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The future is a merger

Robert Peston | 08:46 UK time, Tuesday, 8 September 2009

It has started, as it inevitably would: the process of companies trying to reduce their costs as we come out of recession by merging with businesses in their own industries - or what are known as in-market mergers.

T-Mobile and OrangeToday we've had the announcement that France Telecom and Deutsche Telekom are combining their UK mobile operations, which means that Orange will be glued to T-Mobile.

This is a big deal.

If allowed by the regulators, the enlarged business would have almost £8bn of revenues and 28m customers, which the companies say are 37% of all UK mobile subscribers (these sums only work on the basis that lots of people have more than one phone).

Why are they doing it? Well, the companies say they have 3.5bn reasons - because they estimate that savings in running their networks, in distribution and other areas will over time add up to £3.5bn in today's money (that's the net present value of cumulative synergies).

From the point of view of the businesses, this is rational.

We're coming out of the bleakest period for the global economy since the 1930s but most companies believe recovery will be fairly insipid in the UK.

So to generate incremental profits, the focus has to be on reducing costs. And one of the best ways of doing that is to marry a similar business and remove overlapping activities.

In a way, this process was initiated by Lloyds' controversial decision last autumn to buy HBOS - though this takeover showed that such deals are not risk free, and many of Lloyds' shareholders are sore at the losses they inherited on HBOS's reckless loans to companies.

Also there's an element of looking for efficiencies in Kraft's £10bn offer for Cadbury. That said, Kraft is probably more motivated by the idea that a fairly counter-cyclical business such as Cadbury probably isn't going to get cheaper (and, by the way, the market reaction tells us that for Kraft to stand a chance it will have to raise its offer very significantly).

There will be more of these mergers within particular industries in the coming weeks and months, and not because there are a vast number cooked and ready to go, but because big businesses have a sheep-like quality: the mood in boardrooms will switch from fear of doing anything too bold in uncertain times, to fear that doing nothing will look pusillanimous.

To repeat, eating your rivals probably makes sense for businesses and also for their shareholders, so long as the bidder does not overpay: buying a competitor to generate cost-savings is usually not a licence to destroy wealth for shareholders in the way that other kinds of takeovers (such as those motivated by a desire to become big for the sake of bigness) frequently have been.

But that doesn't mean we should cheer when these deals are announced or that they are necessarily good for the economy.

Cost savings normally equal job losses, which - at a time when unemployment is still rising - can be very painful for those whose careers are sacrificed on the altar of corporate efficiency.

And in some industries, such deals would lead to cuts in research budgets that are valuable to the UK's economic potential and to the transfer of these precious research activities to countries such as India where costs are lower.

Having recently demonstrated that we have become a little too reliant on one industry, finance, we ignore any slimming down of our productive potential in other industries at our peril.

However, it is the impact on competition about which we should be most wary.

We're going to hear lots of sob stories from businesses wanting to merge, about how they'll only be able to invest enough to provide customers with the products and services they deserve if they're allowed to become ginormous.

But today's enhanced cash flows for investment are tomorrow's massive market share and ability to fix prices at levels detrimental to consumers.

As John Fingleton, chief executive of the Office of Fair Trading, says today in a thoughtful speech, the pendulum has been swinging against the notion that competitive markets are good for us, because of the massive costs we've all suffered from the recent market failures in banking.

That said, what happened in banking is not a demonstration that liberal markets are per se bad for us: the madness of banks converting dodgy loans into gilded investments was an example of what can go wrong when markets are dangerously opaque so that prices aren't set in a rational way; it doesn't show that transparent markets filled with lots of suppliers and vast numbers of informed customers are per se bad.

Some of the old rules surely still apply, such as that when a giant institution says that it's in the interests of the nation or of consumers for it to get even bigger, well we should probably presume that's untrue, pending unambiguous proof to the contrary.


  • Comment number 1.

    This is just the next stage of cost cutting by the mobile phone operators in order to recoup the billions they paid for the 3G licences.

    Expect content and customer service (sic) to be eroded. Customers suffer again!!

  • Comment number 2.


    How do you reconcile the comment that "There will be more of these mergers within particular industries in the coming weeks and months" (i.e. large scale redundancies), with the vacuous optimism of the Chancellor and the Governor of the Bank of England (i.e. suggesting that the UK will come through the recession by the end of the year)?

  • Comment number 3.

    I would suggest history teaches us that eating rivals only works when there is over whelming synergy, cost savings is only a small part of this.

    I know of a company whose strategy was to buy out competition. The effect of this was instead of having one unprofitable shop in a town it became faced with 3 or 4 unprofitable shops per town to deal with.

    A used the phrase yesterday that small is beautiful. With such large critical masses being developed to enter particular industries this kills competition, r&d, customer service etc

    We should have learned that too powerful companies usually end up abusing their position

  • Comment number 4.

    Mergers lead to monopolies... There are already far too few banks for there to be any real choice, or market in services - now this is happening to the comfort food of the recession - chocolate (Cadbury's and Terry's( Kraft)) as well as the mobile phone business.

    Phones are a natural monopoly as we all hate multiple mobile telephone masts for each operator - but where is Ofcom when you need it! (OK the phone operators shot themselves in the foot with the totally absurd bids for 3G licences and that is why we are now behind much of the rest of the world who in many cases are moving to 4G systems before we get to 3G) Our so called market in mobiles is in fact serving us badly and that has to be down to the regulatory errors (as in our banks) somehow our national regulators don't do their jobs! (Are they all incompetent?)

  • Comment number 5.

    When the government waved through the Lloyds HBOS takeover, surely it weakened its hand regarding market abuse by newly-created supergiant companies? After all, why shouldn't the merged Orange/T-Mobile be allowed the same market share as Lloyds?

    I simply cannot see regulators having the gall to prevent these mergers, whose primary benefits are not the pretended economies of scale, but rather, as Robert suggests, reduction of competition.

    The laws of unintended consequences come along once again to hit consumers where it hurts.

