Meanwhile back in the Uk

It’s a whole new ball game as watchdog kicks deals into touch

Deals such as JD Sports’ tilt at Footasylum have fallen foul of the Competition and Markets Authority

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The boss of JD Sports could not disguise his anger. Peter Cowgill has long dreamt of expanding his sports fashion empire, so when, on Tuesday, the competition watchdog signalled that it might block JD’s takeover of Footasylum, he lambasted its provisional ruling as “fundamentally flawed”, demonstrating “a complete misunderstanding of our market to an alarming extent”.

Mr Cowgill — who now faces the prospect of selling Footasylum, the smaller retailer that JD bought for £90 million last year — is not the only executive to have been angered by the Competition and Markets Authority in recent months. The watchdog has taken an increasingly interventionist approach to mergers and acquisitions, flexing its muscles to an extent rarely seen before, wading into takeover processes that are nearing completion and even trying to unwind deals retrospectively.

According to Linklaters, the law firm, since the start of last year 12 of the 17 takeovers subjected to in-depth anti-trust examination — so-called phase two investigations — did not survive or are set to be prohibited. They were blocked, provisionally blocked or abandoned by the parties involved, resulting in a 71 per cent kill rate by the CMA.

The CMA also rejected the proposed tie up between Sainsbury’s and Asda

CHRIS RATCLIFFE/GETTY IMAGES

Its scalps include the £12 billion merger between Sainsbury’s and Asda that collapsed last April after the regulator rejected the tie-up. “It was like they were working backwards to get the answer they wanted. They wanted to block the deal from the start,” a senior retail industry source said.

The authority was set up in 2013, replacing the Office of Fair Trading and the Competition Commission. Its work includes assessing markets for consumer problems, investigating cartels and scrutinising takeovers.

Within the past three weeks alone it has said that it is minded to block the JD Sports deal and the $360 million acquisition of Farelogix by Sabre Corporation, two American companies that supply software to airlines. Prosafe and Floatel, which provide accommodation for oilrig workers, abandoned their merger after the authority said that it was likely to forbid it.

Last month the regulator surprised the City by starting a last-minute review of Just Eat’s £10 billion merger with Takeaway.com, its Dutch food delivery rival. Amazon’s plan to lead a $575 million investment in Deliveroo, another online food ordering platform, is also being investigated in an inquiry the two businesses have dismissed as “speculative”.

Some City advisers claim that companies are quietly withdrawing deals before they become public because of the uncertainty caused by the regulator’s new, aggressive stance. “I can think of four or five deals in the last two or three months where people have just said the uncertainty involved in CMA clearance is too significant and have binned the deal and gone on to something else,” one said.

The regulator also has become more active at publicising its activity. In October it hired Stuart Hudson from Brunswick, the City PR firm, to fill a new senior director role that includes strategy and communications.

Its muscular approach comes after the arrival of Lord Tyrie as chairman of its board in June 2018. The economist and former Conservative MP made a name for himself as chairman of the Commons Treasury select committee, when he skewered everyone from bankers to the chancellor with his forensic questioning.

He has been no less combative since taking up his role at the CMA. A year ago Lord Tyrie set out bold plans to broaden the watchdog’s powers, including giving it the ability to disqualify company directors for serious breaches of consumer law.

While the government is yet to consult on Lord Tyrie’s proposals, there are signs that his ambitious vision for the regulator is starting to become a reality. This month the government asked the authority to produce regular “state of competition” reports that will involve far-reaching economy-wide surveys of markets. However, decisions on phase two work on mergers falls outside the scope of the CMA board and sources at the watchdog insist that Lord Tyrie does not influence its stance on specific takeovers.

The CMA itself says that reviewing its track record has helped it to fine-tune its approach. A spokeswoman said: “Lessons from previous investigations show that we expected competition to increase in some cases because of new companies entering the market, but this didn’t happen. We use these lessons, alongside the evidence in front of us, before reaching a conclusion.”

Some City onlookers put the change down to wider concerns that regulators worldwide have done too little to tackle the dominance of large corporations, particularly the giants of Silicon Valley.

A book published last autumn called The Great Reversal, by Thomas Philippon, a French economist, assesses the decline of competition in the United States. It has become influential in regulatory circles and is credited by some as being behind the British watchdog’s renewed vigour.

