|Author Name||SHIRAISHI Shigeaki (Senior Fellow, RIETI)|
|Creation Date/NO.||July 2008 08-P-005|
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This paper is an attempt to derive implications for merger and acquisition (M&A) policy by specifically analyzing the background of the reorganization of Europe's power and gas industries, which was accomplished through means such as cross-border M&As and grasping the reorganization mechanism under the framework of multiple games involving three kinds of players: firms, sovereign states, and international organizations; that act in accordance with their own respective principles.
In recent years, many attempts to reorganize Europe's power and gas industries have relied on cross-border M&As, in addition to other means. The factors behind these efforts can be summarized as follows:
- Institutional factors: The establishment of an institutional environment that is conducive to M&A activity. For instance, in line with the European Union's basic principle of free capital movement, anti-takeover rules have been clarified across Europe with EU member states adopting the EU directive on takeover bids into domestic legislation.
- Business environment factors: Specific to the power and gas industries, there has been an increasing number of policy initiatives designed to create an integrated European market under the philosophy of "sustainable, competitive, and secure energy supply." Cross-border M&As have been identified as an effective strategy to respond to such changes in the business environment.
- Macroeconomic factors: Amid continuing economic growth in Europe, ample liquidity has enabled companies to raise capital, on favorable terms, necessary to fund large-scale M&As, which have been the vehicle of choice for implementing corporate strategy focused on expanding the earnings base.
Against this background, E.ON AG, a German power utility, launched a high-profile takeover battle for the Spanish electricity company Endesa in February 2006. The takeover drama, which also involved a series of other players including competing bidders such as ENEL of Italy, the Spanish government, and the European Commission; ultimately ended when E.ON gave up its bid for Endesa in exchange for acquiring key infrastructure assets in Spain. The E.ON-Endesa takeover battle was subsequently analyzed by applying the framework of multiple games, which yielded the following implications:
- National interests pursued by a sovereign state, profits pursued by a firm, and universal interests pursued by an international organization all have different values based on different principles, and economic globalization is a non-characteristic function form game. The reconciliation of different values is a political (democratic) decision-making process that is a meta-decision-making process in which no unambiguous right answer exists. The specific point that needs to be addressed is the reality of national interests that is judged against specific circumstances. Conditions imposed by the Spanish government on the takeover of Endesa by E.ON can be evaluated positively as a model solution that takes into consideration the reality of specific national interests. Thus, the range of applicability of the ruling handed down by the European Court of Justice that found the Spanish government's conditioning illegal should be viewed with some reservation.
- Sufficient information disclosure is a prerequisite for executing an M&A that would produce the best results and be beneficial for both the acquirer and target company. A hostile TOB may impose significant burdens on both the acquirer and the target, while a compromise to find win-win solutions tends to bring realistic and desirable results. Powerful anti-takeover measures tend to produce greater adverse effects, and conditions for the adoption and use of such measures must be carefully examined.
Future points to consider:
- The reconciliation of the different values pursued by the sovereign state, firms, and international organization involved in a cross-border M&A is made in multilayered institutional settings: 1) foreign capital restrictions and other regulations at the sovereign state level; 2) antitakeover measures at an individual firm level; and 3) adjustments at an international level (e.g., region-wide competitive policy in the case of the EU). However, no established consensus exists on what constitutes a desirable institutional system for reconciliation. Institutions differ from one another in terms of regulatory grounds and degree of flexibility. Also, institutions can be classified among various types in terms of how anti-takeover measures at the firm level relate to foreign capital restrictions imposed at the sovereign state level. It is necessary to further examine these realities and reflect the findings in the design of future institutions.
- Specifically with respect to the energy sector, foreign capital and the issue of how it should be defined and incorporated in designing institutions must be examined with due consideration to the need to ensure energy security. For that, insight from a broader perspective is necessary for answering questions related to capital relationship and energy security.