Lower prices mean a cosy club with fewer players
Well, well, some politicians never cease to amaze us. Just when you thought all was lost with competition law and practice in this country, we have Wayne Swan standing up last week for a more competitive market place by prohibiting the acquisition of ASX Limited (ASX) by Singapore Exchange Limited (SGX).
That was very good decision and needs to be applauded. Now ,Swan has let the side down in the past by allowing bank mergers to go ahead - thereby destroying competition in the banking sector. But on the ASX and SGX deal he certainly did the right thing.
Of course, big end of town interests and their advisers and other supporters will criticise Swan, but such criticism needs to be dismissed for the simple reason that those big end of town supporters have an obvious vested interest in more mergers and acquisitions.
Mergers and acquisitions make those involved lots of money at the expense of competition and consumers. Let’s not forget that a key purpose behind mergers and acquisitions is the removal of competitors.
More mergers mean fewer competitors. Fewer competitors mean higher prices, and in turn that means higher profits. It’s the prospect of these higher prices and profits that helps drive merger activity.
Think about it. If you are a CEO of a major company and you are under pressure to show sales and profit growth, what’s the easiest way to achieve that?
Quite simply, identify one of your competitors; buy it out and, hey presto, you have immediate sales and profit growth. No real hard work involved, just a bit of “strategic” thinking and some good advice from those ever present and helpful advisers.
Once you complete the merger, you have one less competitor and all those so-called “synergies” to enjoy. Synergies may mean lower costs from economies of scale arising from greater sales. That sounds great doesn’t it?
Well, lower costs may, for example, be secured from the now merged larger business screwing down suppliers. Remember that the merged entity will have increased market power which can obviously be used to demand better wholesale prices from suppliers.
What if however local suppliers can’t be screwed down any more? Well they go out of business and we get more imports or less product choice. That’s what is happening with fresh milk right now.
Is it any wonder that we are seeing more TV advertisements for long life milk? Makers of long life milk see an opportunity with fresh milk coming under threat and they are building consumer awareness of long life milk, which of course can be imported.
Now there will be those that will be excited at the prospect of suppliers being screwed down. Yes, lower costs do sound appealing, but it’s always a matter of perspective.
If you are the company enjoying lower costs after a merger, that’s great news for shareholders and naturally for any performance bonuses tied to lowering costs.
For consumers, any lower costs arising from a merger are only good news if consumers get the benefit of those lower costs through lower retail prices.
Therein lies the challenge from a competition and consumer point of view. Mergers lead to fewer players and fewer players tend to act as a cozy club keeping retail prices higher than they would have been if there had been more competition.
In short, mergers remove the very competition needed to keep retail prices as competitive as possible.
As more competitors are taken out through mergers and acquisitions there are fewer competitors to ensure that any lower costs from any merger activity are actually passed onto consumers.
If the lowers costs are not passed onto consumers, they are simply pocketed by the remaining market players.
In this way mergers and acquisitions become another game played, especially by the end of town to increase their market share, profit margins and retail prices.
Of course, let’s not forget the big end of town lawyers and other advisers all of which stand to make substantial fees from merger activity.
Now, there’s no problem with people striving to make money as that lies at the heart of our free enterprise system.
The real problem is that these advisers have a financial, and therefore, vested interest in mergers proceeding and so when they are critical of Swan’s decision to stop the ASX and SGX deal those criticisms should be dismissed as merely self interested.
Naturally, Swan will be criticized for his decision to stop the ASX and SGX deal but at the end of the day unless Swan and the Federal Government stand up for competition, then consumers and the national interest will suffer.
On the ASX and SGX deal Swan is right to object. The ASX is strategically important to Australia given its key role as our primary equities and financial derivatives exchange.
Equities and derivatives trading are obviously very important to Australia’s interests and a tie up with SGX would undermine both the independence of the ASX and the level of competition in international equities and derivatives trading.
Clearly, a reduction in the number of exchanges globally brings with it the danger of financial instability as financial risk is concentrated in fewer and fewer hands.
Less exchanges also runs the risk of the remaining exchanges being able to the force up the price of services offered by the exchanges.
By preventing mergers that adversely impact on competition we are simply giving consumers and, in turn, the national interest the priority they deserve.
An effective merger policy is undoubtedly a corner stone of any effective competition law framework. Merger policy involves a delicate balancing act.
Indeed, mergers should be allowed only to the point where any lower costs or other synergies from the merger will be passed onto consumers as a result of there being a sufficient number of other competitors left in the market to keep the merged entity honest.
Allowing mergers to occur once we are left with only a cozy club of less than a handful of big players is extremely dangerous and clearly threatens the consumer and national interest.
Let’s hope that Swan builds on last week’s good work on the ASX and SGX matter and moves to toughen up our competition laws and the ACCC.
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