Others believe that the authority is trying to build its influence ahead of Brexit, though this is denied by sources at the watchdog. Once Britain leaves the European Union, the regulator’s workload will increase as it scrutinises big takeovers that previously would have been examined by the European Commission. Its budget has been increased to cope and it has embarked on a hiring spree that has lifted its headcount from about 650 to 850 recently and is expected to surpass 1,000 by December.

“I think it’s fair to say the CMA is not looking to be a junior partner to the European Commission post-Brexit,” Dominic Long, a partner at Allen & Overy, the law firm, said. “The CMA want to maintain a seat at the table of global competition enforcers.”

Essential reading on competition

Europe’s free market outshines America

A new book argues that the US economy has grown uncompetitive while EU regulations give consumers more choice

Gerard Baker

Thursday December 05 2019, 12.01am, The Times

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Love it or hate it, most Americans would probably agree that their economy is a model of capitalism. Competition, choice, free markets; for good or ill, these seem to define the way America works. By contrast, fans and critics alike look across the Atlantic and see a different model with less choice, more regulation, more government intervention.

But what if, in at least one critical respect, this is the wrong way around? A new book by a French economist who lives and works in the US is making Americans think again about the health of their capitalism.

The Great Reversal by Thomas Philippon of New York University argues, with copious data and rigorous analysis, that in the past 20 years America has gone from being a highly competitive free-market economy to one dominated by huge companies that are eliminating choice, raising prices, increasing inequality and impairing dynamism.

In most key sectors, mergers and acquisitions and a system in which big companies are able to exploit the regulatory system for their benefit have diminished competition, to Americans’ detriment. Meanwhile in Europe, the reverse has happened. The same sectors have become more competitive, ironically perhaps, under the direction of regulatory authorities which, far from stifling economic dynamism, have actually stimulated it.

It’s easy to test Mr Philippon’s thesis. Take airlines. In the past few decades consolidation in the sector has resulted in a handful of companies controlling the market. If you want to fly from New York to St Louis, Missouri, these are the options according to the travel website Expedia: Delta Airlines will fly you from John F Kennedy International Airport on a round trip for $299. Shop around and you’ll discover that American Airlines will do the same journey . . . for $299.

Maybe you want to fly a little later in the day, to give yourself more time to get through the ninth circle of hell that is JFK. Prices for a lunchtime flight rise. On Delta you’d pay $340. But now American offers a real bargain. They’ll fly you there and back for a mere $339. You can use that extra dollar perhaps to buy a fifth of a cup of coffee from one of the 85 branches of Starbucks there.

Now look at Europe. London to Rome is almost the same distance as New York to St Louis: about 800 miles. According to Expedia, for a round trip you can get a flight on Vueling for $88. EasyJet will set you back $118. And if you’re feeling really flush you can pay $178 for a luxurious British Airways flight.

In sector after sector the story is the same on either side of the Atlantic. If you want a high-speed broadband internet connection in New York you have two choices. Verizon Fios will charge you $79.99 a month. Never knowingly undersold, Time Warner Spectrum will charge you . . . $79.99 a month.

This lack of choice means that prices are higher, of course. The average monthly cost of a broadband connection in the US is $68. In the UK it is $40, in Italy $30, in France $31.

Mobile phone service is similar: American users pay about $100 a month, while subscribers in Europe pay about half that.

A recent study estimated that concentration — the reduction in the number of companies that dominate a sector — had increased in three quarters of all American domestic industries between 1998 and 2012.

It wasn’t ever thus. Mr Philippon discovered when he moved to the US in the late 1990s that prices were much lower than they were in Europe. But in 20 years there has been a great reversal. Since the completion of the single market, Europe has adopted many of the pro-market, pro-competition policies that the US has long been renowned for.

In the US, takeovers have been a big factor. The number of mergers increased in the 30 years to 2017 from an average of just over 2,000 a year to more than 15,000 a year. More important has been the power that large American companies have to use lobbying to get favourable conditions from regulators and policymakers at the federal and state level. Mr Philippon estimates that uncompetitive markets cost Americans $300 a month, a total for the economy of $1.5 trillion in the space of 20 years.

The phenomenon is a key driver of the growing inequality in the US. Often immune from serious competition, companies are able to generate profits, the proceeds of which go to shareholders and top management, widening the disparity between those at the top and the rest of the country.

“Most US domestic markets have become less competitive, and US firms charge excessive prices to US consumers,” says Mr Philippon. Excess profits are used to pay our dividends and to buy back shares, not to hire and invest.

