The law bars mergers when the effect "may be substantially to lessen competition or to tend to create a monopoly. In either case, consumers may face higher prices, lower quality, reduced service, or fewer choices as a result of the merger.
A horizontal merger eliminates a competitor, and may change the competitive environment so that the remaining firms could or could more easily coordinate on price, output, capacity, or other dimension of competition. As a starting point, the agencies look to market concentration as a measure of the number of competitors and their relative size.
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Mergers occurring in industries with high shares in at least one market usually require additional analysis. Market shares may be based on dollar sales, units sold, capacity, or other measures that reflect the competitive impact of each firm in the market.
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The overall level of concentration in a market is measured by the Herfindahl-Hirschman Index HHI , which is the sum of the squares of the market shares of all participants. The larger the market shares of the merging firms, and the higher the market concentration after the merger, the more disposed are the agencies to require additional analysis into the likely effects of the proposed merger.
During a merger investigation, the agency seeks to identify those mergers that are likely either to increase the likelihood of coordination among firms in the relevant market when no coordination existed prior to the merger, or to increase the likelihood that any existing coordinated interaction among the remaining firms would be more successful, complete, or sustainable.
Firms may prefer to cooperate tacitly rather than explicitly because tacit agreements are more difficult to detect, and some explicit agreements may be subject to criminal prosecution.
The question is: does the merger create or enhance the ability of remaining firms to coordinate on some element of competition that matters to consumers? Example: The FTC challenged a merger between the makers of premium rum. The maker of Malibu Rum, accounting for 8 percent of market sales, sought to buy the maker of Captain Morgan's rums, with a 33 percent market share.
The leading premium rum supplier controlled 54 percent of sales. Post-merger, two firms would control about 95 percent of sales. The Commission challenged the merger, claiming that the combination would increase the likelihood that the two remaining firms could coordinate to raise prices. Although a small competitor, the buyer had imposed a significant competitive constraint on the two larger firms and would no longer play that role after the merger.
Competitive Effects of Mergers
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Florian S Peters. Cite Citation. Permissions Icon Permissions. Abstract We propose a novel approach for measuring returns to mergers. Issue Section:. You do not currently have access to this article. Download all figures. But as many companies seldom have the cash hoard available to make full payment for a target firm outright, all-cash deals are often financed through debt. For an acquirer to use its stock as currency for an acquisition, its shares must often be premium-priced to begin with, else making purchases would be needlessly dilutive.
There are situations in which the target company may trade below the announced offer price. Perhaps market participants think that the price tag for the purchase is too steep.
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Or the deal is perceived as not being accretive to EPS earnings per share. Or perhaps investors believe that the acquirer is taking on too much debt to finance the acquisition. But such rejection of an unsolicited offer can sometimes backfire, as demonstrated by the famous Yahoo-Microsoft case. On February 1, , Microsoft unveiled a hostile offer for Yahoo Inc.
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