In the City

Making sense of mergers

Jock Bruce-Gardyne

A couple of months back in these columns I suggested that a lowly parliamentary Under-Secretary might be facing the toughest assignment of all Mrs Thatcher's colleagues: Alex Fletcher, in charge of competition and consumer in- terest at the Department of Industry and Trade. Judging by a Financial Times con- ference I presided over last week, that was not too much of an exaggeration. Those present from the City and from industry hardly had a good word to say for the exist- ing system of supervising competition: 'ar- bitrary' was an epithet often heard. That most eminent of Tory backbenchers, Mr Edward du Cann, dubbed it 'quixotic', and called for sweeping reforms to transform the Director-General of Fair Trading into a 'policeman' of abuses of market power, and the Restrictive Practices Court into a 'judicial review' where prima fade evidence of abuse had been identified; as for the Monopolies and Mergers Commission, that, it seemed, should go the way of all flesh.

Meanwhile, from the other side of the Political spectrum, David Owen was also calling for drastic reform, though in the Opposition direction. In the latest edition of the lEA's publication Economic Affairs he calls for 'a small Ministry for Competition to bust open private and public cartels. We should see the demerging of large private corporations, the curtailing of the powers of the multinationals. ... '

Mr Fletcher might be forgiven for con- cluding that when `those behind cried "For- ward", and those before cried "Back" ' the machine must have got it about right. That would be dangerously complacent — as indeed he himself tacitly conceded when he addressed the conference. There had been trailers suggesting that he would take' the opportunity to unveil his own plans for reform. That he refrained from doing so was, perhaps, understandable: he had not even had a chance to clear his thoughts with his new boss Norman Tebbit. But competi- tion policy was indeed, he assured us, under urgent review.

'Monopolies as defined by the Act,' Edward du Cann asserted, 'are an in- escapable feature of mature markets for goods and services in an industrial society.' In the sense that some suppliers will have more than 25 per cent of their markets (one of the criteria applied by the Act), this is no more than a statement of thF obvious. But

as Sir Godfrey Le Quesne of the Monopolies Commission reminded us, that body has yet to receive a single merger referred to it on grounds of market share. Every single reference to date has been made on the ostensible grounds that the combined assets of the group resulting from a proposed merger would exceed a base figure which is currently £15 million. This is a catch-all provision which is plainly long overdue for substantial upward revision -- to £50 million at least. Alex Fletcher con- ceded the point — if not the figure.

But that, on its own, would hardly make a dent upon the grievances expressed last week. Most references are already well in excess of £50 million. The real complaint was that the concept of 'public interest' has come to cover a multitude of sins — regional policy (Chartered/Anderson Strathclyde; Royal Bank of Scotland), employment (Anderson Strathclyde again), export performance (Davy/Enserch), or even, seemingly, plain distaste for a par- ticular tycoon (Lonrho/House of Fraser — very much in Edward du Cann's mind). In- deed, as Mr du Cann pointed out — and as we have been reminded once again by Sir Denis Mountain's response to the Allianz bid for Eagle Star — the Commission is coming to be invoked as a sort of surrogate 'White Knight' by companies in receipt of an unwelcome approach (would Mr du Cann deplore a reference of a bid for Lonrho from — improbable quarter, no

doubt — Israel, one wonders?) • Sir Godfrey Le Quesne put up a robust defence of his Commission. One of its most vital characteristics, he pointed out, was its complete independence. Well, up to a point, Lord Copper. Perhaps the Commis- sion really did adjudicate on the rival bids for Royal Bank of Scotland without a thought for the Bank of England's public opposition to the Hong Kong Shanghai bid; but if so, it is a little hard to believe that that was the Bank's intention. Be that as it may, while restriction of competition may still be the universal consideration in every reference, it does seem to have been slip- ping down the scale of priorities.

Moreover the strongest reservations ex- pressed last week related not so much to what happens when a bid reaches the Com- mission, as to what happens before it gets there. Why is Sotheby referred, and Thomas Tilling not? (Perhaps Thomas Til- ling didn't have the right friends: but that is

hardly a consoling answer.) The Deputy Director of the Office of Fair Trading assured us that they are always willing to be approached for confidential advice by those contemplating putting in a bid — although they may not always be prepared to give it. But as one merchant banker commented to me afterwards, 'if we obtain confidential. advice from the OFT are we then had up for insider dealing?' It is a fair question. Fur- thermore, notwithstanding the hoary old principle of ministerial responsibility, the present set-up does rely heavily on civil ser- vice discretion — not least because the OFT is accustomed to going the rounds of inter- ested departments in Whitehall before it comes up with its advice to Ministers.

Edward du Cann's solution would have the merit of sweeping these uncertainties away. Others would appear in their place. As things stand at present company X may bid for company Y with a view to securing price leadership in a crucial product market. It may be referred to the MMC: it may be rejected. But if it goes through it can assert price leadership without fear of consequences. Under the du Cann scheme it could be confronted with a visit from the OFT which could lead, presumably, to compulsory unwinding of its merger. Whether that would be any more popular With 'practical men in the market' I rather wonder. Moreover the OFT's attempts to police conditions which the MMC some- times attaches to its clearance do not exact- ly inspire confidence that this would be all beer and skittles.

In the end, though, a different balance is always going to have to be struck between considerations of employment, regional diversity, and — above all — domestic con- sumer choice on the one hand, and ability to compete in international markets on the other. To Edward du Cann 'the capacity to compete worldwide ... will require increasing amounts of capital per unit .

high levels of concentration in such markets are inescapable.' That strikes me as a rather oldfashioned viewpoint. One of the speakers at last week's bunderbust was Roger Brooke of Candover. He reminded us that he had started his business career with the old Industrial Reorganisation Cor- poration in the 1960s, when the responsible

Minister (Mr Benn, no less) had as his slogan 'if it moves, merge it'. Now he was organising management buy-outs. Is not his present occupation more respectable;?

Sir Godrey Le Quesne reminded us that the Commissioner's remit was to ascertain whether a putative merger would diminish competition. In theory it could, he pointed out with perhaps a touch of yearning, be re- quired instead to satisfy itself that a putative merger had positive virtues to com- mend it. Mr du Cann would throw up his hands in horror: and many of those present last week would no doubt join him. But not Dr Owen evidently. And not necessarily, perhaps, Mr Fletcher.

As for certainty and an absence of ultimate ministerial discretion, that, I fear, is far too much to ask for.