Story 1: Aviva’s Mergers and Acquisition

Story 1

A firm that is either merging, attempting to take over other firms or diversifying.

Story 2

A firm that is being affected by change with respect to at least one of the following general external environmental factors: political, economic, social, technological, legal or ethical/environmental, i.e. affected by changes in at least one of the general PESTLE environmental factors.

Story 3

A firm that is being affected by changes in the microeconomic environment; there is change in at least one of the operating environmental categories that is specific to the identified firm, eg. changes with respect to Customers, Competitors, Complementors, or Suppliers. 

You should clearly describe each story and demonstrate an ability to apply relevant microeconomic and/or macroeconomic concepts in a real world context; your report should analyse each firm’s situation from a business economist’s viewpoint as you explain the context, rationale and implications of the story about the firm?

Recently there have been a lot of changes in UK in various factors starting from mergers and amalgamation to the microeconomic changes. This assignment will focus on three firms. First, Aviva for mergers and acquisition second is Bank of England for the economical analysis and finally is Aer Lingus for micro-economic changes in business environment due to competition. (Baye, 2000).

Aviva is one of UK’s biggest insurers, which posted that 6% rise to £2.17bn, which has reportedly induced smaller rivals to jump 38% to £556m regardless to the new rules of pension which triggered collapse to the annuity sales. After the £5.6bn takeover, Friends Life brand will disappear which will by then bring cost savings of £225m in part, in the course of 1500 job losses (Beattie, Fearnley and Hines, 2013). Both the insurance firms, Friends Life and Aviva have both profits before the £5.6bn takeover, which was anticipated to be approved later this month by the shareholders (Editorial Board, 2013).

UK’s largest insurer, AVIVA, is acquiring Friends Life at a grave time where all the life insurance firms underneath pressure from the new rules of UK pension which have activated a collapse in the sale of annuities. The firm has posted a rise of 6% in its operating profit for the year 2014 to £2.17bn, which is higher than anticipated. Aviva has rose to 556.5p after there was a 6% rise in the profits of 2014, aligned with the expectations of the investors and also announced 12.25p per share as a final dividend, which takes the payments for total dividend to 18.1 per share for the year (IFC, 2014). On the contrary Friends Life whose performance of the share price has largely been tied to the Aviva’s since the planned acquisition announcement by its rival was made. The share price rose to 424.4p by 4.5%. The insurer has reported a 38% rise in the full-year profits and has confirmed a dividend of full year of 31.15p per share which is subjected to the takeover by Aviva. This made both Aviva and Friends Life the biggest toppers on the FTSE 100 index (Eichler and Maltritz, 2013).

Story 2: Bank of England’s Warning on Fossil Fuels

After the takeover Friends Life will disappear which in return will bring the cost savings of £225m, partially through 1500 the job losses. The chief executive of Aviva refused to give any details about the cuts citing that the company will consult the staff first. There are 16000 employees in UK, which also included 5000 in York and Sheffield based life and pension concern (Das, Raskhit and Debasish, 2009).

There have been a lot of questions about the proposed merger. This would be one of the biggest deals in the insurance sector of UK after CGU merged with Norwich Union in the year 2000, which eventually created Aviva. This is the right acquisition in right time which will speed up the subsequent phase of Aviva. The new sales of Aviva declined 16% as the bulk annuity sales failed to overshadow a drop in the individual sales of annuity. The acquisition of Friends will enhance the management of funds in Aviva, which added £70bn, taking the total funds beneath the management to more than £300bn (Rodrigues and Stevenson, 2013). It is working on the orbit of the business which has very recently fined by the city watchdog for the failure “systems and control” and has paid compensation to eight funds of £131m (Das, Raskhit and Debasish, 2009).

Link:https://www.theguardian.com/business/2015/mar/05/aviva-and-friends-life-annual-profits-takeover-insurer-pension-annuity-sales

Bank of England has warned of enormous financial risk from the investment of fossil fuel. Bank of England’s prudential regulation authority, the deputy head said that the investments in the fossil fuels and the related technologies will take a huge hit very recently (Chortareas, Girardone and Ventouri, 2011).