  • Comment number 6.

    #2. Hawkeye_Pierce wrote:

    "suggesting that the UK will come through the recession by the end of the year"

    They will I suspect define 'come through', 'recession' and 'by the end of the year' not the mean that which the people understand by these words but some definition of their own - just to proven themselves right They will also get academic economists(!!!!), statisticians and regulators (M King etc.) to 'prove' they are right - when unemployment will still be rising and much of the population will be suffering badly (of course they will make sure that their retirement job bank employers are doing OK!). Or am I being too cynical!

  • Comment number 7.

    It is the will of private enterprise to destroy or shape the competitive market that gave birth to the enterprise. Mergers are primarily to enable companies to pursue this strategic imperative. Efficiency where it happens is a fall out and is actively pursued to aid the improvement of margins but manipulating the market is more likely to provide the biggest impact in margins. There is a case for mergers being accepted only as the exception and not refused for exceptional reasons.

    "We're coming out of the bleakest period for the global economy since the 1930s but most companies believe recovery will be fairly insipid in the UK." - A bold statement, Robert, because it is far from certain we are coming out at all!

  • Comment number 8.

    "As John Fingleton, chief executive of the Office of Fair Trading, says today in a thoughtful speech, the pendulum has been swinging against the notion that competitive markets are good for us, because of the massive costs we've all suffered from the recent market failures in banking."

    There is an objective view for you "I am a regulator and you need more regulation" - turkeys don't vote for Christmas. The market did not fail in banking, as it was not a free market.

  • Comment number 9.

    Its because of the introduction of Apple's iPhone into the UK market which has caused this disruption.

    A lot of the high net worth customers switched from Vodafone, Orange and T-Mobile to O2.

    Before this merger, O2 sneaked past Vodafone as the largest mobile operators growing the subscriber base on the back of the iPhone.

    This what Steve Jobs wanted. Consolidated and concentration of power with fewer operators that they could do business with.

    You will see this happen with mobile companies in each country market in Europe as the dominant iPhone exclusive operators wins customers from others.

  • Comment number 10.

    #2. Hawkeye_Pierce wrote:

    "How do you reconcile the comment that "There will be more of these mergers within particular industries in the coming weeks and months" (i.e. large scale redundancies), with the vacuous optimism of the Chancellor and the Governor of the Bank of England (i.e. suggesting that the UK will come through the recession by the end of the year)?"

    Quite easily. Technically, the recession will be over as soon as GDP stops declining (for that is the definition of a recession). It is quite normal for unemployment to continue to grow for a year or more beyond the technical end of a recession.

  • Comment number 11.


    Yes, the future is with merging of companies....

    =Dennis Junior=

  • Comment number 12.

    The statement : "the pendulum has been swinging against the notion that competitive markets are good for us, because of the massive costs we've all suffered from the recent market failures in banking", is a typical piece of sophistry designed to justify ruthless and over the top cost-cutting, redundancies, profiteering and decreasing levels of customer service.
    And these wise people who determine "what's good for us" never seem to be amongst those who have "all suffered". Too many business organisations, particularly greedy banks and large organisations, are using the recession THEY caused to introduce draconian measures which profit them by kicking people when they're down. Caledonian Comment

  • Comment number 13.

    Peston is reading too much into this. This is not an inevitability of coming out of recession. If Peston understood the mobile market as well as he does banking he'd know these initiatives of network infrastructure sharing have been going on for years. In the UK Orange and Vodafone announced in February 2007 their intention to form a very similar 3rd party joint venture (but agreement could not be reached) as announced today between T-Mobile and Orange. This is not a result of "coming out of recession", it would be happening even if the recession had never happened.

  • Comment number 14.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 15.

    There is the most critical of balancing acts to be considered here. I plan to write my dissertation this year on the role played by 'perfect competition' in the banking collapse. I currently believe my research will reveal that the never ending push for returns to shareholders driving competitive actions within the marketplace played a key role in the credit crunch. However without competition would oligopolies or monopolies be even worse? Perhaps not in some cases?

  • Comment number 16.

    Your quote "we come out of recession" I don't know which country you live in but its not the UK

  • Comment number 17.

    Robert - I suspect this is further bad news for the High Street. Both Companies have a shop in most High Streets and I suspect closures may be on the way to save money.

  • Comment number 18.

    13 - Chris - well said - I was just in the middle of writing the same thing (luckily hit refresh first!)

    M&A happens all the time - in actual fact it occurs more in the boom years than in the recession, I guess with a more buoyant job market the almost inevitable shedding of jobs following some of the m&a activity goes unnoticed by the national press.

    If companies have strong cash reserves, now is actually a good time to be picking up struggling companies on the cheap - this is just the way things are - and actually probably saves a few jobs as well (the acquired company in some cases may go under therefore creating a greater degree of job losses than would have happened without the acquisition)

    As for enhancing shareholder value - well it is impossible to say that M&A work does or doesn't - it all depends on the individual transaction and post deal integration and achieving the desired synergies...

  • Comment number 19.

    Robert - what's interesting is that this is a commercially driven merger - not a hedge fund in sight.... and no borrowed money?
    Are we back in the real world at last?
    TM - StH

  • Comment number 20.

    ‘We're coming out of the bleakest period for the global economy since the 1930s but most companies believe recovery will be fairly insipid in the UK.’

    Lol, I got referred for suggesting this was a LIE!!!

  • Comment number 21.

    Robert - good post.

    These merger deals may seem to be good in the short term but in the long term they will not be good for the UK with the consumer paying higher prices as monopolies form.

    A great book which I've just read is "The 86 Biggest Lies on Wall Street" by John R Talbott - he was someone who predicted the housing crash in the US so definitely worth listening too.

    He has many ideas about reforming the banking system but one of his ideas which is relevant to ensuring there is competition in the markets is that companies should be forced to split once they get to a certain market capitalisation. For instance if that had happened the big 3 US car firms would have split ages ago resulting in smaller more innovative companies which are not too big to fail!