Of course, overall US economic performance has been stronger than Europe’s, though Mr Philippon notes that in terms of output per head the gap is much smaller. It’s also true that the US has innovated more in the past 20 years. But here too is a twist: since the big tech companies such as Apple, Amazon and Alphabet have grown to exercise enormous power in the sector over the past decade, innovation has declined.

There is, by the way, a Brexit coda to all this. If it leaves the EU, the UK may no longer benefit from Europe’s competitive markets. On the other hand, Mr Philippon points out that Europe deregulated its markets in part at least because the UK was among the strongest advocates of competition and choice inside the EU. Will a post-Brexit EU result in another great reversal

10 Tips for increasing productivity

Roger Bootle in The Telegraph - ideas, no analysis:

What options are there for policy action?​ Here are my top 10, from the straightforward to downright radical

Two weeks ago, I argued in this column that it was not naive nor daft for the Government to be aiming to increase UK productivity. After all, there is scope for us to catch up with other developed countries. But at the same time, this is far from easy.

Governments have been trying to do this since heaven knows when. What options are there for policy action? Everyone will have their favourite cocktail of measures. I outline below my ten favourites, which range from the straightforward and relatively easy to implement, to the radical and politically difficult.

1. Public Investment

Increasing the appallingly low rate of investment is essential, including investment by the public sector. But just spending public money on any old project won’t wash. There is a long history of wasteful investment projects, many associated with transport. Concorde springs to mind. It looks as though HS2 may soon be added to that list.

By contrast, there could be serious returns to be had from increasing investment in many smaller projects to improve the road system. And government can justifiably spend more on encouraging R&D and facilitating the development of the digital and artificial intelligence industries.

2. Corporation Tax 

Increased public investment will not be enough, however. Private investment also needs to be much higher. Perhaps it will spontaneously pick up decisively in response to the opportunities presented by Brexit, the revival of confidence after the Conservative election victory, and a more restrictive and better targeted immigration system.

But lower rates of corporation tax – which the government has put on hold – could make a difference, both by leaving businesses with more free cash for investment and by making investment in this country more attractive compared to investment abroad for both British and foreign companies.

3. Corporate governance

But on their own, cuts in corporation tax will not be transformatory. There is a good deal of evidence that the system of remuneration for senior corporate executives encourages them to focus on the short-term performance of the share price and to discourage real investment, especially for the longer term. The Government needs to look into this issue with urgency, but the response needs to be careful and considered.

4. Personal taxation

Including national insurance contributions, personal tax rates are too high pretty much throughout the income range. There are also some ridiculous quirks in the system where marginal tax rates jump. This discourages effort and distorts economic activity. The tax system is also ludicrously complex. This wastes the time of both company employees and private individuals, and results in the unproductive employment of countless civil servants. 

5. Regulation

One of the main reasons why the EU’s economy has not done very well is its regulatory regime. There is now ample scope to reshape our system of regulation and to move it away from the safety-first bureaucratic approach of the European Union. If this is done properly, it will not only help to increase productivity directly but will also boost corporate investment. 

6. Trade policy

The more open our economy is to international competition, the stronger will be the pressures to increase productivity. Greater openness can be achieved through concluding free trade deals with other countries and/or by unilaterally reducing our tariffs. 

7. Education

In many ways, the Blair Government’s emphasis on education was correct; it just went about things the wrong way. You do not improve productivity performance just by force-feeding more young people into the university machine.

If anything, the economy needs fewer youngsters going to university and more going into apprenticeships and schemes for work-based learning. Meanwhile, this country has long suffered from low levels of basic attainment by school leavers in the essential skills of reading, writing and simple mathematics. Recent school reforms introduced by Michel Gove have started to make a real difference. This improvement needs to be built upon. 

8. Law and order

Crime is not only a social evil, but also carries an economic cost, including huge amounts of money spent on prevention, security and insurance, not to mention the blighting of crime-ridden areas and the deterrence of investment and entrepreneurship by small businesses. A more effective police force and legal system that punishes crime severely and thereby deters criminals would, amongst other things, bring economic benefits. 

9. The NHS

I have to mention this, although I don’t hold out much hope for radical measures. Of course, the most important thing about the NHS is that it should deliver good health outcomes for our citizens. But there is also an economic aspect to all this. After all, the NHS takes up about 15pc of government spending and employs about 4pc of the national workforce. Getting the NHS to function properly would do wonders, not just for our health, but also productivity. Merely splurging money on it will not do the trick. 

