Sunday, 15 April 2007

Strikes and class consciousness

'It is to those periods of "special grievance", marked by waves of strikes and industrial conflict, that socialists must look for the seeds of radicalisation' (John Kelly, Trade Unions and Socialist Politics, p. 304). What evidence is there for such a link? Illustrate your answer by evidence from the industrial disputes of 1978-1979.

'What we see today is a set of effective rank-and-file strike tactics being militantly applied by one group of workers after another, for objects which, even by the criterion of "trade union consciousness" are rather narrow.'

This essay explores the alleged links between industrial militancy and class consciousness in relation to the industrial disputes of 1978 – 1979, a renowned period in British history infamously immortalised as the 'winter of discontent' the then editor of The Sun Larry Lamb. The impact of strikes on class consciousness has fuelled widespread debate since the waves of industrial unrest of 1968 – 1974 and 1977 – 1979. This debate was precipitated by Eric Hobsbawm's Marx Memorial Lecture of 1978, which launched a fierce critique on what he saw as the sectionalist and economistic militancy of the British working class and its declining political consciousness. The issue at stake was whether strike waves could radicalise workers, even though the strikes that composed them were fought over traditional economic demands. The 'winter of discontent' is widely regarded as epitomising Hobsbawm's view, the antithesis of the 'class radicalisation' thesis, exposing the sectionalism of industrial action and the dividing affects of a purely economistic militancy on the working class. Thus, when people think of the 'winter of discontent', they immediately conjure up images of mile-high piles of rubbish in Leicester square swarming with rats and newspaper headlines that read 'They Won't Even Let Us Bury Our Dead'. 'Britain was under siege'. This is the ideal construct that British capital would have us remember, the allegedly destructive consequences of strikes and industrial action. Of course, this construct is a complete fallacy. The stark truth remains that the 'winter of discontent' was another victory for the working class on it 'forward march': a working class that inflicted the most decisive defeat for any Labour government at the hands of the class struggle, a working class which had deposed of two consecutive governments', a working class whose struggle culminated in Thatcherism. Undoubtedly Thatcherism was the result of the working class. However, contrary to public opinion it was the result of working class success, not failure. It is my contention that the 'winter of discontent' was a victory for the proletariat, a victory which, in the lap of the capitalist class, Thatcher unmercifully reversed. Thus, this work will attempt to propose a countervailing interpretation, the antithesis, which regards the 'winter of discontent' as the culmination of over a decade of class struggle forcing the capitalist class to launch direct reprisals on the working class through Margaret Thatcher. If ever there was a period of "special grievance" that contained the seeds of class radicalisation, it was the turbulent months of the 'winter of discontent' when trade unionists came to the realisation that the Social Contract between themselves and the labour Government had under Callaghan become 'little more than a euphemism for voluntary and subsequently statutory wage restraint.' Thus, if the alleged links between industrial militancy and class consciousness do exist then presumably they can be identified in the 'winter of discontent' that saw workers pitted in struggle against their employers, their union bureaucracy and their allegedly representative Labour Government: the government's five percent wage increase was, due to inflation and the cost of living, in reality almost a five percent wage cut. Indeed it could be argued that the corporate State's apparent bias towards employers – however misconstrued and superficial – could have politicised a struggle that may have begun with wage demands, but through state intervention escalated into a political struggle. The 'winter of discontent' may be regarded, and superficially appear an example, of defensive economistic militancy, what Lenin refers to as the 'bourgeois politics of the working class', however this assumption must be explored. It cannot be accepted without critical analysis, which is so often the case.

Firstly this work highlights the main theoretical approaches utilised in relation to class consciousness and industrial militancy – those of Luxemburg and Hobsbawm – then it analyses the events of the 'winter of discontent' and attempts to isolate which theory, if any, is most suitable and if there were any links between the allegedly sectional and economistic militancy of 1978 – 1979 and class consciousness. Finally, it concludes as to whether those events could have been harnessed by socialists to radicalise English society. It is apparent that contrary to Hobsbawm's theory and other Leninist approaches, 'trade union consciousness' is a key component in the heightening of political class consciousness, through which trade unions mobilise the working class. However to be truly radicalised periods of 'special grievance', as all Marxists will agree, require a mass socialist party. The seeds of radicalisation were apparent during the 'winter of discontent' as was rank-and-file determinism. But, the party was missing: an effective elite of committed political activists who could exploit those radicalised seeds forcing their germination culminating in the emergence of a socialist society.

Perhaps the most influential and well known of theoretical approaches to the dynamic of class consciousness is that of Rosa Luxemburg. For Luxemburg 'it is the scale of strikes, and the response of the State, not the initial demands of the strikers, that are crucial for understanding the link between strikes and consciousness.' Militancy that is initially economistic can become politicised depending on the situation and certain factors, most notably for Luxemburg the intervention of the state. Under capitalism economic and political struggles are often separated and channelled into the reformatory and safe channels of parliament, thus depoliticising trade union struggle. Luxemburg asserted that these political and economic struggles, of necessity, had to be inextricably intertwined for the class consciousness of workers to be increased. She stated,


(t)he workers' condition of ceaseless economic struggle with the capitalists keeps their fighting energy alive in every political interval; it forms, so to speak the permanent fresh reservoir of the strength of the proletarian classes, from which the political fight ever renews its strength and at the same time leads the indefatigable economic sappers of the proletariat at all times, now here and now there, to isolated sharp conflicts, out of which political conflicts on a large scale unexpectedly explode.


Hence Luxemburg viewed the political and economic strikes in times of revolution as mutually dependent and interconnected. According to Luxemburg, it is this interconnection that allegedly makes the effectively mass strike or strike wave. As Kelly correctly posits, the strike was for Luxemburg politicised through two methods; either it was used for directly political purposes, or the economic struggles spearheaded by mass strikes acquired a political character. This link between the political and economic struggle that Luxemburg cited suggests there may well be a link between industrial militancy and class consciousness: however, we must remember that this is also dependent on the revolutionary situation that may not have existed during the 'winter of discontent'. Even though this revolutionary situation is a requirement for the effectiveness of the mass strike/strike wave, we cannot ignore that Luxemburg asserted there must be complete unity between the 'two organizations of the labor movement, the Social Democracy and the trade unions'. As Luxemburg succinctly posited,


There are no two different class struggles of the working class, an economic and a political one, but only one class struggle, which aims at one and the same limitation of capitalist exploitation within bourgeois society, and at the abolition of exploitation together with bourgeois society itself.


Admittedly during the 'winter of discontent' the gap between the policies and opinions of the Labour party and those of the rank-and-file represented a gaping chasm that saw the Labour leaders' and their policies seemingly affiliated with capital, pitted against the people they should have represented. Hoggart and Leigh show there was a real dichotomy between the policies of the Labour party and the opinion of the rank-and-file: 'It is an indication of the way in which Foot and Callaghan had allowed themselves to become isolated from the real world that they failed to foresee the failure of the five percent policy.' However we should not dwell too long here on how effectively the 'winter of discontent' can be explained by Luxemburg's theory as this shall be dealt with later in the work.

Luxemburg, like Lenin, asserted that trade unions could make only a limited impact on workers' conditions under capitalism without the influence of a revolutionary party. She also agreed with Lenin that the 'mass strike' was one of the most effective means of bringing masses into struggle and heightening their political consciousness. Luxemburg stated that a general strike or a strike wave constituted a mass strike only in times of revolutionary struggle outside of which the character of the strike(s) would be more limited and quite probably sectional, not unifying the working class behind a common ideology. The role of the state in industrial disputes was singled out by Luxemburg as the main factor in politicising wage struggles. State intervention in strikes brought workers and their unions into conflict with the state, posing the question of who was to rule society. It also heightened worker consciousness by revealing the bias of the state. Luxemburg saw state intervention as crucial in polarising society around those for and against strikers, those who backed labour and those who supported capital. As Kelly states, 'In other words politics and political struggle came to be dominated by temporarily but overwhelmingly by the reality of class. In this situation sectional outlooks by groups of workers were likely to be transcended, and submerged in a class-wide identity. Coupled with the propaganda of the revolutionary party, strikes which began over simple wage issues would develop into political struggles as the workers' sense of the proletariat as a class-for-itself heightened and increased the class consciousness of that group as a whole. Although it has its limits, Luxemburg's analysis of the dynamics of class consciousness undoubtedly remains the most influential Marxist work on class consciousness.

Another of the most prominent analyses of industrial militancy and its effect on class consciousness is that of Hobsbawm, particularly in his work The Forward March of Labour Halted? and to a lesser extent his Worlds of Labour, in which he stressed that the militancy of the English working class from the 1950s has been of a purely economistic and sectional character. Hobsbawm condemned the selfishness of this economistic militancy when he suggested that,


The strength of strikes today, particularly in the public sector where the market and profits are not the determinants, rests largely on the ability to put political pressure on the government by the ability to make life difficult for the public including all non-striking workers.


Hobsbawm saw this sectionalism and selfishness as inherent within purely economistic militancy undermining the consciousness which workers' derived form other forms of trade union struggle. Within wage struggles workers' have no real sense of their collective nature, they become ignorant of their ability to be a class of workers 'for itself'. He suggested, 'In fact, and in contrast to both the classical syndicalist era and the general tendency of strikes for a good deal of this century, the great strike movements of the 1970s are overwhelmingly economic in the narrowest sense.' Hobsbawm then believed that there was no politicisation inherent in the strikers' actions. They were striking for purely materialistic meas. These workers did not think economistic militancy could produce a politicisation of the struggle and what is more, according to Hobsbawm, they did not care. 'The logic of Hobsbawm's critique of section wage struggle was that if trade union action was engaged in by a wider range of forces and directed towards non-wage objectives then it would be more likely to generate class consciousness.'

By analysing certain statistics such as trade union membership, party membership and voting patterns, Hobsbawm concluded that union density was barely higher than in 1945, and 'the number and proportion of the electorate voting Labour had declined at almost every election since 1951.' He stated, 'in absolute figures Labour (plus Communist) after 1951 barely ever got to within one million of its then vote, and in 1974 it polled about 2 and a half million less than in 1951, less than in any election since 1935.' The statistics suggested that while the number of strikes was reaching a high for the twentieth century, the militancy was of an economistic and sectional character, concerned merely with wages. Hobsbawm's theory is extremely simplistic and designed to fit his Marx Memorial Lecture as laid out in The Forward March of Labour Halted?. Over the years he revised it significantly, the primary consideration being to show how economic struggle could in some instances heighten class consciousness. However for the purpose of this work we shall utilise the theory in its most simplistic, unrevised form. We shall now briefly account for some important statistics in relation to trade unionism and 1979.