    The more mergers that happen the less competition for consumers and the market system breaks down as we don't have a choice. Also companies are created which are 'too big to fail' as letting them go under would result in mass unemployment etc. The irony is that these so called 'free market' businessmen want to create mergers to get a monopoly and ensure the market isn't free anymore!

    P.S. As well as reducing competition these mergers are encouraged by investment banks (for the fees) and CEOS (with pay offs etc)!

  • Comment number 22.

    "As John Fingleton, chief executive of the Office of Fair Trading, says today in a thoughtful speech, the pendulum has been swinging against the notion that competitive markets are good for us, because of the massive costs we've all suffered from the recent market failures in banking."

    3-Mobile and T-Mobile have already combined its radio network. Vodafone and O2 are following their foot steps to some extend. Now after Orange and T-mobile merger practically means 3-mobile, Orange and T-mobile will share same network.
    Ericsson is Managing 4 out of 5 current networks. After this merger it ll probably be managing all networks in UK. This means 100% monopoly of Ericsson. Isnt that against the rules of fair trading

  • Comment number 23.

    Bear stockmarket rallies are not called "sucker" rallies for nothing. But I am surprised how many people actually seem to believe we're "coming out of recession."

    See you on the next downstroke ....

  • Comment number 24.

    And the band played on as the SS Great Britain began to slip slowly beneath the waves....

    Held up in some sections of the media as a sign that we are on the mend, this merger is nothing of the sort, it's a defensive strategy designed to save costs and protect the two companies involved and therefore should be seen as a sign that companies are being forced into this type of action because the economy is so bad, rather than as a sign that it is getting better.

  • Comment number 25.

    Absolutely right, Robert.

    Just should not be allowed.

    But, it's one of the paradoxes of capitalism that every well run business is (or should be!) trying to get a monopoly on something - whether it's a brand name, a relationship with a particular customer, a channel of distribution, a patent based around a new idea/service etc - because monopolies of course yield above average returns.

    It is simply a matter of scale though whether it's in the public interest or not.

    On a small scale absolutely fair enough and indeed a fundamental part of how capitalism works (what's a new idea if it's not a mutation quite distinct from a relatively homogenous group with a fundamental 'natural' monopoly) and it mirrors the way the much bigger system functions - in evolutionary terms fostering new variations leading to what Darwin would call 'speciation'.

    But at a much larger scale it starts acting against this very system, and becomes the fundamental flaw in capitalism.

    Yes, only when companies have given up on absolutely any other way of developing their business - innovation, investment in new product development, sales effort, opening new distribution channels etc etc (i.e. the things that require REALLY talented management) do they resort to this very easy option. And let's not underestimate the self-interest of the executives in this whole farrago..... 'if we take over company Y, then we'll be a much bigger business and I'll obviously deserve nearly double the salary'.

    I think we could say therefore that Orange (which we know has never been the same since France Telecom took it over) and T-Mobile have very publicly raised the "sorry guys, we've completely run out of any other ideas" flag, and are now conspiring against the public good to raise prices the easy way.

    They need to try harder and find other ways of developing their businesses.

    If you are right, Robert, that this is going to set off an avalanche of merger attempts, then the government must be bold (... what a hope!) and make it clear that in this downturn properly competitive markets and the interests of consumers will not be sacrificed yet again for big business interests and shareholder profits ( lowering the market share hurdles for an allowable merger under OFT rules?).

    And after all, if inflation is going to emerge from somewhere following all this quantitative easing, then, with mobile phone bills being part of the CPI, this will be one place.

  • Comment number 26.

    Cadbury's workers beware of Kraft. Terrys of York is now Terrys of Poland, the York factory shut a few years ago. York a few years ago used to have a substantial railway works, a factory processing sugar beet and Terrys. Tourism is by far the largest industry for the city so it is fortunate in that respect. Bradford is not so fortunate as it has not managed to properly replace the loss of textiles and engineering over the last 40 years. My Dad is right when he says the only industry left in the UK which will produce real wealth is tourism. So called growth during the last 12 years has been puffed up by the huge increase in debt and population increasing from immigration.

  • Comment number 27.

    "That said, what happened in banking is not a demonstration that liberal markets are per se bad for us:"

    Oh yes it is..... I've just been watching a video of a new floating offshore wind turbine that was developed by StatoilHydro in Norway which is of course still partly owned by the State and so is working with the Norwegian Govt and Norwegian industry to achieve strategic industrial objectives.

    This would simply never happen in the UK....

  • Comment number 28.

    I appreciate the desire to cut costs and reduce competition if you are the usual run-of-the-mill greedy boss and you've got shareholders to satisfy. But would I be wrong to accuse those same directors of constantly failing to improve customer service and provide value for money whenever a merger takes place? Inspite of their assurances that it will.

    Is there ANYONE out there who can confidently say their customer service experience actually improved, on a permanent basis, following a business merger? (Many of you will have experienced your building society being taken over by a bank, for example.) If not then I think it's fair to say, in the case of Britain, that such business activity must be socially useless!

    I don't hear cries of joy in the streets at the news of this latest mobile phone merger. (I do wonder why, only it's not that hard to guess.)

  • Comment number 29.

    What ever has happened to the UK Monopolies and Merger Commission - why is it so weak when a stronger commission would help reduce UK unemployment?

    More No. 10 and No. 11 Downing Street bent finances and governance?

  • Comment number 30.

    Robert Peston is undoubtedly one of the most informative journalists in his field but occasionally lapses into undecipherable jargon ( to me anyway). For example, what on earth does "that's the net present value of cumulative synergies" mean? (in relation to the news that France Telecom and Deutsche Telekom are combining their UK mobile operations.)

    Also, am I guilty of being parochial and narrow minded when I feel indignant that so many of our "British" industries / brand names are being bought up by foreign companies? (question inspired by the proposed Kraft takeover of Cadburys). Is there any value in trying to revitalise British industry as being so dependent upon the financial sector has been part of our downfall?

