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).

Have you seen more ads for longlife milk lately? Photo: Lyndon Mechielsen.

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.

Most commented

7 comments

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    • craig says:

      07:24am | 13/04/11

      God bless chocolate breakas

    • Andrew says:

      08:29am | 13/04/11

      While Swan was right to object, I think it’s more to do with it being a bad deal then any competition situation.  In fact there will soon be more competition to the ASX (which has had a monopoly until now?) with the new exchange opening soon.
      If it was more of a merger and less of an acquisition, and allowed local businesses to more easily list overseas (and hence get foreign capital), then perhaps that would be a more convincing argument?

    • Luke says:

      01:24pm | 13/04/11

      Nice article, pity there’s no comments about it.

      The government/ASIC/ACCC/whoever else has allowed this country to be ruined by multiple mergers and acquisitions. Remember when the Commonwealth Bank was a government business? If you’re too young for that one, then try blaming successive incompetent governements of selling off critical services (electricity, water etc) and how that’s screwed everyone’s bills.

      The NBN is another instance of gov-sponsored monopoly, and you’d have thought they’d learn their lesson after the Telstra crap that we’ve been put through.

      Can the useless pricks in parliament (of both corrupt and incompetent parties) please explain why we’re subject to only 4 banking and 2 retail giants who are all colluding to make sure they can continue to post multi-billion dollar profits at the expense of ‘the little people’?

    • Knemon says:

      03:00pm | 13/04/11

      I agree Luke, with all your sentiments - it sometimes surprises me what Punchers comment on and what they don’t, I do wonder what makes them tick?

    • Darragh Scully says:

      03:10pm | 13/04/11

      No milk today, my love has gone away The bottle stands forlorn, a symbol of the dawn

      Yet Kenesian philosophy tells us all otherwise in that we should not interfere with the market what so ever. So whats the catch right here. Its funny how not many Punch readers are very interested in Economics.

      I am all for regulating the players. Make sure they are not manipulating prices and that they are abiding by human rights agendas. This is the kind of dilema we are faced with when it comes to Important issues such as Human Rights and International relations, something that Australia itself has not got the best record in. On one hand we go into East Timor with reference to the Human Rights abuses the Timorese experience and then on the other hand we do buisness with China who have probably the most deplorable human rights record. We cant live with out the money, the prosperity. What a dillema. Are the Chinese behind the push to move the ASX into the hands of the Singapore exchange? Maybe the Control Freak nature of our Society is to blame for this dillema.

      I dont know you tell me?

    • Graeme says:

      06:21pm | 13/04/11

      Sorry Frank but this comes over as a very ordinary effort.  Spend more time thinking of your line of attack.  Milk as an analogy for the ASX merger proposal?  Really?

      I thought Swan’s decision was hopeless, pretty much standard for him.  You want to stop deals because the big end of town would make money out of them?  That sounds awfully like envy to me.  I think the test should be whether the deal harms the national good rather than requiring proof of a national good as you seem to wish.  We should all be free to do the best deal we can as long as no one else is trespassed against surely.  None of this nanny state nonsense please.

      Swan seemed to worry about size for some reason.  What is this, a Singaporean insult to Aussie manhood or something?  Its rubbish.  It is unusual but not unheard of for smaller entities to launch bids for larger rivals, even without reverse takeovers.  The Singaporeans offered a good deal, ASX shareholders should have been left to consider it on its merits.  The SGX price bounced strongly after the knockback, if you need confirmation.

      Swan claims to have been worried about employment here.  I have read but can’t confirm that this has not been an issue with other tie-ups.  Swan doesn’t care, any old flannel will do for his supporters.  He is happy to consider a tie-up with a larger Stock Exchange.  Surely there’d be a bigger risk to employment there if employment was a real issue.

      Swan is concerned about someone else making money out of our superannuation savings.  If that were a real issue he could have bought shares in the merged vehicle at a discount once the market had decided SGX had overpaid.  Swan doesn’t want to, nor does he want anyone else to have that opportunity.  Why the hell not?

      Your concerns about reduced competition are fanciful.  Time to get real.  Chi-X is on its way and others are likely to follow.  SGX was never going to launch a rival exchange here on its own surely.  The Singaporeans do have a large stake in Chi-X however.  ASX must sit there and have its market nibbled away without being free to act to preserve shareholder value apparently.  Is anyone else reminded of Telstra?

      Face facts, the real reason Labor didn’t want the merger was because they would have had to get off their arse and spend political capital on an issue they really didn’t care about while warding off the slings and arrows of a populist opposition who should have known better.

      The national interest be damned.  This was all about what was best for the ALP.  Just pathetic.

      Thank you for the opportunity to vent.  I became a small ASX shareholder today for the first time ever.

    • Meh says:

      06:44pm | 13/04/11

      The ASX is small potatoes. There’s nothing about our computers that is particularly better than Singapore’s computers, except maybe ours handle fewer transactions of lower value and charge more for the privelage.

 

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