Notes on a potential Telus-BCE merger
The big news story (Globe article here and political analysis here) of the day is the proposed merger between Telus and BCE (aka Bell), and what the government should do about it. Below are a few notes to add some context, and an alternative, to merger mania.
First, was it not just a year ago that both BCE and Telus was going to convert to income trusts. Then when income trusts rightly got shot down, the game was private equity. Now it is mergers. It seems that senior management are obsessed with ploys that play to the financial markets, in order to boost share prices and therefore justify their massive salaries, rather than actually running a good company. I cannot speak for Bell, but Telus is all marketing campaign (a successful one featuring cute animals) but notoriously bad customer service.
It is nice to see the Globe be upfront about this commentator’s conflict of interest (unlike Bank of Canada policy as Arun points out), but they run with the quote anyway:
Investors like the thought of a Telus-BCE combination. “Longer term, you don’t want to see the Canadian markets have fewer and fewer world class opportunities to invest in,” said Rob Callander, a vice-president and portfolio manager at Caldwell Securities in Toronto, which holds both BCE and Telus shares. “So obviously my bias would be a solution that sees BCE-Telus combination as a publicly available stock rather than have private pension plans partnering with US buyout firms taking these things private.”
Second, the arguments about the economics are a lot like bank mergers, although in this case there is a more highly defined regional separation based on former monopoly. To wit, we need to merge to become players on the global stage, and competition will come from foreign competition (like banking, this is restricted in telecommunications) or from adjacent industries like the cable companies. Will this lead to a better marketplace for Canadians? Don’t bet on it.
The Globe article notes the importance of the lucrative wireless segment of the market, where competition is greater than in traditional land-lines, and more of a proxy for what the sector as a whole is imagined to look like in an ideal world:
Telus would have to keep the wireless business in order to make the purchase worthwhile. The traditional land-line business has been under attack since cable operators entered the local phone market in 2005, and revenue for that business is little changed at best. In contrast, the wireless business is experiencing a period of unprecedented revenue and profit growth as the market has gone from five competitors to three in the space of a decade.
Any deal, however, would have to be approved by the Canadian Radio-television and Telecommunications Commission, which business and government sources expect to raise serious concerns and possibly force the companies to divest a major piece of their combined business, such as Bell Mobility. Many consumer groups believe there is already insufficient competition in Canada’s wireless-telephone sector, and argue that it is why cellphone costs are higher in Canada than many other countries.
… In many Canadian cities, a combined Telus and BCE would dominate the wireless market. According to the CRTC’s latest numbers from 2005, BCE and Telus held 56 per cent market share in British Columbia, 73 per cent in Alberta, 56 per cent in Ontario, 68 per cent in Quebec, 79 per cent in New Brunswick, 74 per cent in Nova Scotia, 91 per cent in Prince Edward Island, 96 per cent in Newfoundland and Labrador, and 100 per cent in what it terms “The North.”
Third, since we have been praising the OECD for discovering that labour markets do not behave as textbooks say they do, and even endorsing minimum wages and flexicurity, there is an OECD link to all of this thinking. The OECD has been pushing for the elimination of foreign ownership restrictions in Canada for some time, a view that is at least partly shared by those in senior government positions.
An alternative you will not hear in the pages of the Globe and Mail is public ownership. Most of this stuff is just infrastructure, wires in the ground. Trying to force mega-corporations in the real world of capitalism look like a textbook market, through blocking the merger or foreign competition, may well be folly due to the very nature of the enterprise, which requires truly massive upfront investments in infrastruture. Why not have one fat set of pipes across the nation and into people’s homes, owned by the public?
Having just a chapter on the OECD and competition policy for an academic volume, here is the gist of my argument:
Historically, at a national level, competition policy (also known as anti-trust policy) was seen as a subset of regulation. The emphasis of competition policy was on abuses of dominant position, cartels and the review of mergers and acquisitions. With the advent of greater economic integration, competition policy has shifted its focus to enhanced contestability of markets through trade and investment liberalization, deregulation and privatization of state enterprises. In this view, formerly regulated private or public natural monopolies were deemed to be competitive given a new local of competition from foreign capital. Thus, this ascendant neoliberal competition policy (distinct from domestic competition or anti-trust laws) is now viewed as a substitute for regulation, rather than a subset of it.
… [W]hile traditional competition policy can and should have a role in corporate governance frameworks, the neoliberal variant is less likely option to deliver superior outcomes, because of a false premise about the underlying nature of the economic forces of capitalism. The suitability of a neoliberal competition policy will vary a great deal on the circumstances of a given market and the particulars of the domestic context, including differences based on the nature of the industry, the associated level of industrial concentration, and the level of openness to international trade. Regulatory options may in fact be more efficient and effective from the perspective of the public interest. And in certain cases, where the economic function is non-trivial and plays a utility role in the overall economy, or other non-economic considerations are significant, outright public ownership may well superior, an option that is essentially taken off the table in the neoliberal framework.
Moreover, these choices revolve around fundamental issues related to how economies are structured and governed â€“ and therefore what role the state can and should play to address undesirable outcomes, which itself will be a function of whose interests the state makes those decisions. The public policy responses to real world markets, with all of their challenges and contradictions, will reflect both economic interests and power, and ideological priors. Thus, the desired degree of democratic control and accountability are essential considerations to any policy choice.
Unfortunately, the deification of markets and competition â€“ “market fundamentalism” in the words of Stiglitz (2000) â€“ can be a large obstacle to clear thinking about regulation, competition policy and public ownership. There is range of faith, and the OECD is more moderate and politically-grounded than free-market fundamentalists. But an essential faith in markets characterizes the OECD approach, with a tendency to downplay well-known shortcomings of capitalist economies.
… Competition policy … at its core accepts the primacy of capitalist-led development with only minor fixes after the fact, whereas there are plenty of industries when this logic should be completely rejected.
An alternative approach should reframe the debate in terms of the very nature and types of institutions required to meet the basic needs of everyone in society, and this means moving beyond dependence on market/capitalist institutions. If there is a taboo in neoliberal thinking it is public ownership. But while currently unfashionable, there are valid reasons why the state should retain more autonomy in designating monopolies and other state enterprises. Natural monopolies â€“ in electricity, water distribution, sewage disposal and treatment, and telecommunications â€“ are often better addressed through a public or regulated private monopoly. In some areas like telecommunications, the belief in competition has spurred a complex mesh of “pro-competitive re-regulation”, but this is not necessarily a superior model to a public integrated monopoly.
The OCEDâ€™s critique of Canada is most acute when it comes to sectors of the economy where foreign ownership is restricted. In numerous areas there are additional policy considerations that can and should transcend the alleged priority of market access for foreign investors. There are circumstances where national control is of strategic value for defence or other national objectives (telecommunications and energy), for the overall quality of life of citizens (health insurance and education), where foreign competition is not an adequate substitute for domestic production (cultural industries), or where regional objectives not likely to be addressed by competition are important (postal services or air transport). To privilege competition above these objectives is to make a significant value statement about what manner of democratic choices a country should have to create the type of economy of society that it values.
Finally, a table from the Globe article that has some useful market share figures:
|Wireless subscriber market share by province (2005)
|Prince Edward Island
|Newfoundland and Labrador
|Incumbent local retail market share by province – lines (2005)
|Prince Edward Island
|Newfoundland and Labrador