Analyse the ways in which both Political and Legal Factors Affect an Organisation Looking to Enter in a New Market.
The aim of this essay is to demonstrate how political and legal factors affect an organisation looking to enter in a new market. For this purpose I will use as an example the biggest German utility company, E.ON.
Normally, Multinational Firms are more comfortable investing in markets with a good political environment and law transparency, in order to assure game rules will not change dramatically making them to pay more money for those changes or even loose their investments (PriceWatershouseCoopers, 2006). Within the external environment a company deal with, the most changeable factors are the political and technological.
The technological issues could be led by the firm itself with R & D, but the political factors can just be followed, maybe, if the firm is big enough they can make them a little more flexible for their convenience, but they would never be able to set their own rules or path. It gets even harder when at the end of the government period a new government is form, even if it is from the same party. New people are seated in the presidential chairs, prime minister, parliament or secretaries places. Firms have to deal again some issues like it was the first time, because they have to be inside the “Government’s grace”.
Political factors are so important because they affect a company in the whole sense, from their approach to do business, operations, short term and long term objectives and even their grand strategy. That is one of the reasons European Countries voted for a common market with supranational rules, making easier and safer to invest foreign countries inside EU territory.
With the creation of the European Union, capital factor movements inside the EU are done as a free market economy, where the supply and demand dictate what the market should have, and as a free economy, the governments only set some rules and act as an observer, at least that is what theory states. In practice, companies are aware that there is governmental pressure, especially when foreign companies try to enter the domestic market and takeover big local companies. That is the case for the German titan E.ON, the biggest utility company in Europe, which already supplies the UK, Central and East Europe and Scandinavia (E.ON Company information, 2006).
In February 2006, E.ON made a step into the Spanish market, the fastest market in expansion for the 13th consecutive year (Cahill, Paulsson, 2006) by making a tender offer to Endesa, the largest Spanish energy firm (Endesa Company information, 2006), trying to take advantage of the momentum originated by the general acceptance for a hostile bid made five months before by GasNatural, the Catalan gas firm (GasNatural Company information, 2006). GasNatural offer was so attractive for almost everyone, (maybe except for Endesa itself) that even the Spanish Government supported it, stating they wanted to create a “Spanish Energy Champion”,but it can lose friends within the EU if it used it golden share in Endesa to block a bid from a foreign company. Newspaper reported that the prime minister, jose Luis Rodriguez Zapatero, was opposed to the E.ON offer. (The Economist , 2006).
But the reaction to E.ON’s offer was opposite at what E.ON’s manager’s thought. Stockholders and general public where amazed at the price per share E.ON offered was so much greater than GasNatural bid, and was all in cash. Nevertheless the Spanish Government wanted to block that offer using administrative resources conditioning and almost forbidding it by a special right they have through the ownership of 2.95% of the shares (Lopez, 2006).
It is clear E.ON’s legal department studied the law issues they would have to accomplish and that their intent was totally inside EU and Spanish legal frames, at the extent that they had the approval from the Spanish Stock Market Commission for E.ON to acquire Endesa. Moreover, the European Antitrust Commission cleared E.ON-Endesa merger stating the takeover would not significantly impede effective competition (Euroactive web, 2006).
But E.ON analysts were not aware of the political resistance they were about to receive. Luckily for them, the approval of both, Spanish Stock Market Commission ad the EU Antitrust Commission, had added up pressure to the Spanish Government to let the merger process continue. Nonetheless the Spanish Government tried to make more difficult the purchase by adding many unattractive conditions for E.ON, so they will leave the purchase attempt.
E.ON appealed to EU Commission and the organism ruled in favour of E.ON, resolving the 19 conditions where illegal under the EU Antitrust Legislation and an attempt to “disguise interference with the flow capital” (EFE, 2006). Spanish Government declined 18 of the conditions and submitted it again to EU Commission, appealing that the merger will compromise the secure Spanish energy supplies (Kanter, 2006), justifying their actions by citing article 21 of the European Union Merger Regulations which allows members states to block takeovers on the grounds of “public security” (EU Merger Regulation, 2004). The Spanish Energy National Commission presented some figures that show that Spain imports 99% of its gas supplies and 99.6% of its oil. Both resources represent 70% of Spanish primary energy consumption, higher than the European average 64%, showing a big energy dependency (Comision Nacional de Energía, 2006). The European Commission will evaluate again the matter on January and will declare whether the remaining condition is acceptable by law or not (Cala, 2006).
Now the process is stagnated by Spanish Courtrooms due to a lawsuit against GasNatural and until that matter is solved, Endesa stockholders could not evaluate both offers at the same time as Spanish Stock Market Commission Rules state. Even Spanish Government can not do much about the purchase, according to EU rules about free capital movements, they are gaining time and trying to make the path more difficult for E.ON and discouraging the German company from the merger.
E.ON’s attempt to enter the Spanish energy market had led the German Company to spend a lot of time and money in this matter. The original purchase price was 29.1 billion euros, but Endesa’s Board of Directors determined that the takeover price was too low and to consider the offer E.ON should raise the price (Endesa Board of Directors, 2006). Now they have raised it to 37.1 billion euros as the Board express and as a way of adding pressure to the merger process and making a more attractive offer (AFP, 2006). So they have spent in just the offer 8 billions euros more that they have planned, without mentioning legal costs. However with this second offer, the German firm almost reaches to the price analysts consider E.ON’s maximum price they can afford (Kanter, 2006), thus, if the Spanish government or any other group is able to push the current share price a little higher, E.ON could retire the offer.