  • Comment number 31.

    I do hope the regulatos manage to stop this; are these ones more effective than bank regulators?

    Thanks for the suggestion of the book. And thanks for the PS too!

  • Comment number 32.

    #15 Don't forget to look at fractional reserve lending, fiat currency and the moral hazard of fannie and freddie and bank bailouts.

  • Comment number 33.

    As a T-Mobile customer I'm not looking forward to the merger. Doubtless customer service will be the first thing to be done away with, and Orange's customer service is already beyond laughable. They don't even have a complaints procedure!

    The "altar of coporate efficiency" as you put it has a lot to answer for.

  • Comment number 34.


    It's not Peston's job to be consistent. If it was he'd talk more about the fraud of "relaxed" accounting standards, the DTI ratio of consumers and the inability of the US Government to issue Treasuries forever to prop up the large financial institutions, without falling back on seignorage. In fact, seignorage seems to be happening already what with the Treasury flipping new issues through the primary dealers and onto the Fed's balance sheet. Not without those lovely primary dealers taking a few cents out first of course.

    It's his job to come up with new copy every few days or so.

    This society was arguably more capitalistic in 1933. At least reckless corporate behaviour was punished with failure and bankruptcy.

    Nowadays with just have corporatism. Until it finishes devouring itself. Consumer cannot take on ever more debt and neither can the Government. Extend and Pretend will not work. There's not going to be a meteoric recovery.

    Welcome to the Japanese stagnation scenario.

  • Comment number 35.

    If the future is a merger, then what hope for small and medium sized enterprises? The MMC and the EU Competition Commission must block all these deals. Who benefits from these mega deals?


    Again the political classes pull their forelocks in total subservience to the parasites of the market economy: Goldman Sachs (the U is silent when Sachs is pronounced btw) JP Morgan etc who will cream off large commission rates for little risk.

    The Lloyds Bank Group Merger should be unpicked asap. As it stands it will be used as a precedent for mega mergers in many other industries and cause huge redundancies around the world. This will impact further on mortgages being defaulted, and banks credit worthiness will be scrutinised again. Unfortunately in a world bereft of political leadership the norm will be "do nothing, say nothing" and hope the problem will go away or solve itself.

  • Comment number 36.

    Sorry to bring this back t banks again, but what has to be remembered is that institutional investors hold the shares in many differnet companies so when they held shares in a dead company (HBOS) they backed the deal to have Lloyds buy them out and realised 80% of the share value in doing so. So in their book they lost less money than they woul dhave if HBOS had gone bust. This happended to the detriment of the small share holder who watched their investment disappear but no one cared about them because the stock market is not a place for individuals. The institutions have even less consideration for the general public and it is the regulators job to ensure fair practice but they are continually forced to back down under the threat of businesses relocating elsewhere where regulation is not as rigorous. To summarise we are all screwed by the big boys....

  • Comment number 37.

    One thing worth mentioning is that Investment Banks love a good M & A season. They can make huge sums on colsultancy / book-running etc..

  • Comment number 38.

    This makes good sense really. I was a T-Mobile customer a long time ago, and I was an Orange customer a while back too, the customer service of Orange is a lot better than T-Mobiles (from personal experience).

    Everybody is worried about competition, they shouldn't. Even with 4 big players instead of 5, there are countless virtual networks and if anything with the current state of the market, its far too confusing with so many different networks, price plans, add-ons etc.

    Sometimes less is better and I wouldn't shed a tear if T-Mobile's name disappears.

  • Comment number 39.

    "However, it is the impact on competition about which we should be most wary."

    Absolutely. If this gets past the competition regulators, then I think we really have to ask why we bother having competition regulators in the first place.

  • Comment number 40.

    Since I don't think anybody is seriously suggesting T Mobile or Orange will cease to exist if they're not allowed to merge, surely what we need here is for the competition commission to do its job? If it deems the merger will be sufficiently harmful to consumer interests then there should be no deal.

    In the current climate there will be pressure to approve mergers that otherwise would not be allowed. But we won't help stability in the long term by agreeing to extraordinary measures with insufficient justification.

  • Comment number 41.

    @30, haveIgotitright:

    It's jargon, but not particularly opaque:
    Net = after restructuring costs (e.g. redundancy payoffs)
    Present Value = value in today's currency, since the benefits will only occur in the future they need to be "discounted" back for predicted inflation
    Cumulative Synergies = all the stuff they both do

    i.e. it's how much they estimate they'll save by merging, given in figures comparable to current balance sheets

    Of course, why they couldn't just say that...

  • Comment number 42.

    I hate to be a pedant but I am. So I quote, "for Kraft to stand a chance it will have to raise its offer very significantly". Surely the term "significantly" is sufficient, "very" adds nothing to this. It's either significant or it's not. For example, you would never consider writing "quite significantly". Or perhaps you would...

    Why have I read two articles regarding this merger and although happy to quote the percentage of the market that T-Mobile and Orange's marriage wouldresult in, no comparative figures are provided for the other two big players. To truly understand the impact of this merger would it not help to provide context?

  • Comment number 43.

    for John_from_Hendon and Hawkeye_Pierce's benefit, the meaning of "come through the recession by the end of the year" is extremely simple...

    Things will have got so bad that they can't get any worse, and it will happen soon. So, by the end of the year, we will be getting no worse, therefore through recession...


  • Comment number 44.

    This merger is about reducing competition so that prices can be increased. The UK Government figured some time ago that we should have five mobile operators, and nothing has changed. So why should they allow that to come down to 4 and allow a new group with 37% of the market.

    For Lloyds TSB and HBOS, an exception was made because HBOS would have gone under. T-mobile is unlikely to go under. As consumers, we have to hope the regulator has the strength to say no.

  • Comment number 45.

    There is no way that the T-Mobile / Orange merger can be in the public interest. The Competiion Commission should never allow it.

    The result will be less competition, less consumer choice and undeserved extra profits for the mobile companies, who are already running a cartel and will just use the merger to raise prices while reducing their infrastructure costs.

