from owning the majority of its relevant market, in case they were to abuse the power that the takeover would result in them having. An example of this is the News Corporations takeover bid of BskyB, which would mean that the joint companies would be in control of a large amount of the media sector. Previous negativity around News Corporation due to a phone hacking scandal means that the government had worries that they would misuse the dominance that they have over the media sector to suit the companies own needs, and this sparked the government to request that Ofcom  create a report analysing the potential takeover. Ofcom reported that after taking over BskyB News Corporation would reach 55% of news readers and could possibly use BskyB’s services for the good of News Corporation.  Rupert Murdoch the owner of News Corporation may use the power that he has to increase prices excessively, this will mean that he could gain a higher profit margin at the expense of the general public.  However if the government had allowed the takeover to go ahead, then it might have actually had an opposite effect. News corporation might have used the merge to lower prices and pass on this saving to the customers. They also could have used the money savings to increase innovation within the companies, this means that customers will be presented with new and innovative things in which would make the takeover worthwhile. 

In conclusion it is down to the government to decide if they will try to intervene with a takeover, this decision will be influenced by the possible positive and negative effects that the takeover will result in. Most take overs which involve small companies will not be seen as a big concern by the government, however it is the large companies which can have an effect on whole market that the government will take into consideration. They will need to weigh up each argument and decide which will have the most of effect on the economy, and if this effect will be a good one. They will base their opinion on what the companies as one will benefit the general public, if the companies are likely to abuse the power, by increasing prices excessively or making large redundancies, then this means the government will do everything in their power to stop the takeover from going ahead.  One of the main powers that the government can use to stop a takeover from going ahead is the competition commission, the competition commission will look into any mergers which the Office Of Fair Trading refers to them, they will investigate the merger and look to see if the merge will lessen the competition in that market, the only exceptions they will make is if merge will raise pubic interest issues, such as with Lloyd’s takeover of Hbos. However it is unsure whether the government will actually use their powers such as the competition commission to stop the takeover from happening, or if they simply use it as a preventative to try and deter large companies from joining together.  Most large companies might not attempt to join together on the basis that they presume they will be stopped, this means that the government has power over the company owners without having to actively intervene.