Enterprise and Regulatory Reform Bill

Debate between Lord Berkeley and Lord Hunt of Wirral

Tuesday 18th December 2012 Grand Committee

[Lord Hunt of Wirral]

My Lords, in proposing this new clause I am concerned about the impact of the current merger regime on small companies. I hope that every effort will be made by my noble friend to lighten the burden. Small companies wishing to grow through merger face a disproportionate cost in the professional fees that have to be incurred in dealing with an OFT investigation. I am seeking to highlight small mergers and to insert, after Clause 26, a new clause which would exempt such small mergers.

At the moment, the Bill misses a great opportunity to exempt or deregulate small mergers. I would have thought that there could be a simple measure based on turnover, which would allow small companies to merge and restructure without the threat of costly intervention by the proposed Competition and Markets Authority. Small companies just do not have the financial and management resources to justify responding to an in-depth CMA review, which I am told would cost between £50,000 and £100,000 or even more. The risk alone of an in-depth review, with the smaller risk of a phase 2 review, can lead to small and defensible mergers being abandoned at quite an early stage. I want the Committee to understand that I believe there is a point where the costs of reviewing a potentially anti-competitive merger exceed any likely damage to consumer interests.

On its own reports, the OFT has reviewed mergers where the turnover of the acquired company was about £100,000. I have also been made aware of a merger of two small companies where the target had a turnover of £500,000; with the OFT narrowly defining the share of supply, there were legal fees of over £100,000 in dealing with the OFT investigation. With the associated cost of professional fees and management time easily reaching a similar figure it must be clear that merger activity would be reduced and growth opportunities for small firms would be diminished unless this approach changes, and I hope that it will.

In this new Clause, I suggested that a turnover figure of £5 million for the acquisition could be applied. That is a proportionate and reasonable figure. This received strong endorsement from the consultation, when one analyses the responses. It is interesting that in Italy, Prime Minister Monti, who is still the Prime Minister and was formerly the EU Commissioner for Competition, has recently announced a liberalising measure that introduces a new turnover exemption of €47 million for the company being acquired. I do not want to say that we should follow that example, but I believe that it is possible to introduce a safeguard to limit the use of this exception over a certain time period to address the concerns of a large company increasing its market position. I leave it to my noble friend to decide what this safeguard should be. This amendment would allow more freedom for small companies to merge and grow without unnecessary regulatory cost. I beg to move.

[Lord Berkeley]

My Lords, I have a few worries about this amendment. It sounds fine for the companies. They will merge, grow and make more money. That is wonderful. What if you are a consumer at the other end of these events? I see something of this in the West Country where I live. There are a number of quite small companies there and occasionally they play around at trying to take each other over or merge, and you end up with monopoly situations. I do not know what the solution is.

A monopoly with a turnover of under £5 million is just as dangerous to the consumer as a monopoly with one of £100 million. Competition is key. I do not know whether there is a simple way for the new authority to look at this and possibly not get involved but suggest another route. It is wrong to put a figure on this and just allow companies to merge, because they are small, without looking at the consequence of the merger on the customer and whether there is still competition for whatever services that are provided rather than turning the company into a monopoly.