    The Government auctioned five mobile licences so that there would be five competitors in the market. This should not be allowed to go down to four. Even T-Mobile, the weakest operator, is making a profit. If its owners want out of the game they should be forced to sell to an outside party, and if the price is too low for their liking, then that is their fault for running a poor operation.

  • Comment number 46.

    18 Horned devil wrote:

    "If companies have strong cash reserves, now is actually a good time to be picking up struggling companies on the cheap---------"

    Strong cash reserves? I may be wrong but the impression I have is that businesses in the UK do not bother with these and rely on going to the market when necessary. This then begs the question: from where do the Kraft's of this world find £ billions for take over bids? Do they have this reserve. Is the same money regurgitated from the same source for all these large take overs? What would that source be - secret accounts?
    I am not a financier and may be showing complete ignorance so I do not mind if someone tells me I am but it would enlightening either way especially when banks are strapped for cash not able to lend to small businesses and the brunt of the failure of the free financial market is going to taken by working people in higher taxes, reduced benefits, lower wages and unemployment. I define working people as being the ones who rely on salaries and wages to live (including journalists) and without whom the whole shebang would fail.

    Any one out there? Mark?


  • Comment number 47.

    Once contracts have cycled round, I wonder how many Orange Tea customers will stick with them? As someone who moved away from Orange to T-Mobile, I may find it necessary to move again when my current deal is up. That might dent their market share if they degrade customer service too much or don't provide the sort of tariff I want.

    Perhaps when they decommission some of their base stations they can stick one near where I live, even 2G coverage is dodgy, none of the mobile telcos have good coverage in my area.

  • Comment number 48.

    I'm reminded, yet again, of some wise words. "We tend to meet any new situation by reorganising, and a wonderful method it can be for creating the illusion of progress, while producing confusion, inefficiency and demoralisation".

    I've been in large companies that merged with others, and believe me these words applied equally through those periods. Strange, since they were written by Petronious Arbiter - in 60AD! Humans don't change very much really do we?

    Alan T

  • Comment number 49.

    Robert Peston:

    Side note, that you may have forgotten to mentioned...That MERGERS don't always bring the desire results to the both sides of the table....

    =Dennis Junior=

  • Comment number 50.

    Good luck Britain. As someone who has been through the merger already (I'm Dutch), it's done nothing but worsened the service. Cellphone towers previously owned by Orange were simply shut off because they weren't compatible with T-Mobile's infrastructure (Siemens vs Nokia back-end). It effectively meant that unless I stood outside, I barely get any reception. Customer service went down the drain (completely incompetent staff), costs went through the roof and in the end I had enough and went to another provider.

  • Comment number 51.

    If the businesses combine to control 25% or more of the market or if the target has turnover of £75m and it is thought that there will be a substantial lessening of competition the OFT refers it to Competion Commission, doesnt it. That is, unless Peter Mandelson overrules the deal in the public interest by defining the public interest so as to promote the merger - didnt John Hutton do that with HBOS and Lloyds merger by saying that preserving the stability of the financial system was a reason to avoid a merger reference.

    Good old politics again!

  • Comment number 52.

    mergers are rarely as successful as the parties say they will be....on the question of the end of the recession I am not an economist but surely quantitative easing raises GDP so it is a false measure of whether the recession has ended...

  • Comment number 53.

    #42. At 2:03pm on 08 Sep 2009, stuntedmonk wrote:

    "I hate to be a pedant but I am. So I quote, "for Kraft to stand a chance it will have to raise its offer very significantly". Surely the term "significantly" is sufficient, "very" adds nothing to this."

    Ah, you are one of those people who don't understand the use of adjectives - I once worked for a company where adjectives were banned in official documents.

    When I informed the person responsible for this policy that they did not know how to use the English language properly, I got sacked.

    Funny that.

  • Comment number 54.

    People need to get wise to this corporate con. Mergers and Acquisitions are one of the worst crimes of recent times. Based on false promises of synergy the CEO sells a rosy story about enhanced shareholder value to the money managers. The financial institutions are happy to go along for the ride because the short term value of their funds rise off the back of this news. Both CEO's cash in and the law firms and investment banks that cut these deals make enormous fat fees regardless of whether the deal delivers. If it doesn't (and let's remember that only around 12% of mergers and acquisitions actually deliver on their promise) its irrelevent because both ceo's and their management team will have filled their boots and moved on like locusts to their next con trick. While the city pops another cork the public are left with the consequences. The workers lose their jobs and the public get less choice and worse (or more likely non-existent) customer service. These deals offer nothing socially constructive. They don't add value and they very rarely deliver. Just another transfer of wealth upwards that has serious consequences for those on the receiving end. Quite simply repugnant!

  • Comment number 55.

    The BBC's lead article on this states that firms saw the current levels of competition as "ruinous" because of how low they had to keep prices to win customers. ... or to put it another way, this much competition keeps prices low for customers, which is precisely why teh merger shouldn't be allowed to happen.

  • Comment number 56.

    "Mergers and Acquisitions are one of the worst crimes of recent times." (from a comment just above me somewhere) Except maybe... I dunno... the genocides in Sudan/Darfur, repression in Burma etc etc?

    Taking away that specious overstatement, the charge is that because many mergers fail to deliver what they set out to achieve (not "promise" to achieve) is just One Of Those Things That Happen. It's a risk that businesses who sign strategic deals, contracts or takeovers end up taking. Characterising that kind of thing as a kind of conspiracy designed to fleece the poor and feed the rich is just divorced from the reality of business.

    I know it's unpopular coming out to bat for big corporations in these benighted times, but it's the big companies who have the cash reserves and technical know-how to bring us innovations like smartphones, mobile broadband etc etc.

    And it is precisely the existence of such behemoths that creates the opportunities for smaller, more nimble businesses to disrupt and improve services overall. If you're unhappy with the service you get from massive companies, you're free to find smaller operators with more personal service. My mobile provider is 3 - still a massive company, but a much more responsive in my experience than the bigger fish.