Steve Jefferys has quite astutely shown that many of the indicators Hobsbawm used to substantiate his thesis on the forward march of labour were flawed. He suggests,


While there has been a massive structural shift away from the traditional manual working-class occupations … trade union consciousness has been more widespread in the 1970s than fifteen or thirty years ago. Women and black workers have been recruited to trade unionism at a faster rate than their white male counterparts, and have strengthened rather than weakened "class solidarity".


So within the trade unions the statistics do not paint the declining picture of the state of the labour movement as Hobsbawm suggests. The unions were in a strong position reaffirming 'class solidarity'. By 1979 trade unions and their rank-and-file members were situated in a better position than ever before, unions were 'as never before at the heart of popular culture and discourse.' Total union membership had reached 13.5 million by 1979, with trade unionists comprising 55 percent of the labour force. In 1979 more than 29 million working days were lost, the fifth largest figure of the twentieth century. Trade unions and their rank-and-file were enjoying the fruits of successful and determined collective bargaining. Unions played, unlike today, a crucial and respected part in the governance of society.

We shall now assess whether the events of the 'winter of discontent' did heighten class consciousness. To do this we shall concentrate on three crucial components of the 'winter of discontent'. Firstly, the Ford's strike of 1978, the Road Haulage dispute of 1979 and finally, the infamous events of the public service workers' strike that has inflicted such a damning reputation upon the events of 1978 – 1979. The reader should be aware that literature on these respective strikes, the most important of the 'winter of discontent', is extremely limited and in some cases non-existent. This has constrained the following analyses.

The path to defeat for the Callaghan Government was completely laid by November 1978. in October the Labour Party conference voted by 4 million to 1.9 million to reject the five percent policy. The in November 1978 the workers of the Ford Motor Company ended their nine week strike with a pay rise of 16.5 percent consisting of a 9.5 percent rise of their basic rate, a 2 percent rise in holiday pay and a 5 percent attendance allowance. Whether it was a wildcat strike or not the Ford industrial action quickly gained the support of all Ford workers against what Ron Todd called the company's 'derisory' offer. The rank-and-file – partly motivated by shop stewards, partly spontaneously – began to actively support their demands in Halewood and Southampton on 21st September 1978, and by the 26th, 57000 Ford workers collectively stopped work. The Ford strike was characterised by massive solidarity, so much so that picket lines and coercive persuasion were not required, hardly anybody contemplated entering the factories. Neither were 'flying pickets' necessary, the active solidarity of the English proletariat blocked all movement of the required components both on the roads and at the docks. Indeed, even the wives of Ford workers' asserted, 'We Ford wives are a hundred percent with the strikers.' The Ford strike is crucial as it could have only have reached the levels of success it did through a complete ignorance or rejection of 'capitalist values', an ignorance producing a solidarity and cohesion otherwise unthinkable. The result of the Ford strike saw the 'awful' Government isolated from both the workers it was meant to represent and the capitalists whom its policies had seemingly benefited. The workers had been pitted in struggle against their employers and their government, and had emerged victorious. Thus, the confidence of the working class was massively enhanced by the Ford strike and such direct struggle between workers' and the Government brought about a mood of radicalisation that spurred on trade unionists throughout the 'winter of discontent'. It was the 1978 Ford strike which ensured there would be a real showdown between the Labour Government and the working class. As Ken Gill suggested, this was a political struggle:


It was precisely during the 60s and 70s period of mass political struggle, when "wage militancy" was at its peak, that the ruling class tried a final solution of the trade union question. There is a clear link between struggle and political change. The fact is that wage struggles are no longer pure wage struggles.


Of central importance here of course is the last sentence, which shows that the increasingly meddling role of a right wing government in workplace affairs served to politicise wage militancy. This was precisely what happened in those turbulent events of 1978-9. It would seem that, as Luxemburg suggested, state intervention here politicised a wage struggle.

The next major event of the 'winter of discontent' was the road haulage dispute where once again the government capitulated to the working class. On January 4th, tanker drivers belonging to British Petroleum and Texaco began a complete fuel strike. By January 8th 13-15 percent wage increases had been accepted but the Texaco drivers continued with their strike. They arranged 'flying pickets' to the depots of other companies who had returned to work. Closely intertwined with the lorry drivers' dispute was that of the truck drivers, which was seen as the second most brutal strike of the period. The enduring legacy of that strike was of 'bearded men in duffle coats huddled around braziers.' Although the expected shortages never materialised during the road haulage dispute, there is not question that the failure of the Labour Government was measured against the appearance of Britain under siege. As Healey suggested, 'Nervous viewers thought the Revolution had already begun.' The various drivers' disputes saw Government intervention again politicising what may have started out as pure 'wage militancy'. Government – particularly Home Secretary Merlyn Rees – questioning the legality of 'flying pickets' ensured the lorry and truck drivers' disputes had political affects. There were problems with the legality of the flying pickets in the lorry drivers' disputes, and such issues did arise in the hire and reward road haulage dispute of 1979. However, as Smith suggests,


The solidarity that characterized road haulage trade-unionism in the major industrial centres made it unnecessary to organize pickets at strikers' depots, and as the dispute rapidly acquired a national dimension it also proved unnecessary to travel to other areas to extend support.


Within the union then, solidarity dictated that pickets at strikers' depots were not necessary. Workers' knew their collective action was influential, they held optimistic views that the strike would be resolved with a successful outcome. This belief in the strength of workers' collective action may not have had politicising effects, but it was tantamount to an increase in class consciousness, even if it was only a consciousness of the proletariat as a 'class-in-itself'. A belief in collective action breeds a belief in the group, the collective. This sense of collectiveness is a form of class consciousness, whether it is a political consciousness or not is irrelevant. Politicisation can come from a group of committed revolutionaries it does not have to come from striking workers. It is the job of these revolutionaries to harness the class consciousness of workers and transform it into what Gramsci called a 'hegemonic consciousness'.

Where pickets were stationed – docks, container bases, rail terminals, wholesale markets, cold stores, supermarkets and roads – only a handful of strikers were required and they relied on moral argument to persuade people not to cross the pickets. Another example of solidarity among the striking workers' can be seen through the support lent to the road haulage hire and reward strikers by drivers, dockers and manufacturing workers who took part in blacking. For almost a month – particularly on the motorways, in the ports and the factories – it was clear that the lorry drivers and their strikers' committees were the law, and not the unions, the State, or the Althusserian Repressive State Apparatus' such as the police. When many of the lorry drivers had resumed work (approximately 2nd February), in some cases they had received pay rises as high as 22 percent. Once again the five percent policy had been smashed and, for a time, law and order had been administered by a gang of drivers. Whether or not radicalisation was apparent, the seeds for that radicalisation had definitely been planted. This may have been a purely economistic struggle however the success of this collective action inspired a class consciousness that could quite possibly have been turned into a political class consciousness if the 'right' political guidance had been offered. Indeed, the strikers might have developed a political class consciousness had the environment been more akin to the revolutionary situation described by Luxemburg. The militancy displayed here was purely economistic – although it did have political repercussions as can be seen by the issues of legality surrounding 'secondary action' and 'secondary picketing' – yet it was not sectional as Hobsbawm probably would have posited: solidarity among striking workers, all members of the working class, was too widespread for sectionalism to have been present. In this instance then, the dynamics of class consciousness and industrial action cannot be completely explained either by Hobsbawm's theory, or Luxemburg's. The events of the hire and reward road haulage dispute sit uneasily between these two prominent theories.

Finally we shall analyse the heart of the 'winter of discontent', the public services disputes that bore witness to the most infamous events of 1978 – 1979. The public services disputes began on 22nd January and lasted on and off for approximately six weeks. 'For the first and only time the Government activated its own machinery for crisis management through the Regional Emergency Committees.' On the public sector workers' day of action 1.5 million workers' were called out in opposition to the Government's five percent pay ceiling. Those workers infamously included gravediggers, refuse collectors, hospital workers, school caretakers and airport staff. The four unions involved – National Union of Public Employees (NUPE), General and Municipal Workers' Union (GMWU), Confederation of Health Service Employees (COHSE) and Transport and General Workers' Union (TGWU) – demanded a £60 minimum wage and a 35 hour working week.

One factor in these disputes that does suggest some form of class consciousness was the awareness of the workers that the structure of modern capitalism enabled them, through strike action, to completely paralyse the apparatus of production. Dave Walton suggests there was a widespread refusal of capitalist ideology by the public service workers. Walton sums this rejection up as, 'I don't want to do this because I want to do something else.' In other words, the capitalist values of voluntary cooperation were overturned by the selfishness of the workers who had no interest in the exploitative firms for which they worked. This seems to be a peculiar reversal of the charge of sectional proposed by Hobsbawm. Walton sees this sectionalism as becoming the unifying factor of the working class in their struggle with the Labour Government. This militant 'acting for oneself' came before any other consideration, including those of employers. In other words, trade unions and their bureaucracies were subverted by their rank-and-file whose discontent with Labour's policies meant that all Labour affiliates were viewed suspiciously. The trade union apparatus, normally so favourable to capitalism, was during the public services' strike hijacked by the rank-and-file leaving union bosses helpless in the face of this peculiar proletarian militancy. Of course this militancy did start out as purely economistic yet we must not forget that it was aimed directly at the state, which does suggest some form of politicisation was involved. When such an action is aimed directly at another group or class, class solidarity tends to be reaffirmed. However, it is interesting that within the public sector disputes, a strange number of Conservative trade unionists were present, particularly among hospital staff. Chris Powell's film 'The Winter of Discontent' paints a picture of Jamie Morris, a Conservative trade unionist based at Westminster Hospital, who said it was better to have a bad Conservative government than a bad (or good) socialist government. This trade unionist actually campaigned to bring Margaret Thatcher into power, and surprisingly his political stance was not as far removed from the rest of the public sector strikers' as we would like to believe.

