Discuss broadly the merger assessment techniques. How are they applied? What are the advantages, disadvantages, etc.? There are many benefits to a merger between firms. These include: exploiting economies of scale, diversification and of course increasing shareholder wealth. The reason for mergers are predominantly monetary. These benefits can either be competitive or anti-competitive, when a collusion is anti competitive a governing body should intervene. Anti competitive behaviour would reduce the level of competition within a market, this could lead to exploitation of consumers and workers.
It would increase the inefficiencies within a market. A government would deem it necessary to intervene in a merger of two firms, when this merger “significantly impedes effective competition. ” This could be in one of two way; unilateral or coordinated effects. These effects would “eliminate competitive constraints on a firm and increase anti-competitive coordination,” respectively. To stop anti competitive mergers the governing body must apply assessment techniques to try and evaluate the impact of mergers.
It does this by first defining what market the merger would operate in, this can be done by look at demand and supply side substitution, and potential competitors. When the market has been defined one can now assess what impact the merger would have on the market in question. These techniques are explained below: One such technique is known as the Herfindahl–Hirschman Index, hereby referred to as HHI. The index assesses the change in the level of market power, due to the merger.
The Essay on The IT professionals role in competitive market intelligence
The successful company will be driven to increase stakeholder value and profitability while creating a working environment that encourages and nurtures the growth of personal creativity and development as well as nurturing a sense of well-being for all members of the organization. When dealing with the forces that drive industry competition, a company can devise a strategy that takes the ...
A merger is deemed to be anti-competitive if the post market share of the merger is over 50%. The commission will not explore the possibility of anti-competitive behaviour; if the post-merger HHI is below 1000 in the market, with a post-merger HHI between 1000 and 2000 and a delta below 250, with a post-merger HHI above 2000 and a delta below 150. Where delta is the difference between the pre and post merger value of the HHI index. The HHI index is calculated by squaring and summing the market share of the firms involved in a single market.
Whilst it is relatively easy to get an HHI index it has many important limitations, these include but are not restricted to these examples; a merging party is an innovator that is not reflected within the HHI index, a merging party may be a maverick firm with a high likelihood of disrupting coordinated conduct and a merging party may have a pre-merger share of more than 50%. For this reason the HHI index is used with some caution, the restrictions specify the restrictions for a competitive merger, however if the merger fails the restriction, that is not to say it will be anti-competitive.
Other measures and more detailed econometrics must be used if there is deemed to be the potential of anti competitive behaviour. A merger simulation can be used as an alternative to the HHI index; this technique models the industry and nature of competition to predict the post merger prices, using pre-merger data to calibrate the model. A merger simulation is useful for giving a quantitative prediction of the unilateral effects of a merger, and can be quite accurate if post and ad-hoc behaviour of the other firms is constant, and there is a large enough data set to make the results meaningful.
Of course this technique has the obvious limitations that any prediction has; if there is misspecification the results become invalid, the results are highly sensitive to specification, and the results are meaningless to non-specialists. Upward Pricing Pressure, referred to as UPP is a commonly used technique. UPP looks at the loss of competition from the merger, which brings upward pricing pressure and compares this to the marginal cost saving from the merger, which brings downward pricing pressure.
The Term Paper on Pepsi Soft Drink In Thai Monopolistically Competitive Market
Pepsi is sold in numerous countries around the world that can be associated as Americas, Europe, Asia, Middle East and Africa. Quite a lot of those countries, Pepsi are not a leader in the cola soft drink markets; however, Pepsi is a soft drink leader in several countries including Thailand. The Pepsi soft drink or the soft drink in this report means specifically only a carbonated cola soft drink ...
If the net effect of these two forces bring an upward pricing pressure, than there merger should undergo more in depth scrutiny, as there is a possibility the merger will lead to anti competitive behaviour. The process of obtaining the UPP involves comparing the pre and post merger values of the price and cost of the good, and a diversion ratio between the two firms. The interpretation is simple, if the UPP is positive then there is the potential for anti competitive behaviour. UPP is easy to implement and captures important pricing incentives.
UPP avoids the speculation used with merger simulations, and gives a more accurate interpretation than that of the HHI index. It is not without its drawbacks however, for one it assumes Bertrand competition when determining prices, which is a more theoretical concept and infrequently observed in a real market. The framework does not account for new entrants in the post-merger price increase and does not allow for possible product reposition from competitors, to respond to higher post merger prices. A large setback of UPP is the inability to assess by how much the prices of a merger may go up, only that they will go up.
The Small but Significant and Non-Transitory Increase in Price (SSNIP) identifies the smallest relevant market, where a monopoly or a cartel could incur a profitable price increase. It is often used for defining markets before looking into the impact of a merger; however it can also be applied to assessing a merger. If two firms in a potential merger are the largest firms in a single market; then an increase in price would be a profitable move by the potential merger. This is because they would not incur a substantial loss of sales to a substitute, and therefore an increase in price would lead to greater profits.
This would be an anti competitive measure. The SSNIP test observes whether a small increase in price, between 5 to 10% would induce a significant consumer switch to a substitute, e. g. Coca-Cola to Pepsi. If it is seen to have a strong substitute then there is a competitive market. In the context of a merger, if the two firms are substitutes within a market, than a merger would have strong anti-competitive connotations. Despite the easy application and interpretation of SSNIP it is not without its limitations. When analysing a merger of X and Y, the pre merger SSNIP test on X will be empirically different to that of Y.
The Essay on Mergers and Acquisitions and Market Share
Mergers and Acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity. A merger is a combination of two companies to form a new company, while an acquisition is the ...
One should only consider the competitive pressure that Y puts on X. SSNIP assumes that all losses associated with the 5% price increase are due to a substitute’s product. In reality, this could be due to out pricing from another product, or consumers choosing to save money rather than spend that extra amount. This model is also only relevant for assessing competition through price which would have obvious limitation, especially in a heavily branded market. All these techniques assess whether a merger could be anti competitive.
What these techniques fail to do is look into the level of anti competitive activities in a merger, they can only assess whether or not a merger has the potential to be anti-competitive. Most of these are based around the price of a good, which is not always the source of anti-competitive behaviour, or necessarily a symptom of anti-competitive behaviour. It is very difficult to get definitive answers when looking into mergers, indeed it is the case that many high profile court cases break out over whether or not merger would be of a competitive nature.