    Right now, entrepreneurs are looking at new gaps that this merger will open up in the market, and ultimately it is these that create the danger of 'failure' - not something inherent in the nature of mergers/takeovers themselves. [Unsuitable/Broken URL removed by Moderator]

  • Comment number 57.

    Ignore the so called cost cutting and leaner and meaner businesses, has the monopolies commission not seen the 51st State? Has everybody forgotten the scale factor in the collapse of the banking system, do these so called great minds of industry and commerce not have the ability to learn from past mistakes? Orange and T-Mobile; Kraft and Cadbury's; the ever increasing monopoly of supply - we are all paying the cost of quality of service as the range of actual supply shrinks. Yes we have a multiplicity of names, but in the main owned and controlled by an ever decreasing number of individuals. we as a nation blankly sit back while we allow individuals without our best interests at heart to take over our world. Look at Murdoch Jnr's recent rant about the BBC, compare the range of programmes provided, let alone actually produced, by the two alternatives to see what monopoly comes to. Without the monopoly on sport what would BSkyB have to offer, and does nobody see a connection between the interests of Sky and Amstrad in the initial negotiations for Premier League rights, the Premier League in their ivory tower obviously had no idea who make the satelite dishes for Sky.

    When a merger of like organisations occurs the government should introduce a mergers tax to pay for the large number of individuals who will be made unemployed for the convenience of lack of competition and corporate profit. We are constantly told by the wise heads of the CBI, et. al., that the deadwood should be removed from the market place - so how come it is OK for two relatively unsuccessful players in the mobile phone market (thus not able to produce the coverage or products/charges the market wants) to merge into a new organisation that will represent over a third of the market (37%)? Hedgefunds, hedgefunds, greedy little individuals wanting greater rewards for not actually producing anything NEW, just rehashing same old, same old, but for lower costs (i.e. lots of people unemployed) and thus increased profits - oh and ofcourse a big fat bonus for the surviving directors.

    Capitalism is plunging into a black hole of monopoly, where individuals of ever increasing wealth make self-engratiating decisions that remove choice from the general public and increasing stress within the workforce. Management by threat to worker security; customer choice; a grandeur of scale reminiscent of the Roman Empire; the Ottoman Empire; Imperial China where the fringes are bandit country uncontrolled by the centre allowing for illicit actions by officials at all levels. Remind anybody of the recent past in the banking industry?

    Let commercial organisations start earning their place in the market, stop the shabby practices of weakness growing into stagnation and corruption. I seem to remember Tom Peters and Gareth Morgan intimating that small is proactive and large cumbersome and slow to react; that large is in the main protectionist (just look at Microsoft and the various actions against it for restrictive practices).

    Monopolies Commision throw this application to the winds, declare that in this era of collapse in confidence in recent commercial activities companies should adapt or die, if what is provided is not wanted just making it bigger does not make it more attractive.

  • Comment number 58.

    In response to post 56.

    I agree the crimes you mention are worse and clearly put M&A's into context. However, they still have negative consequences. Again I don't disagree with you that there is always opportunity in other peoples misery (that has always been the case) but it does not justify an activity that causes more harm than good.

    As for technical innovations I think you will find the majority of the know how for modern wonders like the internet and i-pods came out of the tax payer funded pentagon system rather than the coffers of private companies. And remember in the UK the majority of research and development is still conducted in our state funded universities who then hive of anything useful to the private sector to sell.

    While research and development does take place in the private sector a belief that the majority of our technical innovations eminate from the private sector is largely a myth.

  • Comment number 59.

    "......transparent markets filled with lots of suppliers ....and well-informed consumers" I have a lot of respect for you Robert, but are you in fact living on the planet Zarg? (unless you were being ironic of course). The object of almost every enterprise, from oil supply, banking, energy and now mobiles is to engineer a private, opaque monopolistic cash cow. "Public bad, private good" is the mantra and has been for some time now

  • Comment number 60.

    To all those contributors who are thinking that at last Robert has come up with a real business story and not just another banking tale I am afraid you are all to be disapointed.

    This is actually a banking story. These merging companies just like the other player of the day, Kraft, will no doubt be increasing their leverage and in doing so will be increasing the amount of money sloshing about.

    Certainly a win for the banks. But is it a win for the rest of us?

  • Comment number 61.

    To sum it up: There is absolutely nothing desirable about mergers. Regulators should get ready before it becomes a serious problem.

  • Comment number 62.

    Two Points :
    A) Is this an attempt by these companies to reach the critical TBTF - Too Big To Fail - size that they will be bailed out by the Gordy when they belly up ?
    B) In my local bookshop there is an economics section with discount offers on ‘popular economics’ books that tell us how great modern economists are – the main example in al these books is how much money the 3G licenses raised after some economists borrowed some game theory to design the 3G auctions 10 years ago – they still have this debt around their necks – what genius !

  • Comment number 63.


    I do not think an apology for 56 is necessary, although the crimes 56 mention are terrible, this is a financial blog.


    If you are interested in rectifying humanity at every turn, then I suggest you find another blog to stir.

  • Comment number 64.

    Alan Greenspan!!!! ( Radio4 Today trailer fro a TV programmme on Money)

    AG says that he was not responsible in any way for creating the conditions that led to the bubble economy as he was only responsible for setting short term interest rates and the market set long term rates.

    Leaving aside that it is impossible to be both rational and polite about this assertion. (i.e. short term rates influence long term rates etc.. etc..)

    But let me not challenge it: this assertion demonstrates just how bad economics education has become and why there must be wholesale and complete reform of economics and economists. When many many people spotted that there was a bubble economy in place (and pointed it out to the economics trained regulators and politicians who are supposed to manage these things) and further that it needed curbing as early as the mid 1990s and even Alan Greenspan acknowledges this - why did economists not work on methods of curbing this bubble economy - the only rational explanation is that they are miss-educated fools and this the problem lies in the whole pseudo-science of economics and by implication the main schools of economics training are the chief culprits. (Harvard Balliol etc... etc...)

