MERGERS Overview Context: market structure changes by means of - - PowerPoint PPT Presentation

MERGERS

Overview

• Context: market structure changes by means of entry, exit — and

mergers and acquisitions

• Concepts: efficiency and market power; unilateral and coordinated

effects; merger waves

• Economic principle: as always, there is the good, the bad and the

ugly

Why mergers?

• Synergies

− Sony and Columbia Pictures

• Entry into new market

− Nestl´ e and Rowntree

• Supplier power

− Philip Morris and Kraft

• Distribution efficiencies

− Nestl´ e and General Mills

Types of mergers

• Horizontal: between competitors
• Vertical and complementary: firms in different or

complementary stages of the value chain

• Conglomerate: industry-unrelated firms

Largest M&A transactions as of 2014

Rank Year Acquiror Target $ b eb 1 1999 Vodafone AirTouch PLC Mannesmann AG 202.8 204.8 2 2000 America Online Inc Time Warner 164.7 160.7 3 2007 Shareholders Philip Morris Intl Inc 107.6 68.1 4 2007 RFS Holdings BV ABN-AMRO Holding NV 98.2 71.3 5 1999 Pfizer Inc Warner-Lambert Co 89.2 84.9 6 1998 Exxon Corp Mobil Corp 78.9 68.4 7 2000 Glaxo Wellcome PLC SmithKline Beecham PLC 76.0 74.9 8 2004 Royal Dutch Petroleum Co Shell Transport & Trading Co 74.6 58.5 9 2000 AT&T Inc BellSouth Corp 72.7 60.2 10 1998 Travelers Group Inc Citicorp 72.6 67.2

Effects of horizontal mergers

• Efficiencies

− Common cost savings − Synergies, complementarities

• Market power

− Unilateral effects (closer to monopoly) − Coordination effects (closer to collusion)

Merger effects: Hyundai and KIA

10 20 30 1996 1998 2000 2002 2004 2006 2008 2010 Year # ratio # models # models/platform # platforms 1 2 3

Merger effects: Hyundai and KIA

5 10 15 20 1996 1998 2000 2002 20004 2006 2008 2010 Year Prices (1000 KW) Exports (million units) domestic price exports 0.4 0.8 1.2 1.6 2.0

Merger in Cournot triopoly

• Initially n = 3, all firms with C = F + c q
• Firms 2 and 3 merge, forming 2&3 with C = F ′ + c′ q
• Merger efficiencies:∗ F < F ′ < 2 F and c′ < c
• Determine effect on

− merging parties − non-merging parties − consumers

∗ Merger efficiencies could also take place at the product level.

Merger effect on merging parties

• Equilibrium profits under Cournot
• πi =

a − n ci +

j=i cj

n + 1 2 − Fi

• Firm profit before merger

π1 = π2 = π3 = a − c 4 2 − F

• Firm 2&3 profit after merger

π′

2&3 =

a + c − 2 c′ 3 2 − F ′

Merger effect on merging parties

• Taking differences

π′

2 − (π2 + π3) =

• 2 F − F ′

+ a + c − 2 c′ 3 2 − 2 a − c 4 2

• Effects

− Fixed cost savings: F ′ < 2 F (positive effect) − Marginal cost savings: a + c − 2c′ > a − c (positive effect) − Market power: n′ < n (positive effect) − Exit: from 2 to 1 π (negative effect)

Merger effect on outsiders

• Taking differences

π′

1 − π1 =

a + c′ − 2 c 3 2 − a − c 4 2

• Effects

− Rival’s marginal cost savings: a + c′ − 2 c < a − c (negative effect) − Market power: n′ < n (positive effect)

Merger effect on outsiders: examples

• BP acquires Amoco (oil industry). Mobil’s stock up $2.625
• Western Digital announced Hitachi acquisition (hard drive

industry). Seagate’s stock up by 9%

• BA and AA announce plans to merge (air travel industry). Virgin

Atlantic paints its aircraft with “BA/AA No Way”

• GKN plc and Alvis plc merge (European defense industry), putting

pressure on Vickers, the third competitor

Merger effect on consumers

• Consumer surplus under Cournot

CS = 1

2

• n a−n

i=1 ci

n+1

2 = 1

2

• n

n+1

2 a − 1

n

n

i=1 ci

2

• Merger effect

CS ′ − CS = 1

2

2

3

2 a − 1

2 (c + c′)

2 − 1

2

3

4

2 (a − c)2

• Effects

− Cost savings passed through: a − 1

2 (c′ + c) < a − c (positive effect)

− Market power: n′/(n′ + 1) < n/(n + 1) (negative effect)

Merger effects: Miller and Coors

0.00 0.01 0.02

• 0.02
• 0.01

2007 2008 2009 2010 2011 2012 Time Change in price (%) change in p due to change in H change in p due to change in d

Merger dynamics

• Preemptive mergers

− Google and Waze

• Merger waves

− US supermarket chains − Advertising agencies

• Mergers and entry

− US radio stations

Merger waves: US radio stations

100 200 300 400 500 600 700 800 1990 1995 2000 2005 Number of mergers and acquisitions Year

Entry in US radio station markets

0.00 0.01 0.02 0.03

• 0.03
• 0.02
• 0.01

−0.03 −0.02 −0.01 0.00 0.01 0.02 0.03 Pre-merger Post-merger

Monthly net entry rates