Post on 15-Feb-2018
MERGERS
1
Overview
• Context: market structure changes by means of entry, exit — andmergers and acquisitions
• Concepts: efficiency and market power; unilateral and coordinatedeffects; merger waves
• Economic principle: as always, there is the good, the bad and theugly
2
Why mergers?
• Synergies
− Sony and Columbia Pictures
• Entry into new market
− Nestle and Rowntree
• Supplier power
− Philip Morris and Kraft
• Distribution efficiencies
− Nestle and General Mills
3
Types of mergers
• Horizontal: between competitors
• Vertical and complementary: firms in different orcomplementary stages of the value chain
• Conglomerate: industry-unrelated firms
4
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
5
Effects of horizontal mergers
• Efficiencies
− Common cost savings
− Synergies, complementarities
• Market power
− Unilateral effects (closer to monopoly)
− Coordination effects (closer to collusion)
6
Merger effects: Hyundai and KIA
0
10
20
30
1996 1998 2000 2002 2004 2006 2008 2010
Year
# ratio
# models
# models/platform
# platforms
1
2
3
7
Merger effects: Hyundai and KIA
0
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
8
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 ′ < 2F and c ′ < c
• Determine effect on
− merging parties
− non-merging parties
− consumers
∗ Merger efficiencies could also take place at the product level.
9
Merger effect on merging parties
• Equilibrium profits under Cournot
πi =
(a− n ci +
∑j 6=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 ′
10
Merger effect on merging parties
• Taking differences
π′2 − (π2 + π3) =(2F − F ′
)+
(a + c − 2 c ′
3
)2
− 2
(a− c
4
)2
• Effects
− Fixed cost savings: F ′ < 2F (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)
11
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)
12
Merger effect on outsiders: examples
• BP acquires Amoco (oil industry). Mobil’s stock up $2.625
• Western Digital announced Hitachi acquisition (hard driveindustry). Seagate’s stock up by 9%
• BA and AA announce plans to merge (air travel industry). VirginAtlantic paints its aircraft with “BA/AA No Way”
• GKN plc and Alvis plc merge (European defense industry), puttingpressure on Vickers, the third competitor
13
Merger effect on consumers
• Consumer surplus under Cournot
CS = 12
(n a−
∑ni=1 ci
n+1
)2
= 12
(n
n+1
)2 (a− 1
n
∑ni=1 ci
)2
• Merger effect
CS ′ − CS = 12
(23
)2 (a− 1
2 (c + c ′))2 − 1
2
(34
)2(a− c)2
• Effects
− Cost savings passed through: a− 12
(c ′ + c) < a− c (positive effect)
− Market power: n′/(n′ + 1) < n/(n + 1) (negative effect)
14
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 pdue to change in H
change in pdue to change in d
15
Merger dynamics
• Preemptive mergers
− Google and Waze
• Merger waves
− US supermarket chains
− Advertising agencies
• Mergers and entry
− US radio stations
16
Merger waves: US radio stations
0
100
200
300
400
500
600
700
800
1990 1995 2000 2005
Number of mergers and acquisitions
Year
17
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
18