Insurance companies may suffer an extreme damage if the investments in the fossil fuel companies cause severe actions on the climate change. This is a case of environmental issue which could be analyzed through the framework of PESTLE. Right now it is a risk for the insurers to invest in the assets which could be trapped by the changes in policy which will limit the use of fossil fuels. The companies should try to avoid the systemic risks of the economy. With the increased limitations of the carbon emissions in the economy and the move towards the alternative sources of energy, the investment in fossil fuels is increasingly growing in the recent financial market (Raugei, Fullana-i-Palmer and Fthenakis, 2012). The Deputy Head of the bank’s PRA told that he has already mentioned about this but it is yet to be infused by the companies. One of the world’s key banks warning came that the majority of the fossil reserves are unburnable if the limitations to the climate change is 2C as vowed by the world’s government. Bank will provide the report to the government on financial risk portrayed by carbon bubble. The research director at Carbon Tracker Initiative has earlier mentioned that it is good to see that the major central bank is seeing the necessity to move with the times and realize the role which deals with one major challenge which is facing the economies today.  All financial institutions should respond in the same manner and try to collaborate on the issue. A sequence of analysis shows that the existing reserves of the fossil fuels cannot be burnt devoid of blowing safe budget for the emissions of carbon (Raugei, Fullana-i-Palmer and Fthenakis, 2012). Recent study in the month of January has pointed out that 80% of the coal reserves, oil and half of gas would have to remain in the ground. In the Insurance Summit 2015 in London bank’s executive director Paul Fisher has mentioned that the policies which are designed to put a limit the emissions of carbon are to prevent the catastrophe change in the climate and it would mean that the fossil fuels become a “stranded asset”. Companies have spent £436bn in the year 2013 only for searching more fossil fuels and investments that would be worthless if the activity on the global warming allows emissions. Professor of Energy Policy in the University of Oxford, Dieter Helm has told that there is no virtual chance of binding the agreement in Paris which will lead to the two degree limit to be successful. Along with the environmental issue this is also an economical issue. Fisher also mentioned that the changes in the climate impact the insurers from both sides of the balance sheets. They may be impacted by the increase in insurance claims; it also appears that the asset side will also give rise to the unexpected risk. He mentioned that the insurance industry has started taking steps of climate curve on liability side but not doing in the role as investors of long-term. The bank’s approach to deal with the systematic economic risk would change by the analysis of carbon bubble. The fundamental changes in environment may affect the financial and economic stability and also the safety and soundness of the firms with the possible inference to the banks.

Story 3: Microeconomic Changes in Aer Lingus due to Competition

https://www.theguardian.com/environment/2015/mar/03/bank-of-england-warns-of-financial-risk-from-fossil-fuel-investments

Recently IAG, British Airways parent company has been rejected by Aer Lingus for a takeover by its competitor. Aer Lingus has mentioned that IAG “fundamentally undervalues the airlines. Willie Walsh, former pilot and chief executive of IAG has denied earlier on adding the Irish carrier company to bring with it the important extra take-off period at the Heathrow airport. The airlines industry has recognized target the competitors continued association with European Airlines (Barrett, 2006).

Aer Lingus has mentioned that it has initially received an extremely conditional and non-binding attitude from IAG. Aer Lingus has reviewed the proposal and has found that the British Airways have basically undervalued them and the desirable prospects (Jeffers and Mignin, 2004). Here comes the uncertainty that if any offer will be at all made or not and so the shareholders are advised not to take any action. IAG issued a statement mentioning the moving price of the share of Aer Lingus and also confirmed that it has given a proposal for an offer to the company, which was rejected by the Aer Lingus board (Townsend, 2002). This competition between both this companies, to garner more passengers’ base and expand its reach to more places, has changed the business environment and has created an uncertainty about the takeover (Barrett, 2006). 

John Stickland, aviation analyst has clearly mentioned that there could be challenged and regulatory concerns from the other airlines on the grounds of competition. Aer Lingus was successful erstwhile against the tough economic climate even so a deal will give IAG a sound position in Heathrow. This cannot be merely termed as a takeover because it more of a competition in the same industry where uncertainty of takeover is been clearly seen here. Here one career group is being undervalued by the other. The competition has raised so much that Ryanair, an Irish career had also plans to buy Aer Lingus which was later thwarted. To garner more

https://www.theguardian.com/business/2014/dec/18/british-airways-iag-moves-takeover-aer-lingus

Conclusion

Thus we see from the above mentioned articles the changes in the business environment. There were issues of takeover in the first article where Aviva has acquired Friends Life followed by Bank of England article where the issues with the environment being hampered with the investments in fossil fuel thereby affecting the economic condition of the country, the two factors of PESTLE and finally the competition of taking over Aer Lingus. The articles rightly points out the reasons why a company wants to expand or what is the impact iof an institution on the economy and the environment. It also shows the dealings of between two or more organization.

References

Barrett, S. (2006). Commercialising a national airline—the Aer Lingus case study. Journal of Air Transport Management, 12(4), pp.159-167.

Baye, M. (2000). Managerial economics & business strategy. Boston: Irwin/McGraw-Hill.

Beattie, V., Fearnley, S. and Hines, T. (2013). Perceptions of factors affecting audit quality in the post-SOX UK regulatory environment. Accounting and Business Research, 43(1), pp.56-81.

Chortareas, G., Girardone, C. and Ventouri, A. (2011). Financial Frictions, Bank Efficiency and Risk: Evidence from the Eurozone. Journal of Business Finance & Accounting, 38(1-2), pp.259-287.

Das, B., Raskhit, D. and Debasish, S. (2009). Corporate restructuring. Mumbai: Himalaya Pub. House.

Editorial Board. (2013). Journal of Economics and Business, 67, p.CO2.

Eichler, S. and Maltritz, D. (2013). An options-based approach to forecast competing bids: evidence for Canadian takeover battles. Applied Economics, 45(34), pp.4805-4819.

IFC. (2014). Journal of Economics and Business, 75, p.IFC.

Jeffers, R. and Mignin, R. (2004). Global business workforce restructuring. London: Kluwer Law International.

Raugei, M., Fullana-i-Palmer, P. and Fthenakis, V. (2012). The energy return on energy investment (EROI) of photovoltaics: Methodology and comparisons with fossil fuel life cycles. Energy Policy, 45, pp.576-582.

Rodrigues, B. and Stevenson, M. (2013). Takeover prediction using forecast combinations. International Journal of Forecasting, 29(4), pp.628-641.

Townsend, H. (2002). Foundations of business economics. London: Routledge.