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Opinions of Saturday, 10 April 2004

Columnist: Appiah-Kusi, Tweneboa

The GGL AND GBL Proposed Marriage: My Thoughts

On the 18th of December 2003, the boards of Guinness Ghana Limited (GGL) and Ghana Brewery Limited (GBL) came out with a statement that talks are on-going between the two firms with the view to merging their operations. As of now, it is not clear whether the deal is a merger or an acquisition. But based on the information provided so far there is every indication that the transaction is a takeover bid. Transactions of this nature all around the world raise a lot of interest and questions right from the announcement stage through to its consummation. This is rightly so because of the effects such transactions have on the industry, competition and the society as a whole.

Simply put, a merger is any transaction that forms one economic entity out of two or more economic entities. The term is usually used to define a friendly agreement between the senior management of two or more companies to combine their assets and bring such assets under the control of one set of managers. Typically, one firm will be more dominant in the merger transaction, with its managers taking more senior positions in the post-merger firm. This type of transaction is effectively an acquisition or a takeover.

An acquisition or a takeover is where one firm buys another firm. The acquirer could have a 100 percent or a majority stake which gives it control over the acquired firm. The acquisition could be through a cash offer, share offer or both.

Mergers and acquisitions are usually treated together because in both cases two or more firms combine their operations and use a single name. Besides, the motives and effects of such transactions are the same.

We have different types of mergers and acquisitions to wit; Horizontal ? This is merger between firms in the same industry producing identical or similar products and selling into the same market. Vertical ? involves the merger of firms that operate at different stages of the production process. That is when a firm merges with its supplier or distributor. Conglomerate ? when the merger is between firms producing less related products or operating in different activities.

REASONS There are a lot of motivations for firms to merge their operations. Shareholders prefer managers to maximise the value of the firm on their behalf because this maximises shareholder?s wealth. Managers may indulge in activities, however that does not maximise the value of the firm. These include investing in unprofitable businesses and under-utilising the firm?s resources. Mergers are thus used to replace under-performing managers with managers that can better utilise the firm?s resources.

Mergers are also employed because of the economies of scale that come with it. Mergers increase the size of the firm and enable it to produce at lower cost. It also enables it to do a lot of things that it could not have done alone. These economies come via specialisation, increased investment and automation, bulk buying, the pooling of research and development risk and economies emanating from indivisibility of scientific equipment.

Increased market power is yet another reason why firms merge. With mergers firms are able to obtain a dominant market position and dictate the pace of the market. The merged firm is able to use its position to restrict output and charge higher prices. This in effect leads to high profits and more shareholder gains.

Mergers and acquisitions again offer a means for a firm to enter another market or industry. When a firm wishes to enter a market or industry, takeovers make it easier as it readily acquires a market share and goodwill in the industry. It simplifies the process of having to start on a ?greenfield?. With respect to the proposed merger at hand, this could be Guinness? quick way of entering the beer market in Ghana.

Managers may also be motivated to increase the size of firms because of the prestige in controlling a large amount of assets and employees. There is a body of empirical evidence indicating that managerial remuneration is highly correlated with size (Conyon, Gregg, and Machin, 1995). It is important to state, therefore that mergers are the quickest way of expanding the size of the firm.

MY CONCERNS

The GGL, GBL proposed deal falls under the horizontal type of merger as the two companies are in the brewery industry in Ghana. This brings to the fore a lot of issues which are worth taking a second look at in view of the effects that the proposed transaction can have on the industry and the market in Ghana.

As already discussed, mergers and acquisitions typically increase the market power of firms. A dominant market position may be used to exploit economies in the purchase of production materials, production, pricing and the distribution of products. Already GGL controls about 30% of the market in the brewery industry. GBL also has a market share of about 40%. In case this merger goes through, all other things remaining the same, the new company will control about 70% of the market which is enough to exert a domineering influence on the market. Guinness already has exclusive deals with some bar operators for the sale of only Guinness products. There is therefore the likelihood for Guinness to exploit its new market power further to coerce more bar operators into its fold.

Directly related to above, is the fact that, the proposed merger between these two giants in the brewery industry could greatly obliterate normal marketplace competition and yield undesirable price controls. This in turn may cause the market to stagnate and sap individual initiative. Competition helps to increase consumer choice, production efficiency and competitive pricing all of which go to improve consumer satisfaction and prevent exploitation. This deal definitely is a way of getting around the competition which could seriously influence the turn of events in the industry.

There is also the tendency for the mergers in the industry to lead to the emergence of monopoly. GBL was created out of a merger between Achimota Brewery Company (ABC) and Kumasi Brewery Limited (KBL). We now have only three companies in the industry. The merger of GGL and GBL will thus create a virtual monopoly for the new company. It is possible for the new firm to use its market power to influence competition in its favour and thus kick its only competitor Accra Brewery Limited (ABL) out of the market. Beside this, it is possible for the new company, because of its size, to raise the necessary capital and acquire its only competitor thereby creating a monopoly for the industry. The menace of monopoly, I believe, is well known.

There are other social factors that may arise out of this merger as well. First, is the issue of the concomitant unemployment usually associated with mergers. The ILO report in February 2001 gives credence to this claim. Merged firms usually want to enjoy economies of scope (synergy or indivisibility of equipment) which is the gain from reducing duplication of functions cost reduction. This means some workers are going to be laid off and has the tendency to exacerbate the already precarious unemployment situation in the country. That aside the effects of the merger on ABL could lead to staff lay offs. Thus the merger could create excessive social cost for the entire nation which no one can imagine for now.

Government tax revenues can also be affected by this proposed merger. There is the likely loss of income tax that may come out of the associated job losses. In addition, in a year when one of the companies makes a loss corporate tax to the government may fall. Suppose GGL makes a profit of 40bn and GBL a loss of 20bn. Given that corporate tax is 40%, GGL pays 16bn and GBL nothing. Upon a merger, the profit from the merged firm will be 20bn. So the firm pays only 8bn tax. In effect the firm redistribute 8bn from the government to the firms. This may have adverse effects on the distribution of wealth.

In view of the foregoing, my opinion is that the proposed merger between GGL and GBL is not in the interest of consumers, the industry, government and the entire country. I am therefore urging all influential bodies including the consumer association, NUGS and TUC to protest and fiercely resist this proposed merger. I am also calling on the government and parliament to take a critical look at the proposal and take measures to protect consumers and the industry as a whole.

Again I am calling on the government and parliament to embody antitrust laws in our trade laws to regulate such deals in future. Antitrust laws limit the market power exercised by firms and control how firms compete with each other. Countries like Israel, UK, US, Australia, Netherlands, Kenya, South Africa, Zambia and Brazil have all got antitrust laws. There are classic instances where transactions of the nature of the one between GGL and GBL have been stopped. The recent bid for Safeway in the UK is a typical case in point. In the US, there was a suit against Oracle for its proposal to takeover People soft. Microsoft has also lost a lot of money in many countries through antitrust suits.

Ghana also needs some of these laws to regulate our markets and protect consumers. Diageo and Heineken which are behind GGL and GBL respectively are well aware that this deal would not be allowed to go through if it were in their home countries. Why should it go through in Ghana?

The earlier we act the better.

Email of Author: appikusus@yahoo.com