Big business just doesn’t get it. At the Australian Financial Review’s Chanticleer lunch in Melbourne on Wednesday, some of our business leaders spent a lot of time urging their peers not to attack one another, or to unite on issues and policies (while admitting that a tax cut was crazy optics at the moment).
But what these business leaders didn’t face up to was the growing lack of competition in Australia – four big banks and a handful of tiddler banks, two and a half big supermarket chains, a handful of oil companies, one and a bit airlines, three commercial TV networks, one giant newspaper company, and one formerly big print company, one pay TV near monopoly, two and a bit electrical consumer retailers (and one getting bigger via takeover), two online property groups, two department store chains, and two and a bit mid level chains.
It is a situation the competition regulator, the ACCC and its chairman, Rod Sims recognises (but not many in the business media do, many being part of the deal-driven cheer squads).
“The rise of large corporations in the Australian economy has been substantial. Indeed it seems we have outpaced the US,” Mr Sims told a business conference in Sydney on Thursday.
“In Australia many markets are concentrated or are likely to become concentrated as firms pursue efficiencies from scale. In some markets there may not be room for more than a few efficiently sized firms given the size of demand,” he said.
“From a competition perspective, what we need to understand is whether smaller rivals or new entrants can readily contest the position of larger, more established firms.”We should, therefore, have an eye to how often the identity of large firms change,” Mr Sims said.
Analysis prepared by Port Jackson Partners for the ACCC shows the revenue of Australia’s largest 100 listed companies increased from 15% of Gross Domestic Product (the value of all goods and services produced in Australia, including the benefits of exports less imports, or GDP) in 1993 to 47% of GDP in 2015. This compares to the US figures of 33% to 46%.
And he said Port Jackson Partners also found that of the ASX top 100 companies in 1990, only 29 companies remained in the top 100 as at October 2015.
And Mr Sims rejected the argument coming from many in big business and and some market analysts and economists that we need not be concerned with industries becoming heavily concentrated, and with monopolies and their behaviour.
“It seems to me that, absent a clear and convincing economic and evidence based explanation of how a merger will avoid harming consumers, the standard economic wisdom should prevail,” Mr Sims said.
“This wisdom is that mergers resulting in high levels of concentration in markets with substantial barriers to entry will usually reduce competition and cause harm to consumers and our economy.”
He also said circumstances where monopoly pricing has no effect, or only a small effect on economic efficiency, are rare. And this is not some esoteric argument from economists.
For example, the ACCC is currently considering a proposed purchase by News Corp of the daily and weekly papers in northern NSW and Queensland owned by APN News and Media.
In dollar terms, it is a small deal – just over $36 million (for assets that were worth hundreds of millions of dollars a decade or so ago), but the ACCC has found it will create monopolies so far as advertisers are concerned in parts of Brisbane and South East Queensland and northern NSW and on the Sunshine Coast.
And there are also h[going to be monopolies on news and information at the print level across all of Queensland and parts of Northern NSW as a result of the deal being approved without change.
Only the ABC and the Seven network will provide any meaningful alternate source for news across all the state, with the Nine and Ten networks also supplying TV news and some current affairs.
Seven, Nine and Ten will provide some commercial alternatives for advertising, but that will generally be too expensive for many consumers looking at classified type advertising or for real estate transactions.
But there is another side to business takeovers – one that has just received a lot of publicity in the US – that a majority of them fail.
Alan Lewis and Dan McKone of well known consulting group, L.E.K. Consulting found that 60% of the 2,500 big mergers they studied destroyed shareholder value
“Often the weakest assumptions involve estimates of how much additional revenue the companies can generate when combined,” they wrote in the Harvard Business Review this year.
“This, in turn, leads bidders to overpay.” The best current example of a deal heading for that route is the proposed $US85.4 billion takeover of uS cable TV and content maker,Time Warner, by America’s biggest telco, AT&T.
In 2001 Time Warner (which then included its current TV and film assets, such as HBO, as well as its cable TV networks and magazines and websites) was bought by AOL for $US164 billion worth of shares. That collapsed soon after with massive write offs and losses, sackings of staff, executives and is regarded as the world deal ever in American business.
There’s lots of research that backs up this research KPMG for instance produced similar results a few years ago, the Financial Times has reported on several other studies. In general, the bigger the deal, the bigger the potential for losses and value destruction for shareholders (and in many cases creditors).
But consumers are rarely mentioned and they generally are the silent losers from transactions that fail, and from those that succeed. For example passengers in the US have not received better deals, flying conditions, flights, or reported improved experiences from the plethora of mergers in the sector in the past two decades.