However this is counterbalanced by the political viewpoints of one major union, NUPE, and the views of its officials and representatives. NUPE, led by Alan Fisher and Bernie Dix, was a brash leftist union that unlike other unions recruited many of its officers from the radical left. However, due to its militant tradition and radical politics, NUPE was ostracised by the other main unions and its leader Fisher was constantly denied a place on the TUC General Council. Its presence however helped consolidate the feelings of those public sector workers paid minimal wages for difficult and dirty jobs. Although the most brutal, and the most enduring in the public consciousness, the public sector disputes were perhaps the most uneventful of the period in terms of class consciousness. Many of the workers involved seemed to have had no interest in politics which is unsurprising when they were paid such pittance. The only concern they probably will have had much time for was feeding their families. Class consciousness does not seem to have been affected by the public sector disputes. Indeed, developments in class consciousness seem to have been more in line with Hobsbawm's theory of sectionalism and economist militancy than with Luxemburg's theory of politicisation. Activists within the trade unions, such as Jamie Morris, were working to undermine the Labour movement rather than further the cause of socialism.

If the 'winter of discontent' did not directly heighten working class consciousness then it can certainly be seen as contributing to the radicalisation of the Labour Party and strengthening the left within the party. The left united behind accountability of the leader and party, which contributed to a leftist manifesto spearheaded by stalwarts of the left such as Benn and to a lesser extent Foot. After the 'winter of discontent' Foot became leader of the party and Benn narrowly missed being elected as deputy leader. The party was again becoming, although rife with factionalism, a party for the workers', which it had not been under Callaghan. With hindsight, Callaghan's government indicates that New Labour is not a new aberration. The internal party reform striven for after the events of 1978-79 under the auspices of the Rank and File Mobilising Committee show that the left may have been frustrated, yet leftward momentum continued within the Labour Party. Indeed, regionally the labour movement was gaining momentum. In Liverpool Trotskyists backed by Militant began to exert their influence. In 1978 Derek Hatton stood in the Tuebrook ward of Liverpool and was able to increase the Labour vote by a staggering 50 percent, despite not being elected. After the 'winter of discontent' Hatton was elected. Such gains were made by the labour movement throughout the country. The Labour Party may have lost the 1979 election and lost some support, yet this was support that had voted for Callaghan, a right wing choice for Prime Minister. Once Labour moved back towards the left it was inevitable that some of these right wing supporters would swing towards the Conservatives and the Thatcherite counterrevolution.

This work has attempted to explore a countervailing interpretation to that proposed by Hobsbawm of sectionalism and pure wage militancy in relation to the 'winter of discontent'. This has proven an incredibly difficult task, the orthodoxy of sectionalism and pure wage militancy ringing true for most of the events. However, there were some examples of solidarity that lend hope to the notion that class consciousness was to an extent increased. Still I can see no real correlation between the 'winter of discontent' and class consciousness, either an increase or decrease. In terms of the theorists, Luxemburg seems to be most appealing, although her theory does not hold true when applied to the events of 1978-79. Hobsbawm's theory seems too rigid and inflexible whereas Luxemburg allows for external factors in the heightening of class consciousness through industrial action. To conclude then, class consciousness can be divorced from industrial action in the 'winter of discontent', no real links are apparent. However, it seems that industrial action can do more good than harm for class consciousness, so Hobsbawm's theory is flawed. Although I see no real links between class consciousness and industrial militancy it still seems that the 'winter of discontent' was not the reason for the election of Margaret Thatcher. The real reason behind her election was a right wing government who could not decide whether to side with labour or capital, sitting uneasily between the two thus alienating itself from both.

‘Bravermania’: The capitalist labour process and the car industry

This work investigates the effectiveness of Braverman's deskilling thesis in analysing transformations within the British car manufacturing industry during the twentieth century. This is a particularly difficult task. Although the British car industry has often been a hotbed of industrial militancy, it has not proven to epitomise Braverman's theory as many scholars asserted it would. Indeed, many of Braverman's 'predictions', such as technological deskilling, appear to be extremely limited when applied to the British car industry even after the onslaught of automation. Firstly this work will review the Marxian notion of the labour process, and then it shall briefly highlight the main tenets of Braverman's deskilling thesis including the primary theoretical flaws. The next section analyses the usefulness of his thesis in explaining transformations during the twentieth century in Britain's car manufacturing industry. My conclusions shall show why Braverman's thesis is inadequate in analysing the British car manufacturing industry. It must be made explicit that any conclusions reached in this work have to remain within the confines of the British car industry. Theories of the labour process are not the universalistic and monolithic structures that many theoreticians would have us believe. Thus, the conclusions of this work cannot be juxtaposed, out of context, on to other industries. In short, evidence in this piece cannot be used to substantiate conclusions regarding other industries. Before proceeding any further it is vital that we understand the notion of the labour process as theorised by Marx.

The driving force of capitalist society is surplus value. The labour process is a Marxian notion which explains this valorisation through the transformation of the human potentiality for labour, labour power, to the actualisation of that labour power, labour. As Braverman suggests, 'The labor process … begins with a contract or agreement governing the conditions of the sale of labor power by the worker and its purchase by the employer.' The labourer's labour is expended upon the subjects and instruments of labour – the means of production – provided by the capitalist thus producing a commodity with a use-value, leading to the material and spiritual alienation of the worker. As Braverman suggests,


Before it is anything else … the working class is the animate part of capital, the part which will set in motion the process that yields to the total capital its increment of surplus value. The working class is first of all raw material for exploitation.


To the capitalist the worker is merely a raw material whose labour 'objectifies' the other materials in the production process. Where surplus value is accrued the capitalist's goal of valorisation is fulfilled. For Marx this labour process, the 'critical area for explaining social conflict and control' is inherently exploitative. Labour power, the worker's potential labour, receives a minute fraction of the eventual use-value of the commodity which is the fruit of his labour. Hence, the relationship between labour and capital is inherently exploitative as labour power will always receive a disproportionately small fraction of the eventual use-value of the goods produced. Under the capitalist labour process, the time the labourer works gratis for the capitalist is lengthened, thus reducing the value of labour power and increasing the relative surplus value of the commodity produced. This discrepancy between the workers' wages and the value of their productive activity provides the surplus value which becomes the capitalist's profit. As Grint posits, 'since the exchange involved in wage labour was inequitable, the relationship between capital and labour was exploitative.' Thus, what Marx termed the 'labour theory of value' can be utilised as the measure of exploitation in any given capitalistic labour process.

Within this framework of exploitation Grint suggests Marx saw technology, mechanisation and 'machinofacture', as servants of capital designed to complete the real subordination of labour to capital. As Grint asserts, 'For Marx and the labour process theorists technology is quintessentially a class tool: a machine to oppress and exploit the working class further'. However, Marx also underlies the authoritarian nature of managers' and their strategies' as they strain to retain control of an increasingly belligerent workforce. Here, problems begin to arise. Marx's view of technology – the productive forces – in which control is inscribed negates the necessity for the managerial control strategies which he identifies. Such problems, paradoxes and irreconcilable tensions have plagued subsequent theorists of the labour process which is unsurprising when they caused such difficulties for one of the most gifted theoreticians in recorded history. Now we shall analyse the efforts of one of those subsequent Marxist theorists, Braverman, isolating the main tenets of his deskilling thesis and identifying the primary theoretical flaws with the theory. Only major flaws with Braverman's theory shall be underlined as there is a 'veritable avalanche' of existing criticism that is simply too large for every problem to be accounted for within the imposed limits of this work.

Braverman's theory is unsurprisingly grounded in the four 'traditional' tendencies of Marxist schema, i.e. deskilling, fragmentation, hierarchisation of tasks, and establishing the means to control labour. His theoretical approach is taken directly from Marx, particularly Capital, from which he utilises three lines of analysis. Littler and Salaman assert that he utilises the following lines of analysis: (1) Marx's distinction between labour and labour power, (2) his theoretical schematisation based on the distinction between formal subordination of labour and the real subordination of labour; and finally, (3) the general deskilling dynamic suggested in Capital. As Littler and Salaman suggest, for Marx the real subordination of labour to capital occurred during 'machinofacture' whereas Braverman suggests that at the turn of the century there were still significant areas of production within which workers, particularly craftsmen, maintained real control over aspects of the labour process. Hence for Braverman, Marx telescoped the transition from the formal to the real subordination of labour that only occurred during the twentieth century through Taylorian scientific management and the automation of industry. Braverman then seeks to update Marx's theory of the labour process by asserting that only Taylorism – the fundamental base of twentieth century capitalist society – completely removed the execution of work from its conception, making the workers' thoroughly dependent appendages of the machines upon which they worked. He states, 'in the capitalist mode of production, new methods and new machinery are incorporated within a management effort to dissolve the labour process as a process conducted by the worker and reconstitute it as a process conducted by management.' Taylorian scientific management is for Braverman the culmination of these 'new methods' that has finally ushered in the period of the real subordination of labour. So as Braverman argues, under capitalism 'The unity of conception and execution' being 'dissolved' involves the appropriating of the labour process from the labourer and its reorganisation with the capitalist manager firmly at the helm. As Stark suggests, 'Braverman argues that the developmental logic of the capitalist mode of production results in an increasing loss of control of the production process by the direct producer.' Thus, under Taylorian scientific management or rationalisation, the labour process was completely dominated by the capitalist and the transition to the real subordination of labour completed. The working class, although still a class-in-itself, is left, as Elger posits, unable to challenge this real subordination:


For Braverman the process of degradation of work and the disciplining effect of the reserve army of labour together appear to produce a virtually inert working class, unable to pose any substantial problems for capital either within production or beyond it.


As we have seen, Braverman's theoretical critique rests upon two main principles. Firstly, his view of 'scientific management' as 'the fundamental practice of management in twentieth – century advanced capitalism.' Secondly, his development of the general deskilling dynamic laid out by Marx in Capital. This deskilling is for Braverman the central imperative of the capitalist organisation of the labour process which, by dissolving the skills underpinning craft opposition to the reorganisation of production, guarantees capitalist control over the labour process. So to realise the 'infinite potentiality' of labour, 'the logic of capitalist production necessitates the continuous transformation of the techniques of producing' increasing mechanisation and automation with the desired result of the displacement of workers' skills and the entrenchment of the real subordination of labour to capital. This 'logic' is for Braverman the conscious design of capitalists to utilise scientific systematic knowledge to subdivide labour and increase their control over all parts of the profit making process.