    Or of course Alan Greenspan is simply dissembling as he cannot bear the idea that he is responsible. I suspect a little of both. By the way the same 'well educated' economists are those who are involved in valuing these takeovers (and the dotcom bubble). We must purge economists!

  • Comment number 65.

    Mergers and acquisitions-
    This is more about what revenue streams it can produce for the banks rather than any 'efficiency drives'.
    Last year the merchant banks started scraping around looking for easy money when they thought they were going to be squeezed. They didn't quite believe that the government would print bucket-loads of money for them. These M+A's are entirely un-neccessary and basically a dumb idea.

    Kraft/Cadbury synergies -you're havin a laff mate. Two giant, smug corporations with massive overheads and no inclination to make tough decisions in the top echelons.
    Presumably Cadbury/Schweppes has great synergy too. (Oh, I forgot, they broke that up cos it was a dumb idea..........)

    Anyone who has worked in the private sector knows that the bigger the company, the more impossible it is to run. The only way (out of two) that it ever works is if you split it internally into self-determining 'profit-centres', with basically full independence from the head office numpties. (The other way is to have a monopoly or a cartel working in your business sector, and we don't want that do we?)

    There is no end in sight for this recession. £200 billion has gone into the system in the UK alone and NOTHING has trickled down to the real economy, remember. This is not a 'green-shoots' business initiative, this is pinstripers floundering in the mud trying to shake up a short-term profit.

    The fees will be collossal.
    Guess who will come out of it on the plus side.
    (Clue -nobody who makes or consumes snacks).


  • Comment number 66.

    A merger is what happens when a business fails, so the future is bleak if RP is correct.

  • Comment number 67.

    "Capitalism is plunging into a black hole of monopoly, where individuals of ever increasing wealth make self-engratiating decisions that remove choice from the general public."

    Errr... isn't that the whole point of what is happening?

  • Comment number 68.


    I'm not trying to "rectify humanity at every turn" or "stir" this blog - I was merely responding to post 54 which made the claim that mergers and acquisitions were among the worst crimes of recent times. Factually, they are not criminal activities and in terms of scale they barely compare with other crimes - points which 58 gracefully conceded.


    I know that the basis for some technology originates in publically funded science, but to characterise the private sector as lazily living off this stuff and not contributing is just overstating the case massively. Let's not forget that the light bulb, the railways, the internal combustion engine etc came from private entrepreneurs and investors.

    Is the ipod in that kind of league? Maybe not - but that is the kind of innovative use of infrastructure that publically funded programs just never result in. Why are so many Government IT projects light years behind their counterparts if the public sector is so innovative?

    Going back to the financial aspect of this, the money necessary to make investments in things like 3G or cable run into the order of billions. Hence, bigger companies are needed in order for those kinds of investment to be made - unless we are to trust everything to the State. And which, it is often forgotten, relies on money made privately for its income. The very money used for research and development comes from tax on private enterprise in the first place.

    It's a lot more yin and yang than I think you're allowing.

    The focus is very often on profits, but profits are merely revenues minus investments. Sure, some of this investment goes on marketing and big salaries etc, but no company can survive without investing in developing new products and services. Otherwise we'd be discussing this on Usenet on a 48-baud DSL connection.

  • Comment number 69.

    Merger and Acquisition (M&A) historically goes through cycles of activity; there is big money to be made in this activity by investment banks, who often drive companies into each others arms, so they can pick up a fat 7-10% commission on the deal price. Other times, the drivers are more specific to the underlying economics of the industry, such as we saw in aerospace during the past three or four decades. The concept of the minimum efficient scale (MES) is important where underlying unit costs reflect scale effects and capital requirements. Other times the M&A will be driven by egos of CEOs; at others, it may be marketing issues which come to the fore. In other words, M&A activity can be driven by many factors. Research on historical M&A shows generally that the majority are not favourable to shareholders or customers, especially where the cultural mix does not work well. However, since the investment bankers, lawyers and economists are usually a little weak in their understanding of psychological and/or soft issues of business (as opposed to numbers) they can kid themselves that 1+1 =3 (synergy), when usually the reality is something more akin to a situation of -1+1=0 or if you want to be creative -1. Finally, remember that the M&A activity we have seen in the mobile phone operator market over the past 15 years is also part of a much longer term shift towards the major players positioning themselves against the global market space, not just the UK market. I agree with the comment made elsewhere that this kind of thing would be happening in this marketspace anyway, despite the recession, etc. Therefore, I should contend that its not such a big deal as you suggest Robert, in terms of its relationship to where we are on the current macroeconomic cycle; however, it clearly represents a significant concentration of market power within the UK mobile phone space. These are two different things and should not be confused. In much the same way as one should not confuse the drivers for increased size and concentration amongst UK banks, independent of the government forced mergers/take-overs due to the inept and irresponsible behaviour of select senior management in some of these institutions.

  • Comment number 70.

    Id suggest anyone who has a contract with tmob or orange when it expires to simply move to another provider!

  • Comment number 71.

    I have not got a issue with mergers, but very concerned about monopolies.Monopolies are the enemy of the general public, as they often cushioned and protected from the real world environment. One only needs to look at the year on year Utilities and Council tax increases to realise that monopolies are not beneficial.

    No company should be allowed more than 20% of any specific market, this ensures a minimum of 5 companies are always competing. Restricting market share allows small and medium size companies to grow and innovate.

    Although not perfect, supermarkets have been a good model on how real value can be passed through to the general public.

  • Comment number 72.

    #56 (big companies -technical know-how etc.)

    With respect, I would suggest that T-Mobile and Orange are not stuffed with bright, creative technical geniuses producing white-hot technology. They just sell phones and bandwidth; all the great leaps forward were done by outsiders.

