Blog 6: Merger and Acquisition Activity

Last week, we talk about advantage and disadvantage FDI. Actually, FDI has divided into two activities, they are Greedfield investment and international merger and acquisition (M&A) activity. Greenfield investment is the companies enter to new market by buying the land, building the factory, or doing it by joint venture. M&A activity is totally different with Greedfield investment. It is two organizations agree to join together and pool their assets into a new business entity called merger, and joining of two unequal partners by agreed acquisition or hostile acquisition called acquisition.

In my opinion, if company want to enter the new market quickly. M&A is better choice for company to enter the new market. For example, Oil companies don’t have to build up power plant for 4-5years. Also, M&A may let both host and invest side to apply superior managerial skills or obtain unique technical capabilities by sharing their knowledge.

However, M&A activity would link to economic uncertainly that is political risk. We can see that from 2000 to 2002, the US and World recession fear reduce corporation activity. As the result, M&A activity would slowdown because of the company focus on its own core business or decline in market confidence. Therefore, M&A activity would be affected by economic stability.

M&A activity is seeking for sector concentration which means sector have to concentrate in same industries to improve concentration. Why? We know that there are petrodollar recycling between oil industry and bank. Why doesn’t company diversify itself for example oil industry acquires Bank? It is because it will use large resource (capital) to acquire bank that affect shareholder maximization and create monopoly problem in market.  Therefore, M&A activity is seeking for synergy that resource available to the merged businesses which can be more effectively exploited.

However, it is only the theory of M&A from the lecture, how about the real world? Even industry try to acquire same industry, it would still create monopoly problem in the market. Also, there are regulation from the government and pressure from the public while the corporation executes M&A activity. Therefore, the corporation has to face those problems that would not mention from the book.

Let’s look at hot topic on The News Corporation bid BSkyB. News Corporation plans to bid BSkyB for take over the rest of 61% of BSkyB from June last year. News Corporation offered 700p a share for BSkyB, valuing the company at about £12bn. Sky rejected the offer in June. (BBC, 2010)

The problem has come out. It always creates controversy on the media ownership.

“Sky's competitors (the BBC, BT ) complained the move could have serious and far-reaching consequences for media plurality". (BBC, 2011)

Which mean if the News Corporation bid BSkyB successfully, it would bring too much power to News Corporation (which owns the Sun, the News of the World and the Times and the Sunday Times) which may create monopoly problem in the media industry. That’s why media regulator Ofcom has to look at the potential impact of the deal on media plurality. It lets public concern about the independence of Sky News after News Corporation post acquisition that dominance of the media landscape.

Therefore, on 3^rd of March, Rupert Murdoch (CEO of News Corporation) has offered to dispose most of Sky News Channel to allay concerns about they have too much power in media industry. Also, News Corporation’s announced that the board of Sky News would have a non-executive, independent chairman and a majority of non-executive, independent directors. (BBC, 2011)

The News Corporation would want to complete the takeover at a price as fast as possible(700p at first bid) because it is a risk that the value of BSkyB could go up since there would be other competitors who want to bid BSkyB too. Just like the example we learnt in London Stock Market bided by Deutsche from 2004 to 2005. And NASDAWQ also launched a bid that would increase the share price of LSE.
The government approve for News Corporation bid to take over BSkyB on 3^rd of March. However, the share price has risen up to about 850p when government approved News Corporation to bid BSkyB.

It is a huge change to the UK media industry. It is because the merge of News Corporation and BSkyB would reduces revenues of all rivals. Also, the share price of BSkyB is now above 800p, So News Corporation have to raise its offer that mean about £2bn extra cost for takeover BSkyB.

Where does the cost (£2bn extra cost for takeover BSkyB) back from? It may back from reducing the cost of operation; it may back from generating more profit such as increase the charge for the channel. But as we know, it would mostly pass back to the public finally.

Also, there must generate more profit after News Corporation takeover BSkyB, and News Corporation would reinvest the money to its own company for improving digital technology to provide high definition TV for customer. It means that it would increase the competitive with other media organizations. And News Corporation must use that unique technology in other countries to generate profit. As the result, News Corporation might invest in other countries for more profit.

Are this M&A activity beneficial to UK’s media industry? It would depend on the News Corporation long term strategy. However, we might predict the answer by core concept - Maximization Shareholder Wealth.

After reading the news of The News Corporation bid to take over BSkyB. The process of M&A activity is not only seeking for synergy anymore. There are some ethical problems due to the M&A activity and company have to solve it.

Will the company monopoly market because of too much power? Thus, public have fewer options? Will public therefore suffer from it?