Indeed, this is one of the fundamental flaws of Braverman's theory. He seemingly eschews the importance of profit for the capitalist in favour of his will to subordinate the worker. As Grint explains 'For the capitalist the problem of work is the problem of managerial control: how can managers ensure the maximum degree of effort for the minimum amount of reward?' This is not the capitalist mindset. If employers could gain profit without subordinating workers, they would, as Burawoy has ascertained. Surely even Marx with his conceptualisation of class conflict would not presume that subordination of the workforce is more important for the capitalist than profit. 'Control over the labour process is not the sine qua non of capitalism, profit is.' Braverman's interpretation of the capitalist reorganisation of the labour process is extremely conspiratorial, viewing the subordination of labour as a conscious decision of management. He fails to see the labour process as a "'frontier of control" the scope and depth of which is determined, in large part, by the degree of militancy and the forms of organisation of the working class.' So, as Schwarz remarks, Braverman's approach fails to recognise the 'working class as an active and problematical presence within the mechanism of accumulation.' Indeed, by ignoring the role of the proletariat, Braverman precludes the possibility that scientific management and rationalisation could produce new control problems. The 'objective interdependence' of workers' in flow production heightens their ability to disrupt production. In short, the proletariat is not just a class-in-itself. As Price eloquently proposes,


I will confess at the very outset that I am extremely suspicious of the growing tendency to elevate subordination as the core strategy of analysis … because it closes off the possibility of a genuinely dialectical dynamic to which the "subordinate" groups contribute more than just the material for their own subjection.'


Price's suspicions reflect my own, in that the subordinated proletariat clearly offer more to the labour process than the material for their own subjection. Braverman's complete ignorance of the proletariat as a class-for-itself is therefore plainly wrong. The 'frontier of control' is shaped as much by worker resistance as it is by managerial strategies of control. As Elger argues, 'the inadequacy of his objectivist conceptualization of the working class … fails to address the manner in which class struggle is integral to the course of development of the capitalist labour process.' This neglect of worker resistance and class struggle universalises the working class as a subordinated whole, which is of course incorrect. If Braverman is correct regarding the persistent deskilling of labour the proletariat should be a homogenous mass of unskilled workers. 'In reality the opposite seems closer to the truth, with ever more divisions within the working class and a persistent tendency to heterogeneity.' Indeed, as well as a 'frontier of control' the production process can also be termed, as Burawoy proposes, a frontier of consent, aptly described by Friedman's notion of Responsible Autonomy. As Joyce argues, 'the relationship of capital and labour is inherently ambiguous, concerning compromise as well as conflict, mutual as well as divided interests.' Braverman, through his crude and dogmatic Marxism obscures this compromise in favour of class conflict while ignoring the role of the proletariat, the group of pivotal importance in class conflict.

Although Braverman himself suggested his conception of class would be objective, this does not mean that we should not account for any problems which this may cause. Braverman tries to pre-empt such criticism by suggesting that the subjective content of class is a result of bourgeois consciousness. Braverman is often regarded as having a masterly grasp of Marxist theory, which I would suggest is questioned by the nature of his conceptualisation of class. Also, his view of technology as a managerial strategy is in direct contrast to Marx's view of the labour process. Marx may have seen managers' as authoritarian however this was merely to oversee the formal subordination of labour. Indeed, Marx himself suggested,


when surplus value has to be produced by the conversion of necessary labour into surplus-labour, it by no means suffices for capital to take over the labour-process … The technical and social conditions of the process, and consequently the very mode of production must be revolutionised, before the productiveness of labour can be increased.


The real subordination of labour for Marx, therefore, was a product of the development of the productive forces. As Marx suggested the productive forces may have enslaved the proletariat but only they contain the seeds of human freedom. Braverman however seemingly neglects the role of the productive forces, viewing them as less influential than the relations of production (embodied by managerial strategies to subordinate employees), while neglecting the pivotal role of the proletariat in the transformation of these relations. He severs the dialectial link between the relations of production and the productive forces while ignoring a crucial factor in the transformation of those relations, the role of the proletariat. Braverman concludes there is no longer a contradiction between the forces and relations of production, only a correspondence. This of course allows no place for meaningful class conflict. Thus Braverman, while adopting a Marxist approach completely undermines the dialectic, the driving force behind historical materialism. This surely challenges claims that Braverman has a masterly grasp of Marxist theory.

One more significant problem with Braverman's analysis is his failure to distinguish between labour and labour power. The distinction is made early on in Labour and Monopoly Capital (Braverman, p. 51) however from then on it is largely ignored. Capital extended upon labour power is of course the variable potion of the capitalist's money, thus some sort of control is necessitated to decrease the variability of labour, which leads to management. Admittedly this is expressed early on by Braverman however the distinction should be constantly realised and illuminated in order for a proper grasp of the Marxian labour process to be had. Of course there are many more problems' with Braverman's analysis. However, for our purposes they are essentially irrelevant. We cannot dwell too long upon the theoretical problems with Braverman's thesis as the purpose of this work is to analyse the effectiveness in practice of the deskilling thesis. Braverman's thesis shall now be applied to the British car manufacturing industry during the twentieth century.

The usefulness and place of labour process theories in analysing the car industry is a controversial topic upon which extremely little has been written. Certain commentators suggest that Braverman's paradigm fits the car industry in the early years of the twentieth century and the inter-war years, however afterwards its relevance declines – Bedauxism is often cited as inaugurating a strict Taylorian direct control strategy in many countries during the 1920s. Paradoxically, case studies of the car industry from the 1960s onwards suggest that a 'frontier of control' existed and that management attempts to utilise subordinating strategies were common. The ability of Bravermania to analyse the car industry then is something of an enigma, which we shall now explore. Braverman adopts the four traditional tenets of Marxist schema for his analysis, i.e. deskilling, fragmentation, hierarchisation of tasks and establishing the means of control. These tendencies of Marxist schema shall therefore provide us with the analytical framework necessary for our analysis. Obviously, these schemas are all interrelated and unified under the management umbrella of control. Fragmentation, hierchaisation and deskilling are all strategies designed to give management control over the production process and the workforce. Their separation is not ideal, however to analyse each factor of Braverman's theory simultaneously is to complicate an already difficult subject. Indeed by separating the main tenets of his theory we can illuminate just how intrinsically intertwined they are.

Initially we shall start with the deskilling affects of technology upon the British car industry during the twentieth century. Analysing the deskilling caused by technological change in the car industry is extremely problematic as there is no literature focusing specifically on the affects of technology upon line workers' skill. Therefore this shall appear the most limited section of my analysis.

The big five of car manufacturing adopted methods of mass and flow production during the 1920. Friedman assets that 'Ford introduced flow production in a very small way at Trafford Park back in 1911.' So, what affect did these methods of flow production have on the skill of workers? Mass production techniques require the maximum utilisation of labour and this can only be achieved by subordinating the operator to the machine process at the most intense level. Indeed, the automobile industry is the domain of the new semi-skilled worker and this is almost certainly, at least in part, due to technological changes within the industry. Less than one worker in a hundred in a car plant can refer to themselves as skilled. Turner et al suggest that technical changes 'did at least extend mechanization from skilled operations to many unskilled jobs like materials-handling.' However they also argue that management has usually taken care to ensure technical change causes a minimum of overt downgrading of this kind. The inevitability of such technical change does necessitate the deskilling of labour to some degree in order for levels of surplus value to grow. Hence, 'During the 1920s and 1930s the development of mass production involved semi-skilled operators taking over the jobs formerly performed by a variety of skilled craftsmen.' The transition to automation was obviously going to adversely affect the skill of workers and coupled with the adoption of flow production it is unsurprising that the deskilling was relatively widespread. Rolls Royce works manager Wormald condemned the 'drudgery of being confined to one operation and one machine for any length of time' and the deskilling that this automation and division of labour would involve.
However despite the "human element" of thought from Rolls Royce, machine tasks were still simplified and divided into small components suitable for unskilled labour and the company continued to employ a large amount of unskilled labour in the lowest wage brackets. This is quite surprising when compared with Lewchuk's view of British management, who he asserts, 'came to see the "human element" as a critical factor in improving productivity. They viewed their concern for the human element as being incompatible with either Scientific Management or Fordism.' The deskilling which took place at Rolls Royce due to the introduction of new technology is quite poignant when we consider that this company is one of the British car manufacturers least enslaved by the requirements of the mass market.

The history of the assembly line worker (particularly at Ford's with the grading system) is one of discontent with the perceived status of their jobs, which centres on 'the degradation of work in the twentieth century and the subordination of the worker to the machine.' Friedman and Meredeen assert that,


It is this subordination which makes the track worker in the motor industry the most discontented and alienated of all production workers: alienated from the end-product of his labour by the fragmentation of the production process; alienated from his fellow workers by the "mechanical jungle" of large-scale production; and alienated from his own nature by the mindless repetition of short-cycle tasks which deny him the opportunity to realise even part of his full human potentiality in his work.


For Friedman and Meredeen production workers within the car industry have, for the greater part of the twentieth century, become subordinate to machines. Thus, Marx and Braverman's notion of deskilling does aptly characterise the relationship between workers and technology within the car industry. The alienation which Friedman and Meredeen suggest pervades workers within the car industry is supported by Beynon's description of workers' feelings in Ford's periphery plant at Halewood, Liverpool. Beynon suggests that the production line is divisive of labour with the worker's alienated from each other as well as from the fruits of their labour: 'Few men see the cars being driven off the line.' Flow production alone has deskilling affects on the workforce by mechanising the thinking of the worker who submits to the insidious grind of the production process by ignoring or blanking out the all consuming monotony which he is trying to escape. The worker becomes a non-thinking robot due to his intentional ignorance towards the monotonous conditions of his employment. Simply, he ceases to think and fulfils the aim of Fordism. While working his mind goes blank: he thinks about his next break, his next wage packet, the weekend, all the while paying no mind to the labour he is providing. This transition from disgruntled resistor to the mindless robot desired by management equates to Althusser's Ideological State Apparatus'. However rather than the state apparatus it is that of the workplace, consciously established by management to further spiritually alienate the worker and complete the transition to the real subordination of labour within the workers' psyche. In short, the monotony of the production process regulates the thinking of the worker who accepts his subordination as it allows him to produce the fundamental necessities required to live, eat and have shelter. As Lewchuk suggests, 'Machine pacing is not the cause of the real subordination of labour, it is merely the manifestation that labour has already accepted a subordinate role.' Obviously Lewchuk is not referring to the technological deskilling of the workforce. However he is correct in that the worker submits to a subordinate deskilled role where the tedious conditions of flow production allow for wage increases. 'On a number of occasions, it was clear that British labour was sympathetic towards a Fordist strategy if it could be guaranteed that high wages would result.' Of course the labourer has no choice: he has to work to survive. So, Lewchuk may be overestimating the workers' acceptance of Fordist production.