10. Road pricing

Here is a really radical proposal with a potentially huge payoff. The idea is to charge motorists a fee per mile of road usage, with the charges varying both by area, type of user, type of road and time of day. The annual fixed charge on motorists, which used to be called the Road Fund Licence, would be cut or abolished. The effect would be to reduce road usage at the margin, incentivise the use of shared vehicles and public transport, and to make more efficient use of our road network. The reduction in the time spent in traffic jams would both increase productivity and improve human wellbeing. 

Road pricing could be for Boris Johnson what privatisation was for Margaret Thatcher. Of course, it would initially be very unpopular – until people saw the benefits. This is why governments have shied away from it in the past.

Mind you, what are large parliamentary majorities for if not to push through radical policies that promote the national interest in the teeth of initial popular resistance?

Roger Bootle is chairman of Capital Economics.

roger.bootle@capitaleconomics.com

How capitalism creates choice

Better Gym and the emptiness of ‘people over profits’ marketing

By Julia Behan

Photo: Jean-Francois Cardella/Construction Photography/Avalon/Getty Images

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•   What could be more people-centred than a competitive business?
•   The idea that profits are only made at consumers' expenses is wrongheaded
•   What would Adam Smith have to say about the UK gym market?

“I chose a gym that puts people over profit”.

In its bid for a slice of the New Year’s Resolution gym membership market, the latest ad campaign from social enterprise Better Gym has pitched for the anti-nasty-capitalist crowd.

But although this kind of glib virtue signalling might appeal to a particular kind of right-on fitness enthusiast, there isn’t much sign that consumers feel particularly antagonised by commercial gyms.

Indeed, it’s hard to think of a worse target if you were trying to prove how unfair modern British capitalism is. Health and fitness is one of our most competitive industries and seldom have consumers had such power, influence and choice in a market.

The raw figures on the UK industry are remarkable. According to the 2019 State of the UK Fitness Industry report, total gym membership in this country has now passed the 10 million mark, with well over 7,000 different fitness facilities available.

The range of different options is equally impressive – and a fine example of the power of a well-functioning free market to offer people what they want.

For shift workers, there are now a host of 24-hour gyms. For those who only want to work out every now and then, there are pay-as-you-go, no-contract gyms. For the more upmarket customer there are establishments such as London’s KX, which doubles as a private members club. There are LGBT gyms, women-only gyms, gyms in Mayfair’s old boys’ clubs, and gyms that double up as brunch spots and coffee houses.

The spike in demand has also meant all manner of classes are on offer, from hot yoga to zuu (primal movement exercises).

All of these options offer something just a little different to each other and quite a lot of them are booming as people try to improve their health, but also move away from traditional retail experiences.

And a diverse market means plenty of opportunities for entrepreneurs too. Young mothers who run their own yoga business build small communities with other parents, the city worker who’s headed off to become a personal trainer creates a community of like-minded folk in the big city.

Nor is the industry confined to the well-heeled professional classes – even in London there are now options that cost less than a fiver a week, and there are all sorts of concessions and discounts.

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This all comes down to the abundance of supply, which forces providers to engage in cut-throat competition, all to the benefit of us, the consumers. To paraphrase Adam Smith in The Wealth of Nations ‘the price of free competition … is the lowest which can be taken’.

So, whatever Better Gym’s marketing team might have you believe, no one is being punished by greedy profit-seekers. If anything, it’s Better Gym’s own customers who are getting a raw deal. Despite its grandiose claims of putting people before profit, it’s not actually the cheapest option around.

For example, In my own London suburb BetterGym charges £30.95 a month for its standard membership – just down the road at The Gym it’s only £23.99, while PureGym is £26.99. This is not just the case in the capital. In Leeds, PureGym charges £14.99 per month, Trinity Fitness £15 and BetterGym £15.95. It seems for all the group’s lofty rhetoric, the free market is better at providing a low-cost option.

Which brings us back to the vacuity of the whole ‘people before profit’ sloganeering. In a properly functioning market, a business only makes profits by providing a service that customers want at a price they are willing to pay – what could be more people-centred than that?

Indeed, if you were being cynical, you might observe that the ‘people before profit’ message is actually that most capitalist of phenomena – a canny marketing ploy from a business trying to grab market share from its competitors.