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 e b 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 # ratio 30 3 # models 20 2 10 # platforms # models/platform Year 0 1 1996 1998 2000 2002 2004 2006 2008 2010

Merger effects: Hyundai and KIA Prices (1000 KW) Exports (million units) 20 2.0 domestic price 1.6 15 1.2 10 exports 0.8 5 0.4 Year 0 1996 1998 2000 2002 20004 2006 2008 2010

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 � a − n c i + � � 2 j � = i c j � π i = − F i n + 1 • Firm profit before merger � a − c � 2 π 1 = π 2 = π 3 = − F 4 • Firm 2&3 profit after merger � a + c − 2 c ′ � 2 π ′ − F ′ 2&3 = 3

Merger effect on merging parties • Taking differences � a + c − 2 c ′ � 2 � a − c � 2 � 2 F − F ′ � π ′ 2 − ( π 2 + π 3 ) = + − 2 3 4 • Effects − Fixed cost savings: F ′ < 2 F (positive effect) − Marginal cost savings: a + c − 2 c ′ > a − c (positive effect) − Market power: n ′ < n (positive effect) − Exit: from 2 to 1 π (negative effect)

Merger effect on outsiders • Taking differences � a + c ′ − 2 c � 2 � a − c � 2 π ′ 1 − π 1 = − 3 4 • 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 � � 2 � � 2 � � n � 2 n a − � n i =1 c i CS = 1 = 1 n a − 1 i =1 c i 2 n +1 2 n +1 n • Merger effect � 2 � 2 � � 2 − 1 � 3 � 2 ( a − c ) 2 CS ′ − CS = 1 a − 1 2 ( c + c ′ ) 2 3 2 4 • Effects 2 ( c ′ + c ) < a − c (positive effect) − Cost savings passed through: a − 1 − Market power: n ′ / ( n ′ + 1) < n / ( n + 1) (negative effect)

Merger effects: Miller and Coors Change in price (%) 0.02 change in p due to change in H 0.01 0.00 change in p due to change in d -0.01 Time -0.02 2007 2008 2009 2010 2011 2012

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 Number of mergers and acquisitions 800 700 600 500 400 300 200 100 Year 0 1990 1995 2000 2005

Entry in US radio station markets Post-merger 0.03 0.02 0.01 0.00 -0.01 -0.02 Pre-merger -0.03 − 0.03 − 0.02 − 0.01 0.00 0.01 0.02 0.03 Monthly net entry rates