This paper discusses the negotiations between Universal and Citigroup to buy EMI Music Company. The negotiations process for this deal was tough and long but in September 2012, Universal finally had the approval of United States and European Union to get EMI Music company against the bid of £1.2bn.
Universal, a subsidiary of Vivendi spent 1.2 billion pounds to acquire the recorded music division of the house of British record company EMI. The transaction was approved by the Executive Board and the Supervisory Board of Vivendi which finance the transaction with its existing credit lines and the sale of 500 million of non-strategic assets (Barker & Edgecliffe-Johnson, 2012).
One of the basic and sustentative issues of the negotiations between Universal and Citigroup, EMI's owner, stumbled on the question of whether the U.S. bank assume its commitments of Pension of EMI employees. Citigroup has since agreed to make these commitments to its account, allowing both parties to move forward.
Another important issue is that EMI is one of the major companies which has 10% share of global music market and has a turnover of £ 1 billion. After absorption by UMG, there are only three major bands left in the world with Sony and Warner. This is why the transaction, which may violate the antitrust laws, must obtain permission from the competitive authorities in the United States and in Europe, Japan and Australia in order to avoid regulatory risk. Vivendi promised that the "Abbey Road Studios (those of the Beatles, London Ed), which are a symbol of EMI and British culture" would be retained.
Universal Music also met representatives of the Federal Trade Commission in the United States. A green light from the competition authorities was crucial for Vivendi, which is committed vis-à-vis Citigroup to pay the full regulatory risk. In case of delay or blocking of transaction, Vivendi has to pay 1.1 billion pounds to Citigroup on September 10. Vivendi, faced with the collapse of its share price and full strategic review of its activities, cannot take the risk of a failed takeover of EMI.
Universal’s negotiations with European Commission were tough and finally in September 2012 European Commission gave the green light to Universal for the deal. This acquisition was especially a sensitive issue for European Commission for Competition. Although the parties involved in the negotiations were accustomed to dealing with such issues but the cultural dimension created difficulties. As competition levels in the contemporary commercial world continues to rise, it has become highly important for companies to seek alternative business strategies in order to maximize profitability and growth potential. European Commission for Competition has given their approval because very significant commitments were proposed by Universal to maintain competition in the music industry and ensured the Commission that European consumers will continue to benefit from all the advantages.
European competition authorities want to ensure that other labels can withstand a chance against a giant like Universal whose size is twice that of its main competitor in Europe. UMG was working with European Commission to plan the sale of assets that could lead to selling classic and jazz labels of EMI and the Virgin Records label. The European Commission wants to reduce the market share in terms of sales and distribution network of the new UMG in several European countries and limit its influence on the market.
UMG was in a weaker position in these negotiations because it cannot afford the failure of this merger; on the other hand, European Commission for Competition thought that this deal would jeopardise the benefits available to the European citizens as well as would have a negative impact on their culture. This made the negotiations extremely difficult which prolonged more than a year. The difference of positions has enabled the commission to pressurize UMG and made it agree on such resolution which it never accepted in the normal circumstances.
In other words, it can be said that there was no balance of powers between the negotiating parties. Hence, it was absurd for UMG to impose anything on European Commission for Competition. Under normal circumstances, buyer dominates and he uses it to unscrupulous imposing his views and solutions. However, this deal is unique where buyer is in weaker position as compared to other parties involved.
In order to make this deal successful, UMG had to give some sacrifices. First of all, the group had to agree to give up one of its prime assets, i.e. the label Parlophone, the label of Coldplay, Kylie Minogue, Pink Floyd, David Bowie or even Tina Turner. Universal also had to agree to separate from EMI France (catalogue owner David Guetta), classical labels of EMI Music, Chrysalis (the record of Depeche Mode and Moby) and several other labels (Sisario, 2013). However, the group created by the merger of Universal and EMI will keep the precious Beatles catalogue in its wallet. Among the countries where the market share of Universal exceed 40% after the acquisition of EMI include the UK, Italy, Spain, Greece, Sweden, and Germany. The competition authorities prefer asset sales rather than licensing agreements because of the difficulty of monitoring such arrangements.UMG deserve all the credit because it played its cards well and ultimately got the green signal from the commission. UMG handled the negotiations with caution and care. The price must be credible but not too ambitious.
These important concessions were required because Brussels' concerns that with this transaction, as originally envisaged, Universal would confer undue market power vis-à-vis its direct customers, who sell retail recorded music on physical and digital "media. In order to maintain some competition in the sector, Brussels hopes that two-thirds of the assets sold are redeemed by a single group and the remaining third by others. Despite these precautions, the green light from Brussels has angered independent producers gathered in the Impala association. They were of the opinion that this decision reinforces a duopoly and it is going against the basic principles of competition. All the artists and consumers will ultimately pay the price" of the merger.