Lewchuk's conclusions are supported by those of Turner, Clack and Roberts. They suggest that 'direct personal downgrading has rarely been a consequence of recent automation.' They assert that the deskilling which took place was before World War One. Although the increased complexity of technology within the car industry has initiated some deskilling, those machines did require setting up and maintenance: as a result some skilled workers were required such as repairmen and toolmakers. Also, craftsmen were often able to win special consideration from employers for displaced craftsmen. 'On the whole, therefore, recent technological change … has produced an increase in the proportion of skilled workers, as well as certain other net upgradings.' Deskilling then has been kept to a minimum. Mechanisation was not – as Braverman, Form and others suggested – invented to 'deskill workers and wrest from them control of production', rather it was to secure surplus value and profit. It is clear that whether or not deskilling took place, this was not the intention of most managers'. Henry Ford may have devised strategies that effectively brainwashed workers' into becoming the mindless robots he desired. However the thought of Ford was not reflected ever by the most extreme scientific managers in Britain. Valorisation was of course their goal, so where new technology brought profits it would be implemented. But the deskilling that ensued, which Braverman said is inevitable, seems to have been negligible. It appears that in the majority of British cases, there is no link between automation and deskilling that has led to management implementing automation. Where automation took place it was for the sake of profit, not to deskill labourers. Indeed, an elite band of multi-skilled workers would probably be more beneficial for capitalists in the car manufacturing industry than a mass of unskilled labour. Hence, the emphasis Braverman and other Marxist theories of the labour process have placed upon the deskilling affects of technology is problematic. Braverman's deskilling thesis then cannot be applied to the British car industry as the evidence suggests that if deskilling was apparent it was limited. And, where it was present, deskilling had little to do with any formal reorganisation of the labour process.

The fragmentation of tasks within the car industry throughout the twentieth century is apparent. Not only has there been an increase in operational factories each with its own different purpose, there has been prominent intra-factory fragmentation. The most severe example of this can be seen at Vauxhall where, after the market for motor vehicles collapsed in 1921, 'the firm took drastic action. The factory was closed for six weeks during which each of the 6000 jobs was studied, time and assigned to a specific grade of labour.' This extreme rationalisation exhibited by Vauxhall's scientific managers laid the foundation upon which tasks could be severely fragmented, not only alienating labour by accelerating the transition from the formal to the real subordination of labour. This is one of the more extreme examples as Vauxhall showed a greater tendency than most British domiciled firms to move in the direction of direct control and Fordism. However other fragmentary strategies have been utilised in the division of labour. Each complex often has several factories and each factory is multifunctional. At the Ford plant in Halewood there are several factories and each one has more than one department. Each complex must obviously have the ability to produce a whole car and this involves many departments. Thus, as Turner et al suggest, 'The separation, between establishments, of engineering processes from more specifically assembly operations, and the related separation by product, is very noticeable.' For example, at Ford's in Halewood there is the small parts shop, the paint shop, the trim assembly department (main production line), and the transmission department to name but a few. And this is not the only complex with such divisions. 'The Ford complex at Dagenham has, of course, similar divisions, with machining concentrated on one factory, body assembly in another, and final assembly in a third.' Within these factories the workers in one section are alienated from those in another, and where the production line is in operation it is too loud to talk to the person at the next station. So within factories, as Braverman asserts, 'the detailed division of labour subdivides humans.' Each station within the different sections must have a planned number of operations completed in a fixed length of track. The implementation of flow production then was the genesis of the real fragmentation of labour, as this was the main purpose of such technology. The subdivision of one task into several was the aim of flow production, so with the onset of the assembly line the fragmentation of tasks and labour was inevitable. Another prominent fragmentation of workers' within the car manufacturing industry appears with the establishment of periphery factories, often located far from the company's main complex and paid less wages. Friedman suggests 'setting up new factories far away from the firms' main control workers held out the possibility of an effective centre-periphery relation within car firms, strongly based on location.' This centre-periphery relationship was established mainly to lessen wages of workers' in certain centres, and of course it fragmented, divided and alienated the workforce. 'While wages in Ford and Vauxhall's large new factories were quickly brought into line with those in their older factories in the South East, Rootes, B.M.C. and Leyland continued to pay far lower rates than in their Midland factories.' This discrepancy between wages in the centre and periphery soon gave rise to claims for parity, and with the 'new' factories being located in 'old' centres of strong worker resistance the strategy of building a periphery of workers within car firms soon failed, completely crumbling in the mid-60s. Indeed, in the case of Halewood the peripheral factory was located only a few miles from Garston, where a main Liverpool dock was located. In these dockland centres communities have traditionally been close knit, and unified in their hatred of managers' who are seen to benefit directly from the poor conditions in which the dockers' were forced to work. Thus, Ford's strategy of erecting a periphery factory in Halewood was not properly thought out, as exhibited by the hatred of supervisors, foremen, managers', and the extreme militancy of the workforce. Although the policy of establishing a number of subordinate periphery factories, there was still an intense fragmentation of labour and tasks within the British car manufacturing industry during the twentieth century. The organisation of the factories after the introduction of flow production in the early twentieth century was highly conducive to such fragmentation and this was ruthlessly exploited by the management of all the major car firms. It is quite ironic that while the direct control was strongest among management before World War One, the technology for such a strategy to be effective did not exist: whereas when the technology for such a strategy to be profitable did exist, it had already been fundamentally undermined by worker resistance.

Coupled with fragmentation, the hierachisation of tasks was a massive strategy for management in its war to crush the craft opposition so idealised by Braverman. The grading of workers' was extremely successful in dividing labour, which was essential under flow production as workers' were increasingly able to disrupt the production process. The grading of those on the assembly line was more often than not B, which was only one above unskilled labour and the toilet janitor. Colleagues who had worked together for years suddenly found that one was a B and the other a D. This inevitably caused tension between workers', their colleagues and management. Many men found it ridiculous that they were graded the same as sewing machinists, which was actually quite skilled in the sheer speed required for the production of seat covers with their often incredibly intricate patterns. Indeed, sewing machinists also objected to their grading. This objection was the cause of a large strike so effectively analysed by Friedman and Meredeen. Although it caused many disputed, grading and the hierarchisation of tasks was probably the strategy least rigidly enforced in managements' efforts to suppress workers'. However that grading was of vital importance in dividing labour, a crucial task in reducing the ability of workers' to act in an efficient collective organisation. Although hierachisation of tasks does not appear a prominent strategy of British management during the twentieth century, it is important when related to deskilling, fragmentation and hierachisation. These methods combined can be seen as completing the forth tendency of Braverman's analysis, establishing the means of control. It was the battle to establish the means of control that caused massive disruption in the British car industry throughout the twentieth century. The labour process, the frontline of the production process, can then be truly regarded as a 'frontier of control', which we shall now explore.

The twentieth century witnessed many peaks and troughs within industrial relations in the car manufacturing industry. Management in the very early twentieth century – the period before World War One – appear to have had strong sentiments of Taylorism and direct control without the required level of mechanisation that would have made the strategy highly efficient and lucrative. The position of the craft worker was not as insurmountable as Braverman would have us believe: they would have been suppressed by direct control if it had been introduced. The period after World War One, which witnessed the increase in techniques of flow production, saw direct control strategies implemented by many firm managers', most notably Morris motors. As Lewchuk suggests,


Accounts of factory life at Morris suggest that the philosophy of work as a means to an end, the end being an improvement in the quality of life outside the factory, may have been carried to an extreme. Inside the factories life was most uncomfortable, and questions of health and safety seem to have received less attention than they might have done.


The idea of work being a way to improve the quality of life appears to mean not only the materialistic quality of life, but the spiritual quality of life, which emulates the ideas of Ford who believed hard graft improved workers' behaviour as 'social animals'. However worker resistance to such attitudes and strategies was extremely fierce and managers' began to search for other alternatives. Ironically then, when direct control could have been most successful the apparatus for control did not exist. By the time the necessary automation required for direct control to be effective was introduced, the strategy had already been undermined by wholesale worker resistance. The managerial strategy that replaced Taylorian techniques in most firms was aptly described by Friedman as Responsible Autonomy. He suggests, 'Within car firms during the 1940s and early 1950s the vast majority of workers were treated as control workers with Responsible Autonomy Strategies. The gang system in many of the main Coventry centres was the epitome of Responsible Autonomy. The 'ganger' liaised between management and the gang yet he remained a 'normal' colleague never becoming a supervisor in the strict Fordist sense of the word. The 'ganger' then was pivotal to the success of Responsible Autonomy mediating the previously strained relationship between the two sides of the 'frontier of control'. As the car industry underwent a boom period between the mid 1950s and the early 1960s direct control experienced a resurgence. However, this was again confronted with strong – and this time – unionised worker resistance. It is the 1960s that is the most interesting in relation to Braverman's thesis. Attempts to implement management control were definitely apparent, however, they were faced with severe worker resistance that Braverman completely ignored. Had Braverman accounted for worker resistance his theory of the labour process would be hugely enriched, particularly if applied to the 1960s when struggles over control of the production process were extremely commonplace.

On the shop-floor of many factories throughout the 1960s, the division between the supervisor and the men was very much a 'frontier of control', with management's rights on side and worker rights on the other. It is in this way, in disputes over control at work, that the struggle has been fought out by the British working class during this century. As Beynon brilliantly posits,


At the lowest, and most fundamental level, it has involved a conflict over how much work the men do and how much they get paid for it. At its most developed level it has produced an ideological conflict over who runs the factory and why, to a questioning of the essential nature and purpose of production within a capitalist society.


This is of course the raison d'ĂȘtre of theories of the labour process, to analyse the relationship between workers' and management and the battle to gain and retain control of the process of production. Braverman's contribution to such theories is indisputable in relation to the role of management. However, his ignorance of the working class fundamentally undermines his understanding of the process he attempts to theorise. The working class arguably have more influence over the organisation of the labour process than managers'. This can be seen by the control of workers' over their sections and the disruptions they can cause by refusing to work. 'The failure of British management to gain complete control of the production process, even during a war crisis, was critical in leading post-war management to reject direct control as a viable strategy'. Although managers' briefly gained the ascendancy and complete control of the production process between the mid 1950s and 1960s, strikes soon became a more prominent feature than ever of industrial relations within the British car manufacturing industry. Ford's, often hailed the bastion of direct control, was regularly forced to make concessions in the face of shop-floor resistance and to negotiate change giving workers more control over the labour process.