    As far as Kraft and Cadbury's go, I can't think of any innovation by either of them since squeezy cheese and the chunky bar of CDM......... and my wife hasn't forgiven Cadbury for buying out Green and Black and cheapening the recipe.

    The proportion of money spent on R+D by the massive corporations is tiny compared to committed, fleet-of-foot SMEs. Unfortunately the financial markets in this country don't have enough cojones to provide the funding to grow these companies, and just wait for them to be devoured by the big boys.


  • Comment number 73.

    No.70, well said. I recommend Vodafone if you like Blackberry or O2 if you like i-Phone, and a pay as you go mobile on the side, with Orange, so you can make use of their two for one deal on movie tickets on Wednesdays. The rest are hopeless. Virgin has got terrible reception/coverage, likewise T-mobile. 3 is the worst of the lot, and for people who can't actually afford a mobile phone, or have such a poor credit rating they can't get a contract anywhere else. Orange aren't much better - but their movie deal is sweet. On Orange:T-Mobile merger will probably deliver less market share between the two of them than each one had individually.

  • Comment number 74.


    There is a good point in there about the distribution of R+D and risktaking actually and it is well taken. Funding for this sector comes mainly from venture capitalists where banks shy away from it in favour of corporate investment.

    However, there is a kind of logic there: VC money grows through spreading money across a lot of potential technologies and innovations - most of which come to naught. It is largely privately funded risk though (I hate to use the Dragon's Den as an archetype, but it will do for purpose). Typically, relatively small sums are invested in many businesses in the hope that one or two hit the big time.

    By contrast, a bank has to balance the needs of its millions of customers, its regulatory commitments, its asset-sheets and its shareholders. Therefore it is seeking relatively lower risk places to invest larger sums. Putting a billion into the shares of someone like T-Mobile makes perfect sense from this perspective: the chances of them going bust are small, and if they are subject to a takeover, the rewards can be massive.

    Now, where the current faultline lies is the point at which bankers start behaving more like venture capitalists (and also taking rewards on that basis). This has become unmeshed in the general cant about bankers and big business, but really has no bearing on mergers like this.

    Is it a perfect system? No - but then none are, and I can't see a viable alternative on the table.

  • Comment number 75.

    68 I tend to agree with a number of your points but I think there is a massive difference between small private entrepreneurs and huge corporates, particularly those driving the financial markets.

    I have nothing against private business per se and sometimes admire the enginuity and drive of small businesses who by and large have to pay their taxes like the rest of us.

    However, any suggestion that large corporations particularly those operating in the murky world of finance pay their way is misguided. Take the example of Merrill Lynch who conveniently carried forward their losses and offset them against UK tax for the next sixty years (yes that's right sixty years).

    Not only do ordinary people have to put up with the consequences of their financial engineering and M&A's, these parasites get a free ride into the bargain. Perhaps we could have better funded Government IT projects if these thiefs paid their way.

    And as for that old Chestnut "they would simply move elsewhere if we taxed them" lets remember we have internationally agreed laws for trade (its called the World Trade Organisation)so why is it so difficult to have internationally agreed rules for global finance. If we levelled the playing field there's nowhere to run to.

    And while you are correct that large companies often leave an opening for small innovative businesses its not always the case. I don't think you will find too many corner shops innovating against the large supermarkets and just see how independent trade is devastated and towns hollowed out when the likes of Wal Mart come to town. The problem is not private vs public the problem is size, power and greed. That's why mergers that are not in the public interest should be opposed!

  • Comment number 76.

    @ 68
    "but profits are merely revenues minus investments. Sure, some of this investment goes on marketing and big salaries etc, but no company can survive without investing in developing new products and services."

    But they borrow from the banks for major investments, growing the debt but still paying bonuses because they are only servicing the debt not reducing it.

  • Comment number 77.

    So, all you who are complaining about monopolies and the privatye sector generally would have been happy living under the public sector monopoly that BT was originally? I would have thought if that situation still existed we would just have been getting the one state approved mobile phone about now.

  • Comment number 78.

    The problem of viewing competition as 'a good thing' is that in nature competition is a transitory state. Competing species, companies, and even things like rivers eventually evolve to a state of non-competition. It is far from clear that enforcing an artificial state of continuous competition is either workable or beneficial.

  • Comment number 79.

    I believe one of your correspondents made the point that if it was the old state owned BT ( I think he/she meant GPO) there would only be one cell telephone and not the many choices available today. Nothing could be further from the truth and the facts. I worked for the CEGB on power station development and construction and handled a couple of station automatic telephone system contracts. Of course we did not manufacture nor design this equipment but went out to tender to at least 5 manufacturers. The main requirement was that the supply voltage was 50 dc and specifications, quality and standards applied. The telephone transmitter/receiver hand sets were also made by different manufacturers and then, as today, a variety of makes were available. These telephone systems were all tied together nation wide via trunk connections very similar to the BT nation wide systems today. I know the GPO at that time also went out to various manufacturers for the supply of equipment. The point of all this is to indicate if the BT was state owned and ran the main cellphone transmitters/receivers they would not make the equipment themselves which would be supplied from any number of companies. This also goes for the cellphone handset suppliers - Siemans, Nokia, Eriksson, Sony, GEC and others who cared to enter the market. In fact most of these companies were in existence at the time to which I refer. The sad point is that there appears to be no UK based/owned manufacturers existing today mostly as a result of the country's dominating financial unregulated system.


  • Comment number 80.

    "77. At 10:43am on 10 Sep 2009, DMJeffery wrote:
    So, all you who are complaining about monopolies and the privatye sector generally would have been happy living under the public sector monopoly that BT was originally? I would have thought if that situation still existed we would just have been getting the one state approved mobile phone about now."

    I would add to my comment 79 to say it would be an advantage to the consumer if standards were applied to make these telephones uniform. The main item which is crying to be made standard is the charger. Has this person ever referred to The British Standards and Codes of Practice. In any case these phones pretty much work using the same functions and need to do on the international network. As an example where would we be if there was no standard say on the 240 volt domestic sockets.


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