MERGERS AND ACQUISITIONS

Mergers and acquisitions (M&A) is a general term that describes the consolidation
of companies or assets through various types of nancial transactions, including
mergers, acquisitions, consolidations, tender o ers, purchase of assets, and
management acquisitions.
• An alternative way of eliminating competition is simply to acquire the rival rm.
• Generally , mergers and acquisitions implicitly imply “exit” (of the merging rms,
or at least of the acquired rm) and “entry” (of the newly formed rm, in case of a
merger).

Causes of Mergers and Acquisitions

Few examples will show that the causes are manifold:-
• In the 1980s, Sony purchased the lm studio Columbia with the objective of
creating “synergies” between two complementary producers. Columbia’s collection
of quality movies was seen as a guarantee of a minimum supply of “software” to
complement the “hardware” o ered by Sony (e.g., video players).
• When Nestle acquired Rowntree, its main goal was to enter the British market for
‘Chocolates. Rowntree owned a vast number of well-known brands (Smarties, After
eight, Kit Kat, etc.). Buying Rowntree allowed Nestle to save the high costs of
launching new brands.
• Philip Morris and Kraft possess a large number of food products sold through
super-market chains. Creating a new rm of greater size allowed Philip Morris and
Kraft To increase their bargaining power with respect to retailers. This is important,
for Example, when it comes to obtaining shelf space for the launch of a new
product.
There are a number of cases where mergers and acquisitions are done mainly for
nancial or tax reasons.
For Example:-acquiring rms from di erent Industries is equivalent to holding a
diversi ed investment portfolio, thus reducing the overall risk for the parent
company.

Types of Mergers and Acquisitions

The following are some common transactions that fall under the M&A umbrella:
• Mergers
• Acquisitions
• Consolidations
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 • Tender O ers
• Acquisition of Assets
• Management Acquisitions

The Implications of Mergers

• Market price increases as a result of the merger. Consequently, if product
di erentiation is not very important—so that market price is the only concern for
consumers—then mergers imply a decrease in consumer welfare.
• For Example that n is a large number, so that n is approximately equal to n − 1.
Then,under Cournot competition, pro ts are approximately the same with n
competitors or with n − 1 competitors. But then the merger between two rms from
the initial set of n competitors would seem unpro table
• Initially, the two rms earn a total of 2 times π(n), π(n) is equilibrium pro ts when
there are n competitors. After the merger, the Combined rm earns π(n – 1). If π(n)
is approximately equal to π(n – 1), then postmerger Pro ts are little more than one
half of premerger pro ts.
• We have assumed that both the xed and the marginal cost of the merged rm
would be the same as before the Merger.

Merger Waves
• Merger activity occurs in waves: Periods of intense merger activity in a given
industry alternate with periods of relative stability. There are several explanations
for this phenomenon.
• Some explanations emphasize Exogenous causes, and others put an emphasis on
endogenous e ects.
• For example, the airline industry. First in the United States, then in Europe and the
rest of the world, the industry is undergoing a process of deregulation. One
Consequence of this is that many airlines have been forming alliances, in an e ort
to Survive in an increasingly competitive industry.
• Currently, there are more than 500 Alliances worldwide.206 Although these
alliances have been formed in sequence, it would be incorrect to say that the nth
alliance was triggered by the n – 1st alliance. More likely, They are both the result
of the (exogenous) change in government regulation.
• The gains from merger between a given pair of rms increase when two rival
rms merge. Although this is not always true, it is an intuitive result.
• If the number of non merging rms is smaller, then the free-riding e ect is lower
and the merging rms are able to reap more of the bene ts from increased
concentration.
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 • Merger waves may result from exogenous events (e.g., industry deregulation) or
from endogenous events (e.g., a merger between two large rms).

Public Policy toward Mergers

• There are essentially three interested parties in a merger: the merging rms, the
nonmerging rms, and consumers. The previous analysis suggests that, in
general, consumers Lose from the merger. Non merging rms may gain or may
lose. Merging rms, nally Are expected to gain from the merger, at least in
expected terms (or else they wouldn’t Merge.
• The merging Firms have a strategic incentive to distort such information, in the
hope of convincing Policymakers that the overall e ect of the merger is positive.
• One of the few general rules for merger policy is that the greater the price
increase , the less desirable the merger is.
• •The idea is simple: A higher price implies a loss for Consumers that is less than
compensated by the gain to rms (the di erence being the allocative ine ciency
caused by the gap between price and marginal cost.
• Even if there were no allocative e ciency loss, a higher price would imply a
transfer from consumers to rms, a negative e ect (from a policymaker’s
perspective.
• • It is important to distinguish these two channels of price increase. The rst
one ,Known as the unilateral e ect of the merger, is essentially a function of the
increase in concentration
• The second one, the collusion e ect, also depends on the distribution of market
shares.
• • Disagreement between rms and merger authorities concerning market
de nition is common. It shows how di cult and inexact the science of market
de nition is. For this and other reasons, anti-trust authorities such as the U.S.
Federal Trade Commission have come to favor the more direct approach of
estimating the impact of a merger on Consumer prices.
• • For example, in examining the Staples/O ce Depot proposed merger, The FTC
concluded that prices in cities with little or no competition between superstore
Chains are up to 15% higher than in cities where there is competition.
• • This provides a Benchmark estimate of how much prices would increase, as a
result of the merger, in Cities where only Staples and O ce Depot operate.
• • A second general rule for merger policy is that the smaller the relative size of the
merging rms, the more likely that the overall impact of the merger will be
positive. There are two reasons for this rule. First, the smaller the merging rms
are, the lower the Price increase caused by the merger.
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• • The second reason is that a merger between small rms indicates that e ciency
gains are likely to be signi cant.
• • The smaller the size of the merging rms, the more likely the total e ect of a
merger is positive.
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