To conclude, Braverman's failure to recognise that management had to take into account worker power fatally undermines his theory of the labour process. Certain aspects of his theory can be applied to the British car manufacturing industry albeit with limited success. However, the history of the labour process within the car manufacturing industry is a history of conflict over speed-up, a history of the ability of workers' to resist management domination. Flow production may have monotonised the workers', and it did increase managerial control. However this rise in managerial control was combated by the newly acquired ability of workers', sometimes only in one section, to bring entire complex's to a standstill. This is a power that cannot be underestimated. The British car manufacturing industry then is not characterised by a history of Taylorian techniques of management, rather it is characterised by worker resistance to such techniques. The workers' are a vital ingredient in the labour process, the most vital ingredient, they cannot be ignored. Braverman's thesis then cannot be effectively juxtaposed onto the British car industry as this industry is characterised by autonomous, militant workers who refused to be dictated to. Workers accepted Fordist techniques of flow production for the wage increases it brought, any other Fordist techniques were quickly quashed in the face of strikes and other forms of worker solidarity and militancy.

References


Beynon, Huw, Working for Ford (1977, Bristol)


Braverman, Harry, Labor and Monopoly Capital: The Degradation of Work in the Twentieth Century (London, 1974)


Elger, Tony, 'Braverman, Capital Accumulation and Deskilling', in The Degradation of Work: Skill, Deskilling and the Labour Process, ed. by Stephen Wood (London, 1981), pp. 23-53


Ford, Henry, My Life and Work (New York, 1922)


Form, William, 'On the Degradation of Skills', Annual Review of Sociology (1987), 29-47


Friedman, Andrew, Industry and Labour: Class Struggle at Work and Monopoly Capitalism (London, 1977)


Friedman, Henry, and Sander Meredeen, The Dynamics of Industrial Conflict (London, 1980)


Grint, Keith, The Sociology of Work (Cambridge, 1991)


Grint, Keith, The Sociology of Work, 2nd edn (Cambridge, 1998)


Joyce, Patrick, 'Labour, capital and compromise: A response to Richard Price', Social History, IX (1984)


Lewchuk, Wayne, 'Fordism and British Motor Car Employers, 1896-1932, in Howard Gospel and Craig Littler, eds, Managerial Strategies and Industrial Relations: A Historical and Comparative Study (London, 1983), pp. 82-110


Littler, Craig, 'Understanding Taylorism', British Journal of Sociology, XXIX (1978), 185-202


Littler, Craig and G. Salaman, 'Bravermania and Beyond: Recent Theories of the Labour Process', Sociology, II (1982)


Lyddon, Dave, 'The Car Industry, 1945-79: Shop Stewards and Workplace Unionism', in A History of British Industrial Relations, 1939-1979, ed. by Chris Wrigley (Cheltenham, 1996), pp. 186-211


Marx, Karl, Capital (Moscow, 1954)


Penn, Roger, 'Skilled Manual Workers in the Labour Process, 1856-1964', in The Degradation of Work: Skill, Deskilling and the Labour Process, ed. by Stephen Wood (London, 1981), pp. 90-108


Penn, Roger et al, 'Technological Change and the Division of Labour in Rochdale and Aberdeen: Evidence from the Social Change and Economic Life Initiative', British Journal of Sociology, XXXXIII (1992), 657-680


Price, Richard, 'The Labour Process and Labour History', Social History, VIII (1983)


Stark, David, 'Class Struggle and the Transformation of the Labour Process: A Relational Approach', Theory and Society, I (1980), 89-130

Turner, H.A., Garfield Clack, and Geoffrey Roberts, Labour Relations in the Motor Industry (London, 1967)


Vallas, S.P., 'Rethinking Post-Fordism: The Meaning of Workplace Flexibility', Sociological Theory, XVII (1999), 68-101

Mezzanine debt market rebounding


Mezzanine finance first came to prominence in 2003 when there was a precipitous decline in the senior debt market for leveraged financings and the high yield debt market was particularly volatile. As average private equity investment returns receded due to a saturated market, many investors saw in mezzanine as a rare opportunity to achieve comparatively strong, risk-adjusted returns.

The increasing liquidity of debt markets and explosion of private equity activity – buyouts account for nearly a fifth of global M&A activity – have spurred the growth in mezzanine. The number of mezzanine deals has doubled since 2003, according to BNP Paribas. The rise in mezzanine is most marked in Europe, where the value of buyouts has exceeded that of the US. The €1bn mezzanine tranche used in October by Casema, the Dutch cable group, took European mezzanine issuance for the year-to-date to €8.4bn, 38 percent ahead of the first three quarters in 2005.

The impressive growth has caught the eye of private equity firms who can use mezzanine financing to invest in other funds. Since 2004 many buyout houses have diversified into mezzanine, opening dedicated investment funds. The Carlyle Group, for example, recently announced that it had raised its first fund ($436m) dedicated to mezzanine investment. Carlyle Mezzanine Partners has invested in eight companies that have "good cash flow and leading market positions, as well as highly motivated management teams." CMP invests in debt and equity securities of third-party leveraged buyouts, recapitalizations and growth financings. According to Carlyle's website, CMP invests in senior subordinated notes with warrants, preferred stock, and minority common equity securities. Blackstone also has its own dedicated mezzanine team. Blackstone Mezzanine Advisors invests up and down the capital structure in firms that need growth capital for M&A, recapitalizations and re-financings. Blackstone will commit from $5m to $150m, structuring a significant portion of its investment as debt with the aim of creating equity and allowing upside potential. Goldman Sachs currently has the largest mezzanine fund in the world. GS Mezzanine Partners III was raised in 2003 with $2.7bn of available capital. Goldman Sachs, due to the size of its fund, will invest from $40m to $250m in companies pursuing
leveraged buyouts, expansion financings, recapitalizations, acquisitions and restructurings.

As mezzanine has grown in stature from a niche subordinated bridging strip to a crucial part of deal structures, the market has become increasingly saturated. As a result terms and conditions have been less favourable for mezzanine lenders over the past 24 months and pressure from new entrants into the traditional mezzanine arena has intensified further impacting the market. Second lien and syndicated second lien loans, in particular, have taken market share away from mezzanine providers as both lenders compete for a similar place in the capital structure. Lenders are attracted by the perceived extra security of second lien when compared with more tenuous mezzanine debt, which is closer to equity thus has higher risk levels.

This competition from second lien does look set to abate as the level of LIBOR has increased and senior lenders become increasingly concerned about the rights of second lien providers. Some senior lenders have been dissuaded from entering into capital structures with second lien lenders due to the costly legal battles that can ensue when creditors attempt to redeem their investments in the event of a bankruptcy. Mezzanine financing may be preferable to second-lien loans for some issuers, especially since the price gap between the asset classes has closed to such an extent that second liens are no longer cheaper. The dip in the high yield market also allowed mezzanine lenders to improve their market share. As a result, mezzanine now represents a more significant portion of capital structures in deals, such as LBOS. The capital structure of an LBO traditionally consists of four types of debt: half the debt is usually bank debt; 10 percent is high yield debt; private equity represents 30 percent and mezzanine debt makes up the remaining 10 percent of the capital structure. While borrowers are increasingly turning to mezzanine, partly as it is more flexible and private, the capital not comprised of bank debt and private equity is increasingly coming from mezzanine. In some cases, suggests one professional, mezzanine comprises around 20 percent of the capital structure.

Due to the increased acceptance of mezzanine as "good" debt, there has been tremendous pressure on prices within the sphere, particularly at the top end of the LBO market. Interest rates are sometimes as low as 9 percent, down from around 12 percent when the mezzanine arena was not over-crowded. Terms have also become much looser with lighter covenants.



Second lien debt market robust

Aided by the robust debt market, second lien has developed from a niche in rescue financing to an integral leveraged financing product. As companies look for bridging debt products in their capital structures they are increasingly turning to second lien. Indeed, issuance for the first three quarters of 2006 – set to be a record year – stood at $18.5bn surpassing the $16.3bn of 2005, according to Standard & Poor's Leveraged Commentary & Data. Major deals in 2006 include the largest second lien loan to date: the $2.25bn loan issued to Koch Industry Inc. for its $20.4bn acquisition of lumber company Georgia-Pacific Corp.

Over the last 12 months second lien financing has become the primary bridging structure in LBOs. During 2005, 68 percent of second lien volume went to finance LBOs and dividends, up from 62 percent in 2004 and 26 percent in 2003. As the bull market of the past few years continues private equity sponsors will continue to tap second liens at the expense of historical LBO financing such as high yield bonds and traditional mezzanine loans – as aggressive buyouts and leverages continue, second lien will offer an additional breakdown of debt that is more secure than traditional bridging structures. Second lien loans have been particularly prominent for mid-market issuers, in financing buyouts and recapitalizations, which cannot easily access the high yield debt market. Of course when the cycle about-faces and a bear market returns, second lien will be put to its more traditional use as rescue financing by hedge funds and distressed debt players.

Companies that are seeking additional financing at competitive rates, with financing flexibility and without equity dilution are helping to drive the rise in second lien issuance. The major impetus behind this increased usage comes from investors. The average spreads on second lien financings are generally higher than 600 base points (6 percent) compared with 300 base points for classic senior debt. And the risk-profile is perceived to be lower than a high yield bond or mezzanine loan. Due to the supposed security of second lien compared to other debt, such as mezzanine and high-yield, hedge funds have aggressively utilised the product. According to Credit Suisse Group hedge funds buy about 60 to 80 percent of the second liens.

However, in the event of a downturn the security provided by second lien may prove to be an illusion. At the heart of second lien financings is an inter-creditor agreement with first lien lenders, which essentially makes the second lien lender as silent as possible in the event the first lien lender has to act due to a problem with the loan. Within these agreements first lien providers will try their utmost to retain exclusivity to work out the troubled creditor with the borrower. Of course, second lien holders want to maintain as much authority as possible in the inter-creditor agreement. Ambiguous court decisions have done little to offset the effects of these inherently conflicting agreements.

The recent bankruptcies of Atkins Nutritionals and Meridian Automotive Systems highlight this point: in the event of creditor stand-offs with first lien providers, second lien holders may get little back on their investment. These returns can be further diminished by costly legal battles. No matter how ruthless hedge funds are perceived to be in their negotiations, first lien providers have the luxury of security provided by contractual agreements. These agreements contain provisions that in the event of a sale of specific asset, they will be first in line to receive proceeds from that sale. Due to such inter-creditor squabbles, and the potential for many more, there has been a push towards the increased standardisation of inter-creditor terms.

