Linde and Praxair — a Merger of Two Giants
Example Use Cases for Prediction Markets
Prediction markets are an invaluable prognostic tool that collates collective wisdom through a system of financial incentives to surface and aggregate salient information about the likelihood of a given outcome or event.
Gnosis’ prediction market platform is uniquely positioned to drive innovation in a range of applications that are pertinent to both global and local economic systems — including finance, insurance, and price discovery. The Gnosis platform also provides the underlying incentive mechanisms for more advanced applications of prediction markets such as distributed and market-based governance protocols.
The range of use cases for prediction markets is vast, and the purpose of this series is not to cover each in detail, but rather to highlight a few instances in which prediction markets might prove particularly beneficial. Enjoy the read!
The Linde Group and its US competitor Praxair have announced plans for a merger in the summer of 2018. With a market value of 66 billion Euros, 80.000 employees and a sales volume of 27 billion Euros, the new company is set to become the global market leader for industrial gases. Since there are very few suppliers of industrial gases anyway, the EU fears that this mega-merger could be harmful to competition and has launched an in-depth investigation into the proposed plan.
EU Commissioner Margrethe Vestager, who is responsible for competition policy, said: “Gases like oxygen and helium are crucial inputs for a large variety of products we use every day. Manufacturers need to buy these gases from a small number of suppliers. We will carefully assess whether the proposed merger between Praxair and Linde would lead to higher prices or less choice for European consumers and businesses.”
According to the European Commission, other companies in the market only have a regional, national, or local presence and lack the technical and financial capabilities to compete on an equal footing. Furthermore, “there is no indication that competition could be fostered by new entrants, due to the very high investment necessary to establish a meaningful position in the market.”
In this use case, the two giant industrial gas companies will serve as an example to answer the following question: Could a prediction market help predict if a merger plan will be approved by cartel authorities?
What's at stake?
Let’s first take a look at why Linde and Praxair want to merge and what’s at stake.
The market for industrial gases is highly consolidated with only four main players controlling some 75 percent of the entire global supply:
- The Linde Group (Munich, Germany)
- Praxair (Danbury, CT, United States)
- Air Liquide (Paris, France)
- Air Products & Chemicals (Walton-on-Thames, United Kingdom)
A Linde-Praxair merger would create an industry giant and reduce the number of major players for the supply of crucial gases to just three. The two companies highlight what they think would be the benefits on their joint website dedicated to the merger plan: “A merger of equals between Linde and Praxair will provide a platform that harnesses both companies’ potential and delivers new value to stakeholders. The combined company will create a leader in the industrial gas industry.”
According to Linde and Praxair, the merger “establishes strong, complementary positions in key geographies to create a more diverse and balanced end market portfolio” and “leverages unique strengths of each company”. It also “creates an innovation powerhouse by bringing together both companies’ research & development competencies” and “is expected to create considerable value in annual cost and efficiency synergies, resulting in a robust balance sheet and strong cash flow generation”.
Being aware of the EU’s concerns, however, both companies have reserved the right to withdraw from the merger if the conditions imposed by cartel authorities are too strict—that is, if sales losses or operational earnings drop by 3.7 or 1.1 billion Euros, respectively.
In this case it is very likely that the move will be followed by sharp price slumps on the stock market, as it happened in 2017 in the aftermath of other failed deals: When US insurers Aetna and Humana abandoned their $37 billion merger after a judge had blocked it, and after consumer goods giant Unilever rejected Kraft Heinz’s $143 billion acquisition offer, all four stocks plunged.
Who could be interested in creating a prediction market?
Since a merger of this magnitude would shake up the entire market for industrial gases, several stakeholders would have a vital interest in knowing ahead of the final verdict whether the deal will be approved or not.
The obvious candidates for creating a prediction market would be the remaining two of the sector’s “Big Four”: The French rival Air Liquide and the US-based company Air Products. The biggest competitors of Linde and Praxair would not only be the most strongly affected stakeholders in case of a merger, they also have the financial resources to fund a prediction market. The sooner they know where the merger deal is headed to, the more time they would have to prepare for its consequences. This could allow them to make proactive entrepreneurial decisions instead of just reacting to a new market situation.
What may come as a surprise is the fact that even the merger candidates themselves could make use of a prediction market to gain certainty about their fate ahead of the authorities’ decision. Establishing a prediction market for their endeavor could help them avoid a long period of uncertainty that might be followed by an abrupt and possibly negative final verdict. Therefore, an investment in a tool like a prediction market that has the potential to buy them a fair amount of certainty could be worth considering.
Who could participate in the prediction market?
The idea of prediction markets is to keep them open to everybody who wants to participate. Therefore, everybody who feels confident to predict the outcome could participate. However, since antitrust legislation is very complex and usually leaves a substantial leeway for interpretation, this specific scenario would require some expertise to enable participants to predict an outcome through more than just a guess.
The most obvious candidates to participate would, therefore, be antitrust law experts. They could use the balance figures that listed companies are required to publish along with all other publicly available data for their assessment. Shareholders, traders, and other market experts who have followed past merger cases could also have an interest in taking part.
Whenever an event outcome depends on a legal procedure, the authorities in charge cannot take part in the prediction market. Since the entire outcome is in their hands, none of the members of the cartel authorities working on the Linde-Praxair case would be legally allowed to participate in the prediction market. In addition, while not being formally excluded, members of the two companies who have access to sensitive information and data should be encouraged to sign an NDA in order to protect the integrity of the prediction market.
Who could benefit from the prediction?
Certainty basically is a currency of its own when it comes to big business. Thus, there are quite a few stakeholders who could benefit from a prediction market that indicates the outcome of the merger review process ahead of the verdict.
First of all, the two companies and all of their employees, as well as stakeholders in their supply chains, would probably benefit most by gaining certainty of their future sooner than the authorities can provide it. Mergers often come along with mass layoffs when tasks are being centralized. While a prediction market can’t do anything about the loss of jobs, it could at least provide employees a heads-up that leaves them a chance to look for a new job before finding out about their fate through the media.
Research indicates that even a successful corporate marriage doesn’t necessarily lead to success, at least not in the short run as post-merger stocks often underperform. According to a study by S&P Global, profit margins of merged companies trail those of their industry peers by 5.3 percent three years after a deal closes. UC Berkeley researchers found in another study that stock returns of merged companies trail those of rival bidders by 24 percent after the same period of time.
Since stocks usually plunge when giant merger or acquisition plans are denied, both current and future investors and shareholders would have a vital interest in knowing the outcome as early as possible. While they often harm existing stakeholders, broken-off mergers can also be big wins for new investors.
Competitors in the market could react accordingly once they know if the merger is approved. They would be able to adjust their business models to the new circumstances which might push them into a new strategical position in a highly consolidated market.
In conclusion, all stakeholders in this particular case would benefit from a prediction market that predicts the correct outcome of ongoing antitrust proceedings. Knowing in advance would give both the companies involved as well as their competitors more time to prepare for the impact of the verdict. Minimizing the risk of an unpleasant surprise might save jobs and a lot of money.
Thanks to Nadja Beneš.
