Mergers

1
Mergers Acquisitions

• End-Results
• Merger of acquired into acquiring
• Consolidation new entity from two old
• Joint Venture temporary with limited purpose
• Purchase of assets purchase of shares
• Structural concepts
• Horizontal present rivals or market extension
• Vertical upward to mfg downward to retail
• Conglomerate different markets

2
Concentration Issues

• Facilitates collusion in pricing, lack of
  innovation, erecting barriers to entry
• Bigger mkt share because more efficient or more
  profitable simply because bigger?
• Acquisition possibility induces entry by reducing
  exit risk
• Efficiency through economies of scale replacing
  inferior management
• Above efficient size merely churning?

3
Clayton Act sec 7

• Amended to include affects commerce
• Where effect may be substantially to lessen
  competition or to tend to create a monopoly
  (the incipiency concept)
• Investment exception for stock (lt5)
• Remedyblock (enjoin) undo (divestiture)
• DuPont doctrine reach-back or backward sweep
  (32 yrs. present risk)

4
Vertical Merger Brown Shoe

• Manufacturer with 1230 retail stores acquires 5th
  largest retailer (350 stores)
• Kinneys sold only 2 nationwide
• Market family shoes in towns gt 10,000 where
  both present
• Court concerned with vendor foreclosure
• Likely different today Kinney only bought 8 of
  its needs from Brown purchases from independents
  grew 18 in 2 yrs

5
More on Efficiencies in Vertical Combinations

• Internalization of tax impacts
• Cost savings by integrating regulated trades
• Reduced transaction costs
• The neutral hand of allocative efficiency
• Is needing more efficient two-level entry really
  a barrier? If so, is it anti-competitive?
• Even a downstream monopolist which acquires a
  more efficient upstream supplier will pass
  savings to consumers Fig.1, p.799

6
Silicon Graphics Games to Play

• 90 monop. mfr. of entertainment graphics
  workstations seeks to acquire the two leading
  software vendors of game graphics
• Foreclosure of other software vendors
• Foreclosure of other workstation makers
• Facilitate price discrimination by SG
• Eliminate horizontal competition by Alias
  Wavefront require two-level entry
• Solutionopen architecture compatibility

7
Real-World Vertical Scenarios

• AOL-Time Warner concern over foreclosing
  cable-modem ISPs
• Note 2, p.803 possible foreclosure of content
  providers from cable network
• Most vertical integration simply reallocates the
  distribution
• A captive seller will seek the most efficient
  downstream buyer to enlarge volume a captive
  buyer will seek best, cheapest inputs

8
DOJ Vertical Merger Guidelines

• No concern re barriers to entry unless primary
  market so concentrated as to facilitate collusion
  and not enough non-integrated buyers in secondary
  market to support two minimum-sufficient-scale
  entrants in primary market
• Will also consider minimum economy of scale in
  secondary market
• Concern over acquiring coveted secondary mkt
  buyer to maintain stability above

9
More on DOJ Vertical Guidelines

• Really aimed at facilitation of horizontal
  collusion in up or downstream markets
• Debatable concern re regulatory avoidance by
  packing costs at regulated level
• Little or no emphasis on foreclosure in G/L