With much of the capital funding second lien coming from hedge funds, the growth in liquidity across the market is not expected to slow. Hedge fund investment capital, estimated at about $500m in 2000, had doubled to $1.1 trillion in 2005, and is expected to nearly double again to $2.1 trillion by 2010, according to Hedge Fund Research.

However, in the event of a major downturn and a spate of bankruptcies and workarounds, the problems with second lien may become apparent. Second lien financing allows companies that may not qualify for senior debt to leverage up to the max. If this capital is not used to enhance profitability then companies may be bankrupt on their balance sheets more rapidly than in the past. This could cause a turn away from second lien. When the next downturn does arrive, court decisions with regard to inter-creditor agreements could tip the scales in favour of second lien financing, or against it. If the ambiguous nature of inter-creditor agreements between first and second lien providers is not eventually resolved, hedge funds and other investors may turn to other debt products, thought before to be higher risk and have higher returns.







High Yield Debt


Global high yield debt issuance reached a record $222bn in November, surpassing the previous record of $211bn in 2004, according to Dealogic. October was the busiest month on record for high yield bonds, according to Dealogic, with $30.5bn worth of issuance. HCA recently sold $5.7bn, while the issue of $5.95bn from Freescale Semiconductor is the second biggest second lien issuance ever, behind RJR Nabisco's $6.1bn.

Companies with junk credit ratings are raising more money than ever in the European debt markets on the back of low interest rates, low default rates and the global rise in leveraged buyout activity, according to Fitch Ratings. Companies in the sub-investment grade category have issued $38.4bn of bonds so far this year, outstripping 2005 and the record 2004.

Record issuance has been supported by bigger deals that do not receive all their financing needs in the loan markets. So, investors are increasingly snapping up high yield bonds and helping private equity firms complete some of the largest buyouts in history. Investors believe that while LBOs continue, the appetite for mega-financing from the high yield market will continue. And apparently risk-hungry investors searching for high returns will continue to take on riskier assets while default rates remain low, liquidity is high and economic conditions are benign.

However, many of the new issuances offer relatively low yields, and demand still seems to be outstripping supply. This suggests borrowers, not issuers, are driving demand. Also, there has been a rise in PIK notes, which allow a company to pay the interest off a bond with further debt, not cash. While investors continue to flock to the high yield market, it would seem they are pandering to the whim of borrowers, unlike other asset classes, such as second lien.

Although high yield has experienced a rebound over the last few years, it has undergone a long and difficult period competing for a place in the capital structure against other, less risky debt products. In 2003 the high yield market had ground to a stuttering halt and bridging structures such as mezzanine filled the gap. For example, of the recapitalizations completed in 2005, nearly all had mezzanine tranches whereas none had high yield bonds in their capital structures. Due to the less onerous prepayment penalties and ease of execution, sponsors were opting for mezzanine tranches except on the largest deals where more rigid, public high yield bonds were still utilised. High yield debt, while it is an established part of the armoury for large LBOs, is particularly susceptible to fluctuations in market conditions that influence its pricing and purchasing attraction. So, even though it is a long-term asset class, it is bound to fall in and out of popularity due to the fluctuations in the economic cycle.

The increased supply of high yield debt to finance capex and LBOS has pressured spreads. Non-investment grade lenders have accepted higher spreads in order to stop investors from migrating to safer investments. As a result, their yields are comparatively low.

While covenant packages in high yield deals are normally robust – they often include limitations on the additional debt a company can raise and the right to have their bonds bought back at 101% of par value if the company is taken over by an unapproved buyer – and have been throughout most of 2006, investors seem to have relaxed their demands of late in order to attract creditors. The recent example of the NXP Semiconductor bond deal has been highlighted by many professionals and commentators as a deal where covenants were too loose but investors were willing to take the risk.

In the US, heightened uncertainty about Fed monetary policy will affect the decision to further invest in the high yield market. Sporadic volatility, so prevalent over the last few years, is likely to ratchet up once again in 2007



Hedge funds: bolstering the leveraged finance market


According to Chicago based Hedge Fund Research, hedge funds now have more than $1.3 trillion in assets under management. Taking leverage into consideration, the value is potentially significant higher. While they are certainly in the midst of the good times, the zenith is apparently still to be reached. During the third quarter of this year hedge funds attracted the most capital since 2003, $44.5bn. And, hedge fund assets will grow at an annualised rate of 15 percent between 2006 and 2008, according to research conducted by TowerGroup.

Despite the large sums they increasingly attract, the returns generated by hedge funds are increasingly lagging, particularly compared to the days when men like George Soros dominated the industry. According to The Economist, in the 1990s, the compound annual return of hedge funds was 18.3 percent. Since 2000 it has been just 7.5 percent. As a result, hedge funds are diversifying their investment strategies to recapture the alpha returns expected by their investors.

This is not solely due to lower than average returns. The calm economic conditions, stagnant capital markets and increased competition have led investors to seek out innovative methods to ramp-up returns in a low volatility environment. As part of their widened investment portfolio, hedge funds are increasingly turning to the leveraged loan market. According to a recent report, hedge funds now account for one third of all leveraged loans. Indeed, some hedge funds like Ritchie Capital Management have formed new divisions that focus only on direct lending. Part of the appeal of leveraged loans is that they hedge against rising interest rates due to their floating rate structure. And, they have traditionally provided solid returns in a variety of market environments. The hedge funds that focus on debt markets will achieve some of the strongest returns within the sector this year, according to JPMorgan.

This move to the leveraged loan market is not the only place where the lines have become blurred between hedge funds and private equity houses. Private equity has consistently outperformed public markets in recent years and presents an attractive opportunity for hedge funds to maximise their returns. As a result, while hedge funds have traditionally been short-term investors – utilising strategies such as convertible arbitrage, long-short public equity portfolios and merger arbitrage – they have extended their timeframes to intensify their participation in buyouts.

Of the estimated 8000 hedge funds globally, around 20 are purported to be contestants in the $1bn-plus buyout market. In several recent auctions of large cap companies, hedge funds have competed against buyout funds to acquire the target company. For example, Cerberus Capital Management LP recently bought out MeadWestvaco Corporation for $2.3bn. Cerberus also lost out to private equity consortiums in bids for Texas Genco and Toys 'R' Us. Another example of hedge fund participation in the buyout arena is the recent feud between Polygon, a US based hedge fund, and Fortress Investment Group, a private equity rival. Polygon, which owns 23.9 percent of Telent, the UK-based telecoms equipment provider blocked Fortress's $639m bid for the company.

When participating in the leveraged buyout capital structure, hedge funds are particularly utilising the second lien debt product. Second lien issuance for the first three quarters of 2006 – set to be a record year – stood at $18.5bn surpassing the $16.3bn of 2005, according to Standard & Poor's Leveraged Commentary & Data. And hedge funds have dominated the second lien market. Second lien agreements – which theoretically give lenders certain rights over a company's assets – often have covenants to limit a creditor's future borrowing and are attractive to hedge funds due to the perceived increase in security over other debt products lower down the capital structure. Ostensibly, hedge funds are providing financing to troubled companies, which other lenders will not finance. Commentators are suggesting that the liquidity being provided by hedge funds, beneficial in the short-term, is storing up problems for the future. And hedge funds, they suggest, will not wait around to help bail companies out. Rather they will retreat from the distressed sector, as was the case during the downturn of 2002, and return to their more traditional strategies. With the volatility that may be present in financial markets at that time, those traditional strategies may once again become more profitable.

The media and critics of the hedge fund industry often point to the collapse of Long-Term Capital Management (LTCM) to highlight the problems with the industry. While they provide a huge amount of liquidity that money can suddenly disappear. LTCM had to be bailed out by the Federal Reserve and the economy was badly damaged.

Contrarily when Amaranth lost $6bn – 65 percent of its value – in one month, there was barely a ripple in the financial markets. Unlike the LCTM case, brokers recouped the money they lent the fund without incurring any losses. This has led brokers and hedge fund managers to suggest their risk management systems and checks and balances have drastically improved. Indeed, the low volatility currently observed in the markets for currencies, bonds and shares suggests that hedge funds have helped stabilise the system. Investors are moving into hedge funds because they are, normally, less risky than capital markets. Hedge funds will probably be at the fore in the next financial disaster, suggests one professional. However, that is because they are at the fore of everything in contemporary financial markets.

International Mergers and Acquisitions Overview 2007

2006: A record year for M&A

Deal making activity has been frenzied over the past few years culminating in 2006, a record year for M&A. Total deal value recently reached $3,368 trillion according to Dealogic, surpassing the previous record of $3,332 trillion worth of activity announced in 2000, the zenith of dotcom mania. While the volume of transactions has been similar to last year, the median value per transaction has increased significantly. This is due to the high value of certain deals. For example, eight of the ten biggest deals ever have been announced since the beginning of this year: Blackstone's offer of $36bn including debt for Equity Office Properties, a real-estate trust, sets a new buyout record taking over from the recent deal for HCA. Average was significantly boosted recently by a number of large deals, with some $75bn worth of deals on November 19th and 20th alone, according to The Economist.

Benign economic conditions have allowed corporates, which currently have a voracious appetite for growth, to amass significant war-chests and easily accessible capital has given them confidence to compete in the M&A arena. Financial buyers have also spurred the rise in deals with buyouts accounting for $563.2bn worth of deals, or 17 percent of deal activity. While ramping up their competition with corporates, buyout funds are increasingly acting like strategic buyers. They add to their portfolios through add-on acquisitions with some funds buying separate companies from the same industry and then merging the two to create synergies and economies of scale.

Corporate confidence and impressive private equity spending are not the only factors behind the impressive statistics. There has been a geographical shift in deal-making. As domestic markets become overly saturated and hyper-competitive corporates are looking to emerging markets to extract synergistic value. Unlike past years, the flow of deals is not just towards emerging markets. Companies from emerging markets are also venturing down the M&A path, increasingly looking to foreign markets for opportunities. In particular, Chinese, Indian and Russian companies have come to the M&A party in a big way. In 2000, Indian companies completed 50 acquisitions worth $957m according to Dealogic. So far in 2006 they have made 146 acquisitions, with a massive increase to a total value of $20bn. Chinese companies bought 27 foreign firms in 2000, worth $1.8bn. In 2006 they have bought 85 worth $15.5bn.


