Mergers

Mergers

When two companies join to form one new

firm, it can be:
 voluntary, also known as a ‘merger’
or
 forced, when it is known as a ‘takeover’
Mergers

Merger activity is an example of ‘integration’

taking place within industries. This can be:
 vertical integration, where firms at different
stages in the production chain merge
and
 horizontal integration, where competing firms in
the same industry merge
Why Integrate?
Firms are sometimes keen to merge when:
 they can make savings from being bigger
 this is known as gaining ‘economies of scale’
 they can compete with larger firms or
eliminate competition
 they can spread production over a larger
range of products or services
 Economies of Scale
There are several types of economy of scale:
 technical economies, when producing the good
by using expensive machinery intensively
 managerial economies, by employing specialist
managers
 financial economies, by borrowing at lower rates
of interest
Economies of Scale
 commercial economies, by buying
materials in bulk
 marketing economies, spreading the cost
of advertising and promotion
 research and development economies,
from developing better products
Economies of Scale

There are sometimes problems that can

affect integrated firms. These are known
as ‘diseconomies of scale’
 firms are too big to operate effectively
 decisions take too long to make
 poor communication occurs
Types of Mergers

 Horizontal: merger between two

competitors.
 Goods are substitutes.
 Vertical: merger between two firms at
different stages of the production process.
 Goods are complements.
 Conglomerate: no clear substitute or
complementary relationship.
Are mergers good for
consumers?
 Yes, large size leads to better efficiency and
lower costs. Stimulates growth in industry and
more jobs. Structure - Conduct -performance
 No, large size leads to market power and higher
prices and layoffs.
Summary of pros and cons
of mergers

 CON
 Monopoly prices
 Job loss
 PRO
 Efficiency
 Promotes innovation

03/26/21
Why so many mergers?

 Economies of scale: both in production and

in things like R&D.
 Economies of scope: synergies between the
two companies.
 Defensive mergers: to deal with contracting
markets, excess capacity.
 Decrease competition: these are the
mergers that antitrust is worried about.
1992 Merger Guidelines:

 Define relevant product and geographic market.

 Measure concentration pre- & post- merger with
HHI. If merger raises HHI by 100 points and
post-merger HHI is > 1000, investigate further.
 Assess ease of entry into market.
 Assess likely competitive effects of merger.
 Assess any significant efficiencies that would
result from the merger.