CPE :: Lesson 1



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Now read the article below. Then you will have to do two activities about it on the next page.


Anyone who glances at the financial pages of British newspapers is bound to come across the term "take-over bid". He may also read about "'mergers", which in practice amount to very much the same thing as "take-overs' The only difference is one of emphasis, since a merger suggests two companies joining forces for their mutual benefit, while "take-over" implies one company gaining control of the other whether the other company likes it or not.

Until recently it was Government policy to favour take-overs on the grounds that the bigger a company was, the stronger and more competitive it would be abroad, an analysis that may sometimes be justified but often overlooks disadvantages, above all because no one has worked out systematically why the majority of mergers take place.
What happens in simple terms is this. A company that wants to take over another one either offers to buy its shares for cash or offers some of its own in exchange or proposes a deal that is a mixture of the two. Generally the shares of the company being taken over belong to a large number of shareholders, who have the right to sell them. Frequently the terms of the bid satisfy the board of directors of the company bid for and in consequence they recommend acceptance of the offer. If they resist the bid, which may not always be because this is in the shareholders' interests but for personal reasons – in other words, because they are unwilling to lose their own jobs and authority – the two companies begin a propaganda battle, in the course of which they try to persuade shareholders either to part with their shares or to hold on to them. The battle goes on until the take-over company achieves its object of obtaining a controlling interest of more than 50 per cent of the shares, or withdraws. In some cases, where the companies involved are both very large, such bids may be referred to the Monopolies Commission, whose responsibility is to decide whether the merger would be in the public interest, or would concentrate too much of the market in the hands of a single group.
There are many reasons why a company may try to take over another. It may genuinely want to build up a strong combination capable of resisting foreign competition; on the other hand, it may simply want to eliminate a rival whose presence in the home market is embarrassing; it may see that another company, which is in trouble, because of financial mismanagement, has employees whose technical know-how would be valuable, or possesses resources that could be put to more effective use, or has a famous name that would boost the prestige of its own products.
On the whole the people who come out of such deals best are the shareholders, especially those whose shares are bought at a price above their market value. Those who are most likely to suffer are the employees of the company that has been taken over, many of whom have worked all their lives in the same place and whose emotions, as well as pay packets, are involved. Take-over bids almost always involve rationalisation of assets, which means closing down branches that duplicate the bidding company's own holdings and making many of the workers redundant.
It may be argued that if the company as a whole was inefficient, such workers would therefore have lost their jobs in any case, but their position is nevertheless unenviable. Unlike the shareholders, they have no say in the decision taken, and unlike the outgoing board of directors, they do not qualify for a "golden handshake," which is compensation paid to executives to speed them on their way.
The Government has now sponsored a university enquiry into the effects of mergers, which is a very sensible step. The results, when they are published, should indicate whether "bigger is always better."


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