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An Analysis of the Proposed Merger Between Lloyds TSB Group Plc and Abbey National Plc.

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Introduction

An Analysis of the Proposed Merger Between Lloyds TSB Group Plc and Abbey National Plc In 2001 the secretary of state referred the proposed acquisition of Abbey National Plc by Lloyds TSB Group Competition Commission for investigation to decide whether the merger was deemed to act for or against the public interest. Lloyds TSB has for many years been one of the four leading clearing banks in the UK along with Barclays PLC, HSBC plc and Royal Bank of Scotland plc/National Westminster Bank plc, which make up the 'big four'. Lloyds has substantially increased in size and diversity of activities in the last six years as a result of other mergers, including that of TSB. Abbey National was the first building society to convert from mutual to public company limited company (plc) status. It has since developed into a full service retail and wholesale bank with 15 million customers in 2000, and is now the fifth largest banking group incorporated in the UK in terms of total assets. The proposed horizontal merger between Lloyds and Abbey National qualified for investigation by the CC as it satisfied the Assets Test. Abbey National had total gross assets at 31 December 2000 of �204 billion, which exceeds the �70 million threshold set for the assets test. The share of supply test was excluded from consideration. The main markets to be investigated were; (i) markets for financial products sold to personal customers, in particular personal current accounts (PCA's) and (ii) markets for financial products sold to small and medium sized enterprises (SME's). The possible effects this proposed merger would have on these markets, as well as the overall effects of the merger on the public shall be considered. The merger's largest effects are likely to be seen in the PCA market. This market is of particular importance as PCA's are also 'gateways' through which suppliers can sell other financial products. ...read more.

Middle

The removal of Abbey National would lead to a reduction in competition in the PCA market than would otherwise exist. This reduction in competition would have adverse effects in the form of higher prices (higher fees and overdraft rates, and lower interest on credit balances) and a loss of innovation. Lloyds argued that Abbey National's role in the competitive process was not of great significance and that its removal would not act against the public interest. It was argued that Abbey National is not a 'maverick' player or a price leader and that it was concentrating on other markets and had lost focus on the PCA market. Halifax on the other hand could provide vigorous competition in the PCA market and could realistically prevent the merged firm from abusing their market power. The view could be taken that changing conditions in the PCA market, such as advances in technology, new entry, the introduction of enhanced services and an increase rate of switching is facilitating the emergence of firms that could potentially pose a threat to the big four. For example, new online banks that have lower overhead costs can afford to offer better rates, which could win them a larger share of the market, leading to more price competition. However, at the moment it seems that customers prefer established banks, which offer Internet banking as part of a full range of services. Therefore this sort of competition may be insufficient to constrain the anti-competitive policies of the big four. In terms of the savings and mortgage markets, the proposed merger would not act against the public interest. There are far more suppliers of savings products than of PCAs and growth and switching is much easier. The market is therefore perfectly competitive and would not face the same problems of concentrated market power if the merger went ahead. Under perfect competition, the firm will produce at the bottom of their average cost curves and the price is given where the demand equals the marginal cost, closer to the Pareto optimum. ...read more.

Conclusion

It is difficult to say whether efficiency gains will be passed on, however, due to their strong market position, I do not think that Lloyds have a great incentive to pass on the efficiency gains in lower prices. * The merger would have an adverse effect on consumer choice and innovation. I would agree with this as it is clear that certain products offered by Abbey National will not be available once the merger has taken place. Losing Abbey National as an independent competitor, would also be likely to lead to a decrease in innovation. Recommendation The Commission concluded that the merger between Lloyds TSB and Abbey National would act against the public interest. Prohibiting the merger is the only remedy capable of fully addressing the adverse effects associated with the merger. I would agree with the Commissions recommendation as it seems that the merger would certainly lead to less competition in both the PCA and SME markets, resulting in adverse effects on the public. However, subsequent changes to the banking market must also be taken into consideration when making a judgement on this decision taken in 2001. The most notable change is that Halifax has merged with bank of Scotland to form HBOS. The possibility of this merger taking place was considered in the Commissions report but its effect on the PCA market was expected to be small. It was not expected that synergies gained from the merger would be used to fund a more competitive stance in the PCA market. I would argue that the Commission underestimated the impact that the HBOS merger would have on competition and market share, particularly in the PCA market. The HBOS merge has created a fifth force that has the necessary network and customer base to pose aggressive competition to the big four. In hindsight, allowing the Lloyds/Abbey National merger may not have acted against the public interest, given the heightened competition created by the HBOS merger. The merger could be re-assessed, taking these recent changes to the market into consideration. ...read more.

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