| What is the definition of a horizontal merger? | A Horizontal merger is a merger between firms that produce and sell the same products, i.e., between competing firms. Horizontal mergers, if significant in size, can reduce competition in a market and are often reviewed by competition authorities. |
| The motives for horizontal mergers can be seen in the pic. What does the profit maximization: Market power regard? | Recall: In an oligopoly, success of a firm depends on the choices made by its rivals (Game theory). But interdependence creates uncertainty in planning and there can be more than one Nash equilibrium. This can be solved in two ways:
a. Collusion (which can be too difficult or costly and sometimes illegal)
b. Merger & acquisition
Option b eliminates a close rival, making entry more difficult. Further, firm A might receive larger market share. The merger can also facilitate collusion as coordination becomes easier and reduces number of free riders. Hence, it raises ability to exploit market power. |
| The motives for horizontal mergers can be seen in the pic. What does the profit maximization: Cost saving regard? | Cost saving is one of the most common arguments for horizontal mergers. The combined size of two firms allows cost savings to be realized through a greater extend than would be possible through internal expansion. Hence, a merger delivers cost savings that is otherwise not possible!
1. Economies of scale (+)
• In production, marketing etc. More effective organization: economies of scale in management.
2. Economies of scope (+)
Overhead distributed on multiple plants, lower transport costs, multi-product production needed fewer shifts at the individual plant that can be used specializing in single products
3. Savings on R&D
4. Productive inefficiency and organizational slack |
| A monopolist maximizes at MR = MC, hence MC might be higher than necessary. How is this affected by a horizontal M&A? | Recall that monopolists do not produce at lowest possible MC, but rather at MR = MC. This is closely related to strategic/organizational literature that says firms care more about market power than inefficiency. Hence, MC might be higher than necessary and then MR is set based on MC, and then the monopolist operates at MR = MC that is higher than necessary.
After a merger, this can go both ways:
a. By decreasing number of firms may increase market power and therefore increase
inefficencies, negative effect of merger (-)
b. Merger might reduce the number of inefficient firms, positive effect on costs savings,
merger poitive effect (+) |
| Which factors affect market power after merger? | 1. Seller concentration
• Mergers between small companies in fragmented markets hardly give market power (-)
• Mergers between large firms in concentrated markets increases market power and increases the likelihood of coordinated behavior (+)
2. Productive capacity of rivals
• If rivals do not have idle capacity can not benefit from higher prices, which is often the consequence of a merger higher market share for the merged firm (+)
• Otherwise depends on how much idle capacity the rival has (+/-)
3. Buyer concentration
• Few large buyers will bargain on price increases which puts a constraint on market power and the gains from a merger decrease (-)
• If many buyers (i.e. not concentrated), merged firm can set higher prices (+)
4. Demand: if demand elasticity is low (+), otherwise (-)
5. Potential entry: The faster market entry the harder it will be to sustain market power - even after a merger (-) |
| Which factors affect cost savings after horizontal M&A? | 1. Utilization of 'Hard to trade assets', synergies
• Hard to trade assets are values that only occurs because companies merged
• E.g. eliminate disputes between two rivals over use of jointly used oil field ( value created by ‘coordination of a joint operation‘ is an asset as well)
2. Utilization of complementary skills in the merged companies
• Each entity specializes on task in which comparative advantage – i.e. exploit complementary skills, more likely through merger than if two separate firms
3. Improved interoperability of products from the merged companies
• E.g. two separate software components which before where incompatible (maybe on purpose) with merger possible to make them compatible.
4. Improved "network configuration"
• Cutting costs for R&D, e.g. by having different entities in the network communicate directly and more frequent with each other rather than to wait for the publication of a patent of rival firm. |
| The motives for horizontal mergers are many. What does the non profit maximization motive regard? | In large modern companies ownership and control often separated (Berle- Mean). Eg. listed companies with many owners, and perhaps weak boards.
Often, management will choose a combination of revenue maximization subject to a profit maximization constraint. However, the managers goals might differ from the owners.
