Welcome to the Cook Islands Herald

CI Times Weekly | Current Issue 262 | 04 August 2008

The PDL takeover - what can we expect?

Speculation about a takeover by CITC of rival company PDL (or merger with) has been met with a wall of ‘no comment’ from all players but has generated alarm in Government circles who are fast tracking a Commerce Commission Bill and Fair Trading and Consumer Guarantees Bill through Parliament next month.
Government’s move has been criticized as a ‘knee jerk reaction’ by the Cook Islands Chamber of Commerce. which has defended the move by CITC, but has offered no explanation as to the benefits, if any, to the public.
CITC is arguably the largest retailer in the Cook Islands but the takeover bid may be an indication that their groceries turnover has taken quite a beating from PDL which was formed with the friendly merger of Foodland, Meatco and Oasis Energy last year.
Acquiring the combined buying power and customer base of PDL Group and their associated outlets such as Muri Mart and Tangees would make them a very attractive target. What are the benefitsto PDL and what are the downsides for the staff and the consumer but nobody is talking!
The overseas experience is that private companies are often concerned about maintaining a level of secrecy or confidentiality because of possible negative reactions from the customers, employees, bankers or suppliers.
The better view is that nowadays most companies are conscious of the need for good public relations and how negative publicity can be influence customers to take their business elsewhere.
Theoretical advantages for a takeover
The Government is reportedly planning to table consumer protection laws next month, so in the public interest, we requested a copy of the proposed legislation from the authorities including Financial Secretary but to date, we are still waiting to receive a copy.
In the absence of any details, CI Times has researched the overseas arenas as to the usual economic theory of takeovers or mergers and once all the parties finally speak up, it will be interesting to compare the reality with the theory.
Synergy is where the combined company can reduce duplication of departments and operations in for instance, accounts, goods purchase, management staff, number of outlets. This is likely to reduce the wages bill from the downsizing of those departments.
Increased market share and increased revenue and thereby increasing its power to set prices and hopefully gain higher profits or at least hold down the overheads.
Economies of scale with increased buying power from increased size and bulk buying discounts
Reduction of transport, storage and warehousing costs by shipping direct to market from only one location rather than several sites. A spin off could be changing the use of a particular property or even to realize the capital value of property which may no longer be needed (ie by selling or leasing the excess property).
Resource transfer by combining scarce resources and perhaps reducing tax liabilities by buying a loss maker (if any) and reduce their tax liability (depending on the tax regime).
Unfortunately, the overseas experience shows that financial performance does not necessarily follow. There is a syndrome called ‘Empire building’ where managers have larger companies and hence wield more power but no real value gained for the company. There are also technological challenges where the buyer has one computer system while the target company has a different system which may be incompatible with the first. This could mean costly outlay of purchasing compatible systems or running two different systems within the enlarged company with resultant duplication of services. Another downside is that the manager’s overconfidence about the ‘synergies’ do not translate into reality from the merger and acquisition (M&A) but the outcomes cannot be undone.
For instance, the new enlarged company may find to their chagrin that key management or floor staff have left and have no intention of returning.
Potential downsides for consumers and staff
While many have been concerned about the lack of competition leading to higher prices than necessary (think airline fares prior to competition) and lower quality (who are you going to complain to) there is the immediate danger of job losses from reduced employment opportunities.
With less money circulating in the economy from fewer breadwinners in the workforce, it could accelerate the very condition Chamber of Commerce is complaining of namely a smaller customer base as more people leave our shores.
Monitoring ‘private companies’
The Government is reportedly planning to table Commerce Commission Bill together with a Fair Trading Bill in next month’s session of Parliament but what will they do in the meantime?
Reportedly the new legislation has been largely created by Melbourne based QC Charles Augustine Sweeny and it will be interesting to see the details because Australian consumer protection laws are very strict and companies that contravene the Trade Practices Act are pursued in a very robust manner by the Australian Competition and Consumer Commission (ACCC).
New Zealand Commerce Act 1986 aims to promote competition and prohibits conduct that restricts competition and the purchase of a business if that leads to a ‘substantial lessening of competition in the market place’.
The NZ Fair Trading Act 1986 was developed with the Commerce Act to encourage competition to protect consumers from unfair trading practices.
There are inherent difficulties in monitoring of private companies precisely because they are private, however, if our proposed legislation is anything like the Australian laws, then the proposed Commission may given the power wide powers including the power to issue ‘statutory demands for information’ with ‘virtually all businesses and the people behind them’ required to comply with the consumer protection laws.
Incidentally, Sweeny QC is the chairman of the NZ Commerce Commission and has stated on the official website that the Commission ‘must be left to do its work independently of government…and not be subjected to personal pressure to yield to the wishes of powerful and well connected companies or their powerful and well connected advisors.’