The seller friendly climate

The aggressive deal climate has been extremely beneficial for sellers. There is intense competition among buyers for a limited amount of quality assets and as a result, sellers are further cashing in by structuring sales as auctions. Vendors have realised that creating competition among a variety of buyers is the best way to exaggerate sale value. The effect of auctions is being exacerbated by cheap debt, which has further pushed valuations and purchase multiples to extreme highs. Although there is not much more room for upside, buyers will continue to pay high prices for quality companies as long as the availability of cheap debt and the benign economic climate are sustained. Private equity firms in particular are not being distracted by high prices. The continued rise of "clubbing" has meant that private equity houses can come together to raise the necessary capital.

Unlike the previous record year, the latest M&A boom is not tied to one sector. In 2000 the telecoms sector accounted for the lions-share of deals, with $740bn of the year's total. This year telecom deals have totalled $366bn, behind finance and not far ahead of property, utilities and healthcare, according to Dealogic. There have been a variety of notable deals across a number of sectors, such as the buyout of HCA and Nasdaq's offer for the London Stock Exchange (LSE).

The mainstream media often suggests that, similarly to 2000, the current deal fever is characterised by reckless abandonment on the part of buyers. With the sheer volume of acquisitions being made in an increasingly competitive business environment, some companies feel they have little choice but to become highly-leveraged to purchase competitors. Indeed while companies are better equipped nowadays, they can overstretch themselves through poor decision making. "There is no room for 'irrational exuberance' in today's M&A environment; there are generally too many checks and balances within investor and purchaser decision-making processes," suggests Jeremy Furniss, a partner at Livingstone Guarantee. "However, there is plenty of room for errors of judgement and over-optimism. History shows that relatively few lose their shirts but only time will tell if major mistakes are being made"

But, suggests Steven M. Bernard, director of M&A Market Analysis at Robert W. Baird & Co., despite how the mainstream media may convey the deal climate, the discipline of the current M&A boom is far removed from that of 2000. Although prices are high, he suggests, the current climate is fare more rational than the excesses of the bull market during the dotcom boom. "In 2000, the height of dotcom mania, it was primarily Tech, Telecom and Media companies dominating M&A activity. Back then companies were using over valued stock to buy other over valued companies, which often had little or no assets, revenues or cash flow. Although it is too early to tell if today's deals will add shareholder value, they are clearly more rational and well thought out. We are seeing (i) industry consolidation, which is helping to eliminate excess capacity and achieve economies of scale; (ii) firms taking a global view at expanding into new markets; (iii) firms are buying real companies with hard assets, revenues and cash flow and (iv) more due diligence and greater oversight on the part of corporate executives and board members."

Industry professionals and commentators do not anticipate a slowdown in deals. Indeed, unless a major economic shock hits, the reverse may be true. As Roy Montague-Jones, a partner at Richards Butler LLP suggests, "It has been an extremely busy 12 months in terms of M&A activity and, if anything, it seems to be getting busier, with the bid for Corus made by Tata Steel, NASDAQ's renewed attempt to take over the LSE and NTL's bid for ITV all very recently announced. Behind this are the huge financial resources available to private equity houses which are competing for deals, coupled with a plentiful supply of cheap debt finance, which have been pushing prices higher." With significant capital levels from record fundraising efforts – according to Private Equity Intelligence firms have raised more than $300bn in new funding this year – private equity firms are highly armed and highly confident. High liquidity levels and strong balance sheets also suggest corporates will continue to search for acquisitions.


Available debt

There can be no doubt that liquid debt markets have contributed significantly to the increased M&A activity. Many commentators and professionals bemoan the amounts of leverage companies are accruing to pursue acquisitions. By over-leveraging companies are leaving themselves open to any significant rise in interest rates, they suggest. But, even if interest rates do rise, a massive private equity overhang will ensure the amount of liquidity in the market will continue to be significant.

As Mr Montague-Jones states, "Debt finance has seldom been more plentiful, and available at more competitive rates. At some point, interest rates will rise, but the volume of private equity money available means that the amount of liquidity in the market will continue to be significant". Indeed, liquidity, rather than price, seems to be driving today's M&A market. The cost of debt does not seem as important as its availability.

The availability of debt has been fuelled by the rise of new entrants in the debt arena, and the variety of new financing solutions they are offering. "It is a very competitive debt market, fuelled by the sheer variety of different debt-based products available and the desire of a number of new entrants to increase their market shares," suggests Mr Furniss. "We see no obvious reason for debt multiples to fall in the near future although clearly this is the focus of much nervous speculation among advisers," he adds.

Many of the new entrants into the capital structure are hedge funds. Hedge funds have an insatiable appetite for deals and are more flexible in the types of debt they are willing to provide compared to senior lenders, mezzanine lenders and private equity firms. They have particularly improved activity in mid-market M&A through the offering of second lien financing. Second lien helps get smaller deals done at better valuations. Smaller deals have traditionally been financed with low multiples of first lien debt above another level of expensive mezzanine debt. Until recently, second lien financing has been favourable compared to mezzanine loans allowing deals to be completed at reduced cost.

As Mr Bernard suggests, the effects of these new debt products is particularly apparent in the US mid-market. "US middle market sponsored lending remains highly competitive – and issuer-friendly – thanks to the number of new specialty finance companies and other non-bank lenders targeting the middle market, increased institutional interest in middle market loans, and continued pressure from indicative staple commitments issued by investment banks. Middle market leverage levels continued to trend upward during the first half of the year, averaging 4.0 times senior and 4.4 times total."

As a result of the increased involvement of hedge funds in the capital structure, the lines between hedge funds and private equity firms are becoming increasingly blurred. Some private equity groups are now focusing on a smaller number of sectors and claiming to be specialists in that field to differentiate themselves from hedge funds. Contrarily, some buyout firms are embracing these similarities by starting their own hedge funds. This looks set to bring the expertise of the buyout market to the hedge fund arena which could help change the perception that hedge funds are merely short-term investors obsessed with rapid exits.


Governmental intervention

Economic nationalism and governmental protection of "strategic industries" was causing problems for acquirers and regulators earlier this year. Several high profile deals were denied due to government intervention. In both Europe and the US protectionism rolled across the corporate M&A landscape. Italy's government rejected a bid for Autostrade, a toll-road operator, by Spanish company Abertis. Germany's E.ON was also dissuaded from purchasing Spanish Endesa in late July. The French government engineered a merger of Suez and Gaz de France in response to Italian firm ENEL's desire to acquire Suez. The US government rejected a bid from Dubai Ports World for container terminals at six US ports on the grounds of national security.

Most professionals thought that protectionism was coming to a halt – the UK government and its regulators look set to let a Nasdaq takeover of the LSE go ahead whether or not the deal is in the national interest. In the UK, Pilkington has also been bought by Nippon Sheet Glass, Abbey National by Santander and Thames Water by German Company RWE. However, the UK is perhaps the world's most open market to foreign buyers and can be set apart from other developed markets.

Certain commentators suggest political factors, namely the Democrats winning Congress, could see another rise in US protectionism. One commentator suggests that this result will mean greater scrutiny of certain sectors, such as energy, security and defence. Contentiously, it has also been suggested that agreements such as the North American Free Trade Agreement and the Central American Free Trade Agreement strengthen protectionism rather than allowing inward trade and M&A.


Legal and regulatory issues

As the world's economy and companies continue to globalise, complexities in M&A transactions continue to arise. A primary example is VAT. This is especially true when US companies are pursuing European targets as VAT does not exist in the US. So, for the inexperienced lawyer or deal adviser it is unlikely to be on the list of initial considerations.

Another example is corruption, which is increasingly a problem for US domiciled acquirers looking abroad, particularly to emerging markets where the legal infrastructure is underdeveloped. With the US government increasingly clamping down on infringements of the US Foreign Corrupt Practices Act, US companies have to be extremely careful and aware of any suspicious goings-on when acquiring abroad: otherwise, they could be incurring huge liabilities when acquiring. According to Richard N. Dean, a partner at Baker & McKenzie, this has had two critical consequences for M&A transactions. "First, corruption has become a significant due diligence item in transactions. Acquirers now must insist on reviewing not only compliance policies and codes of conduct but also suspicious transactions and relationships with agents and representatives of the target. Second, acquirers must be very attentive to post-closing liabilities which may arise either because of the business practices of the target or because of weak internal controls or books and records discrepancies of the target for which the acquirer may be held responsible."

If these potential cross-border deal-breakers are to be effectively managed, it is imperative that acquirers utilise a team with intimate knowledge of the local market. "With the globalisation of market economics, and the impetus of a flurry of free trade agreements throughout different parts of the world, local laws continue to change at an even quicker pace," suggests Richard R. Willis, a partner at McKenna Long & Aldridge LLP. "Having local experts with intimate knowledge of the local culture, marketing and business practices provides an enormous advantage in understanding the local regulatory requirements. Understanding the local expectations can go a long way in effecting a smoother transaction, but more importantly in solidifying the future relationship among the partners." Companies not only need excellent knowledge of the local market, but of the industry sector specifics and the target company if possible. This way issues that could affect shareholder value post-deal can be managed.

Recently there have been a few notable proposed changes to regulation that may affect the M&A environment in the future. For example, a European Court of Justice decision in March clarified significant VAT planning opportunities for pan-European opportunities, according to Mr Willis. "As a result of this ruling, using a head office/branch structure to conduct business across the EU can be very compelling," asserts Mr Willis. Such developments, he suggests, can and should impact structuring considerations, with respect to both how to complete the initial deal as well as post-deal considerations such as integration planning.

In the UK, the Takeover Code is now on a statutory basis, suggests Mr Montague-Jones. This may lead to an increase in tactical litigation in takeover bids. Although not a new regulation, in the US Sarbanes-Oxley still continues to impact M&A activity. The purportedly increased costs of being public are driving record levels of public-private transactions, including not just small-caps but a number of larger companies. It is also driving up activity as many companies and investors prefer an outright sale to another buyer rather than a public offering.

While the good times cannot last forever, professionals agree that the cycle is not going to turn soon. It must be remembered that 2006 was not a sudden upturn in a drought of activity. Deals have been on the increase for the last four years. The cycle is established and while certain factors continue M&A should remain high. For example, continued private equity interest looks set to remain a major driver behind this activity. And none of the major factors driving activity are expected to change during the next 6-12 months. The only worry, suggests one professional, is that a prolonged or sharp downturn in early 2008 could negatively impact M&A activity and drive down valuations and demand.

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