Power of the Negotiating Parties
As discussed above, UMG in a weaker position while negotiating a deal with European Commission for Competition. Everything of UMG was at stake in that deal and it could not bear the failure of the deal. On the other hand, Commission was in much better position and that is why it pressurized Universal groups to get most out of the deal. Nevertheless, the real power base used in this deal was political.
Political environment and political influence do play an important role in negotiations and business decision making. Government actions are governed from the consolidation of a plan, to govern the directions and goals to achieve, and these are implemented by different Ministries and agencies under the direction of an authority are carried out. The plans and programs contained in a government plan are numerous, and involve the tasks of an entire administrative apparatus, but there will be actions that only involve the work of certain departments or certain group of employees in a sector of the government itself. There are no easy solutions to the problems of involvement of government and politics in business negotiations.
Citigroup and Universal were only play the initial part of the deal but signing the whole deal all by themselves were beyond the range of capability, responsibility, knowledge and interest of these two parties. In other words, it can be said that intervention of politics was practically the base from which originates the presence of imbalance. On the dilemma of using political influence in decision making, the concerned parties have increased their efforts to include combinations of the following:
- Establishing policies and guidelines for proper decision making
- Incorporating ethics and values into processes of decision making
- Developing codes of conduct; and
4. Try to avoid political or stakeholders’ influence
Competition and conflict in negotiations while making a business deal may impede the establishment of long-term relationships between firms and institutions. Attempts to increased competition, may have a broad impact on the functioning of corporate governance. The idea that there were significant interactions between government-making and competition leads to systemic approach (Aoki, 1994). According to this view, the decision making in Universal and Citigroup deal must be viewed in the context of the economic structure of Global economic. The differences between countries in terms of structure of market and product were the issues which were all closely linked.
The influence of politics in awarding favours and contracts to the favourite organizations is a common practice. For example, the CEO of Enron in 1986 was Kenneth Lay, who had great interest in politico-economic situation of the country and he had been responsible for the huge success of the company. Kenneth Lay had close relations with Mr. Clinton and Mr. Bush, thanks to financial part of their campaign. With the help of these relations and strong lobbying activity, Enron came to obtain the introduction of a bill to be adopted on the deregulation of natural gas and electricity. Consequently, Enron became a flourishing business, with substantial profits.
The decision makers of the company should "shifting attention to sustainable value creation, has not thus far addressed what those architectures should be" (Peter & Ross, 2002). As a result, they should always act on behalf of the shareholder's interests rather than those of themselves or political parties. Unfortunately, the decision makers in reality cannot always perform governance function according to this kind of premise.
Influence of politics in the above mentioned negotiations between Universal group and the European Union Commission for Competition raised broader debate among the world these days. A group of artists, musicians and retailers of music are concerned about the lack of efficiency of merger decision taken by the concerned companies with the proper support of political influence. Despite all these concerns, the observations on the results of the negotiations between Universal and European Commission remain fragmented because mostly the facts have swept the judgments.
It has been argued that the strategic business negotiations is the process of management planning and its basic purpose is to formulate comprehensive business strategies and to implement these strategies in order to make company effective and efficient enough to compete with its international competitors. The importance of strategic business negotiations and its impact on the performance of the companies has been proved; it is thus necessary for both legislators and professional bodies in strategic role of the board, to have a clear focus.
In this above mentioned negotiations, it is necessary for legislators and professional bodies involved in the negotiations to reform current political intervention practice for bringing back the confidence of petty stakeholders no matter what approaches they take, because there is no one-size-fits-all model (Charles et al, 2003). This is the point that also has been summarized by other researchers, as there is no one model that adequately reflects the requirements of all forms of involvement of political power in the negotiations (Charles et al, 2003).
In order to avoid political influence in business negotiations, the companies involved have to implement proper internal control into the companies. The establishment of an effective internal control involves evaluating the risks the organization faces both from the outside and from within. The utilization of resources and to get involved in the activities to provide services to the community has to be addressed responsibly. It needs to be engaged with the activities that not only gain financial profits but also social profits.
The discussion of the deal between Universal group and Citigroup and the process of long negotiations has the sources of power from political influences. The factor of political involvement in the decision making during negotiations must also be countered by the concerned parties. One of the main objectives of any corporation is to secure value for shareholders investments. An ill effect of transparency in decision making is that competitors may be able to view market policies, past trends and other information of an organization. They may then be able to formulate plans to penetrate opponents markets thereby diminishing the returns of the first organization, an effect to be felt by all stakeholders.