Sligos SA and Signet Ltd: A report on the proposed merger

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Signet Ltd (Signet), one of the two largest processors of payment card transactions in the United Kingdom, has been put up for sale by its owners, Lloyds Bank, Midland Bank, National Westminster Bank and The Royal Bank of Scotland. After consideration of other bids, the vendors' choice was narrowed down to two firms: First Data Resources Ltd (FDRL) which is ultimately owned by American Express, and Sligos SA (Sligos), a French subsidiary of the state-controlled bank, Crédit Lyonnais SA (Crédit Lyonnais).

On 24 October 1990 the Secretary of State for Trade and Industry referred Sligos's bid to this Commission, for investigation and report. The Secretary of State noted in a press statement at the time that since the sale of Signet would lead to the creation of the largest third party processor of payment cards in the United Kingdom, the implications of its coming under the control of a state-controlled company raised issues of public interest which warranted investigation by this Commission.

At a late stage in our inquiry, Signet's owners told us that they had decided to negotiate in detail with FDRL. However, in case these negotiations do not succeed, and the owners wish to turn to Sligos instead, Sligos is continuing with its bid. We have therefore to complete our investigation and report.

While Signet enjoys a substantial share of the payment card processing market, Sligos has not hitherto had any business in the United Kingdom. The merger would not therefore cause any increase in market share in the United Kingdom.

The business of card processing is expanding, and the customers of card processors are themselves becoming more cost-conscious and selective because of the increased competition which they themselves face. Several new firms, both domestic and foreign, have recently entered the market. The barriers to new entry are not so high as to deter major firms, especially as it is possible to start on quite a small scale, and exit costs can be low, since much expenditure can be recovered.

No concern was expressed to us during our inquiry concerning Sligos's possible acquisition of Signet, except in relation to the potential effects of state control. Two banks, both engaged in processing themselves, were worried that Sligos might exploit its position in the market through being able, as a subsidiary of a state-controlled bank, to take longer-term decisions than its competitors. However, as we found in our inquiry into Crédit Lyonnais and Woodchester Investments, in practice the French authorities accord a high degree of independence to the management of banks directly under state control and expect them to operate commercially. This is particularly the case in respect of activities outside France. There is even less reason for supposing that they would be likely to interfere, indirectly, in the United Kingdom activities of Sligos, a subsidiary of Crédit Lyonnais. It is also the policy of Crédit Lyonnais to give the managements of its subsidiaries freedom to run their businesses, and Sligos told us that it follows the same principle with its own subsidiaries.

We do not believe that, if Signet's business under Sligos's ownership were to run into trouble, Crédit Lyonnais and still less the French authorities-would step in with any assistance that could not be justified on the standard financial criteria prevailing in the private sector.

We do not consider that Signet under Sligos would have the market strength, with or without state control, to benefit from anti-competitive practices. If it attempted to do so, major customers could take their processing in-house; or they, and smaller customers, could turn to one of the increasing number of third party processors. Signet's position in the market is not as strong as might be supposed from its large market share: it owes the latter entirely to the business of its present shareholders, the four banks, who would only be committed to Signet for up to about five years after its sale, and that probably on a declining scale. After that period, Signet would have to compete to keep the four banks' custom.

We conclude that the proposed merger may be expected not to operate against the public interest.

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