Good news: merger mania gets the thumbs down

Comment

Just in case you hadn't already realised it, Margaret Beckett, President of the Board of Trade, yesterday made plain beyond any doubt that big rationalising mergers in British industry and commerce are not on. She strongly disapproved of merger mania while in opposition, and now that she's in power, she's determined to put a stop to it.

That in any case is the best way of interpreting her unambiguous decision to prevent Bass from merging its brewing interests with those of Carlsberg Tetley. Perhaps naively, the City had hoped that the responsibilities of office would persuade Mrs Beckett to adopt a rather more sympathetic attitude to these corporatist ambitions, or in the somewhat patronising language that industrialists like to use, that she would follow "a more realistic approach". Not a bit of it. Though some of her wilder flights of fancy on mergers policy have been toned down, she's clearly not changed her underlying view.

Even if Bass had been prepared to accept the suggested remedies put forward by the Monopolies & Mergers Commission, which actually seems rather unlikely given that they required the company to shed 1,900 pubs, Mrs Beckett was still going to block the transaction. I have to say that though I write about big companies all the time, meet their executives regularly, understand them as well as most journalists, and am as sympathetic as any to most of their aims and ambitions, I think Mrs Beckett is right about this.

She is right not just in this particular case, but more generally as well. Too often these big cost-cutting mergers are only an excuse for unimaginative and defensive management. Their underlying purpose is almost always the extension and consolidation of monopoly power, to enhance the barriers of entry and to price others out of the market in a predatory fashion. And their effect is nearly always damaging, not just to employees and customers, but sometimes even to the shareholders whose interests they are meant to enhance.

Like most big merger proposals that see the light of day, the arguments involved in this case are not nearly as black and white as I've just painted them. If they were, Bass would have been wasting its time in pursuing the merger at all, for it could have predicted with absolute certainty that the deal would fail on public interest grounds.

No, it is because the arguments are so much more subtle and complex than this, much more arguable, that Bass came to blow pounds 60m-plus of its shareholders' money on this ultimately fruitless frolic. That, and because the last government, in a piece of decision making that bordered on the negligent, allowed Scottish & Newcastle to acquire Courage, thus encouraging Bass into believing a copycat deal would get the same treatment.

Even the MMC accepted that the commercial logic of the merger was persuasive, In its absence, the MMC concedes, Carlsberg Tetley will be weakened to the extent that it cannot be expected to constitute a competitor approaching the strength of Bass or Scottish Courage. Furthermore, brewing is an industry in a state of flux. Intense competition has driven down wholesale prices quite steeply in recent years. Enforced reduction of the tied estate has resulted in increased efficiency in brewing and by sharpening competitive pressures to meet industry best practice in costs and quality of product, it has also already prompted quite widescale consolidation to achieve economies of scale in production.

The question is, however, where to draw the line. In the end, it hard to disagree with the intransigent view of David Newbery, Professor of Applied Economics at Cambridge. "Beyond some point," he says in the MMC report, "the benefits of increased concentration leading to cost reductions were more than offset by the increased market power of the brewers and their ability to raise prices." The Bass/Carlsberg merger is very definitely that point.

It is not an acceptable state of affairs for just three companies to control 80 per cent of the national beer market. The rest of the argument and debate is just irrelevant noise. Fortunately Mrs Beckett has had the sense to see this underlying truth. Her decision will set the pattern for other industries attempting the same kind of nonsense.

With just five days left before Gordon Brown's first Budget, speculation in the press over what might be in it has reached its traditional pitch of fevered imagination. Tomorrow's Sunday papers will bring a further bout of it. Some of it may actually be proved correct, but in truth I've yet to read a piece, either from the City or in the press, which feels like any more than well-informed guess work.

Some of these self-styled pre-Budget "leaks" - like the one in the Daily Mail that the Budget would be on 10 June - have already been proved wrong. Even by the press's usually deplorable standards of accuracy, that's going it somewhat. The wonderful thing about an early pre-Budget story, however, is that you can always claim you were right at the time but that ministers changed their minds. The closer you get to the event, the more incredible this line of defence becomes, and the more dangerous is the business of making up your story.

Funnily enough, more is known about the main elements of this Budget than usual. That's because several of its measures - the windfall profits tax, the welfare-to-work proposals, and the changes to VAT on fuel - have already been announced. However, this does not seem to have in any way limited the game of "let's pretend we've got a scoop" the press likes to play just before a Budget. Even the more reliable newspapers have already been stung by it.

The FT, for instance, has given odds of 4:1 against the abolition of tax relief on medical insurance for the over 60s. Very responsible that - to make it clear that there is only an outside chance of this happening. The trouble is that if there is one thing we can be sure the Chancellor will do, it is this. So let's all get down to the betting shop quick. Mr Brown announced his intention of doing this long before the FT article.

Then there was the Telegraph "scoop" that Mr Brown is going to cut the rate of VAT on draft proofing and loft insulation as part of a proposed package of green measures. In the circumstances this was not a difficult story to write, for that too, I'm afraid to say, has already been aired before.

Never mind, there's plenty else that has appeared that won't happen. So much so that the Chancellor's special advisers plan a press party in the aftermath of the Budget at which prizes will be handed out for the most spectacular boo-boos. There's already a clear favourite, apparently, though chances are it will be bettered by tomorrow morning.

And finally, for the most interesting part of the Budget of all - what the Chancellor will be drinking at the dispatch box. Highland Spring last week put out a statement welcoming the news that he'll drink its mineral water during his 90-minute speech (yes, really, I've had it from a very good source that it's an hour and a half). Unfortunately, this was another speculative story. Personally I'm putting my money on Irn Bru.

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