This can be seen in Williamson’s managerial utility maximization model (See pic)
Weak owners and boards might have difficulties controlling management; hence management might be running the firm suboptimal as shown in the figure above.
This leads to a threat of being acquired by other firms in the market, as they believe the firm is worth more with the right management.
A takeover is likely if the difference between the acquirer's acquisition costs are less than the potential benefits of the acquisition. However, there are still a lot of acquisition costs to consider: Legal costs, stock options for employees to be bought out, severance costs, warranties for employees. |
| What is the The hubris hypothesis ? | When bidding for target firms, the manager tend to over-estimate the value of the target they bid too high (hubris). Too high means compared to rational expectations (i.e. no hubris). With rational expectations and randomly distributed payoffs, all bids will be close to the average bid which is equal to the true value of the firm that is for sale
With hubris the price paid for the acquired company is above the true value because it goes to the highest bidder hence too high. |
| What is the The capital redeployment hypothesis? | Main idea: incentives of managers to share information with the market distorted difficult to destribute capital efficiently across firms.
Mergers can help to overcome distorted icentives and managers of merged firms can redeploy capital more efficiently within firm than the external capital markets
How? Through internal system of rewards and penalties
Example: a owner that gives funds to a (merged) firm can incentivize the management of the merged firm the reallocation of capital from a non- performing plant of the firm to a more profitable one. Without the merger and the incentive structure capital would not be reallocated.
Important here is also the conflict of interest between managers and owners. |
| What macroeconomic conditions or risk diversification wishes might lead to an M&A? | Changes in macroeconomic factors such as commodity prices might lead a firm towards a M&A conclusion.
Technological development:
› Strong technology and product development in an industry often reduces the effect of a
merger relatively quickly through new entrants
› Recall industry life cycle: this happens when industry is still growing
› Incumbent may find it optimal to buy the new technology so that not lacking behind in the future and secure market power – in favor for mergers (+)
› Especially when incumbent is already in a more mature stage (relative to the market) |
| What rules might danish competition act merger control use to prohibit M&A? And what can they do to let a M&A go through anyway? | § 12c (1) The Competition and Consumer Authority shall decide whether to approve or prohibit a merger.
§ 12c (2) A merger that will not significantly impede effective competition, in particular due to the creation or strengthening of a dominant position, shall be approved. A merger that will significantly impede effective competition, in particular due to the creation or strengthening of a dominant position, shall be prohibited.
§ 12c (7) The Competition and Consumer Authority may grant approval of a merger, based on a simplified procedure, if the Authority, based on the information submitted, finds that the merger will not give rise to any objections on the part of the Authority.
§ 12 e.-(1) The Competition and Consumer Authority may attach conditions to its approval of a merger under Section 12c(2) or issue orders to ensure, for example, that the undertakings involved comply with the commitments they have accepted vis-à-vis the Competition and Consumer Authority to eliminate any anti- competitive effects of the merger.
(2) Such conditions or orders may require that the undertakings involved must
› i) dispose of an undertaking, parts of an undertaking, assets or other proprietary interests; › ii) grant third party access; or
› iii) take other measures capable of promoting effective competition.
(3) The Competition and Consumer Authority may, after its approval of a merger, issue the orders that are necessary to ensure due and correct fulfilment of the commitments made to the Authority by the undertakings involved according to subsection (1) above. |
| What are some exampels of things the competition authorities can impose on firms to do before an M&A is approved, so competition is not too limited in the industry? | What commitments can competition authority require to let a merger go through?
• Selling of industrial plants, for instance to a competitor.
• Selling intangible rights
• Selling of shares from competitors
• Repeal of exclusive rights and clauses
• Influence on firm’s infrastructure (For instance a large gas line for everybody’s good)
• Obligation to sell (inputs) to competitors
• Providing information and increase transparency
• Regulation of prices and discounts
• Structural commitments:
- Commitment to change the market structure, in the hope that effective competition can be ensured / created.
- For example, the sale of holdings, installations, intangible rights, impact on infrastructure
• Behavioral commitments:
- Commitment that governs the merging company’s conduct during and after merger
- For example, price regulation, the obligation to sell to competitors etc. |
