A trolley-load of questions must be asked about the proposed deal, writes accounting expert Prem Sikka.
Another week, another merger and another stock market frenzy. This time the news that ASDA and Sainsbury’s might merge has excited the speculators and they are busy buying shares to make quick profits.
At one point, Sainsbury’s share price rose by 20% as speculators scented gains for the merger. And the owners of these shares will decide the future of the companies – without any concern about the implications for employees, suppliers, customers and local communities.
Currently Tesco dominates the supermarket business, with around 28% of the market share. The combined Asda/Sainsbury’s business will have around 2,800 stores, 330,000 employees – and around 31% of the market.
To get the public onside the companies are promising 10% cut in the price of popular foods, which is probably undeliverable. And while they make some token gestures, they certainly won’t be cutting their own profit margins. Instead, their huge market power is likely to be used to squeeze farmers, food manufactures and other suppliers.
Remember the headlines about Tesco when it delayed payments to its suppliers to boost its cash flow and profits? Some suppliers had to wait two years for millions of pounds owed by Tesco. The company was criticised for unilaterally making deductions from invoice payments.
And Tesco was accused of seriously breaching the legally binding code governing the grocery market. The same can happen again as executives chase performance related pay and shareholders press for higher short-term returns.
All mergers produce job losses, and this one is unlikely to prove an exception: the ultimate driving force behind mergers and acquisition is private profits. Sainsbury’s/Asda say that the combined entity will not close any stores. They might keep to this promise in the short-term, but store closures seem inevitable.
In many localities Sainsbury’s and Asda compete within a stone throw of each other: it is hard to see how that would continue for long. The closure of stores will be devastating news for some neighbourhoods.
And even if stores are not closed there will be job losses: the merged entity will hardly need two purchasing departments, two accounting teams, two Human Resource (Personnel) departments, two staff training facilities and so on.
With huge concentration of market power in the merged entity, there will inevitably be a reference to the Competition and Markets Authority (CMA). This concentration is not just in terms of the bricks and mortar shops in the high street, but also on the internet as the same concerns dominate the online grocery trade.
However, the CMA has been very ambivalent about the grocery business, and has been content to see the big four supermarkets (Tesco, Asda, Sainsbury’s, Morrison’s) dominate the market.
In December 2017, the CMA approved Tesco’s £3.7bn takeover of Booker, the largest food wholesale supplier. In 2015, the CMA cleared the merger of Poundland and 99p Stores. And in 2010, CMA’s predecessor the Office of Fair Trading (OFT) approved Asda’s acquisition of Netto, while the 2004 acquisition of Safeway by Morrison’s was accompanied by the requirement to divest some stores to rivals.
Might the CMA require Asda/Sainsbury’s to sell some of their stores to rivals as a condition of approving the merger? Even if it does so, the new mammoth will still dominate the market and all the dangers to suppliers and prices will remain.
The proposed Asda/Sainsbury’s will turn the ‘big four’ into the ‘giant three’ – though some commentators believe that following its US acquisition of Wholefoods, Amazon may eventually enter the UK fray with the acquisition of smaller supermarkets.
Either way, the merger is likely to be referred to the Business Secretary – a department which tamely approved the recent hostile takeover of GKN by Melrose, and is unlikely to upset big business by exercising a veto.
Whist a lot of public discussion has focused on competition and consumer choice, employees have not been consulted. They should be. Employees have legitimate concerns about jobs and pensions. What will happen to the pension schemes of the respective companies?
Asda operates a defined contribution scheme, while Sainsbury’s (which also controls Argos) operates a defined benefit scheme. Will Sainsbury’s employees be forced to join the inferior Asda scheme?
Secondly, the most recent financial information from Sainsbury’s states that “Our pension deficit has reduced by £589 million from £850 million last year to £261 million at the year end”. So what will happen to the deficit?
The brain, brawn of workers has built these companies: and unlike speculators they have a long-term interest in the well-being of the companies. They should not be traded in mergers and takeover bazaars without any say.
That would not happen in most other EU countries, where workers have statutory rights of information and consultation, and also employee elected directors on company boards. At the very least, the same should happen in the UK.
Prem Sikka is Professor of Accounting at University of Sheffield and Emeritus Professor of Accounting at University of Essex. He tweets here.
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