9 - mergers - stennekstennek.se/onewebmedia/9 - mergers.pdf · 2019. 4. 3. · • can merger...
TRANSCRIPT
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MergersEmphasisonhorizontalmergers
Importanceofmergers
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Notablerecentdeals
3Source:Wikipedia
Industriesarereshaped
• BigPharmaintroubles– Patentsexpire– LowR&Dproductivity
• M&Apattern1998-2012(top20companies)– 991transactionsbetween1998and2012
(Source:CEPTONStrategies)
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Aggregateactivity
SwedishGDP2013ca550billionUSD
http://www.statista.com/statistics/267369/volume-of-mergers-and-acquisitions-worldwide/
Conclusion
• Mergeractivity– Individualdealsaresubstantial– Entireindustriesarereshaped– Aggregatevolumeishuge
• Insum– Mergersreshape/adapteconomy
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Motivesformergers
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Motive1:Efficiencies
• Horizontalcoordination– Economiesofscaleandscope:e.g.centralpurchasing– Rationalization:producepartswherecheapest
• Verticalcoordination– Avoidholdupofinvestments
• Takeoverofunderutilizedassets
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Motive1:Efficiencies
• Anefficiency“externality”– Marketforcorporatecontrol– Takeoverofunderutilizedassets– Threatoftakeoverimportantdiscipliningforceonmanagements
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Motive2:Marketpower
• Horizontaleffects– Definition:Betweencompetitors– Problem:Unilateralorcoordinated
• Verticaleffects– Definition:Betweenbuyerandseller– Problem:Foreclosure
• Conglomerateeffects– Definition:Between“unrelated”firms– Problem:probablynone
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Othermotivesformergers
• Managementdriven– Managementprestige(empirebuilding)– Hubris
• Industrialpolicy– “Nationalchampions”–prestige– Employment
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BasicElementsofMergersPolicy
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RichardWhish&DavidBailey:CompetitionLaw,SeventhEdition,OxfordUniversityPress,2012.
Goals
• Consumerwelfare– Anticompetitiveeffects– Costefficiency,butonlyifbeneficialtoconsumers
• Disregard– Employment– Nationalsecurity?
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Meaningof“merger”
• Definitionof“concentration”– Previouslyindependentbusinessescomeundercommoncontrol
• Examples– Acquisitionofminorityshareholdingmaybesufficient,ifitgives“decisiveinfluence”
– Acquisitionofassets(ex:plants,brands,patents)– Mergerofpartsofbusinessesintojointventure
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Notification
• MergerswithCommunitydimensionpre-notifiedtoCommission– Combinedworldwideturnover>€5000mn– EU-wideturnover>€250mnofeachcompany
• Otherbigmergerspre-notifiedtoMemberState
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Notification
• Extra-territorial– Doesnotmatterifallcompaniesaree.g.American
• One-stop-shop– MergerswithCommunitydimensioncannotbetriedbyMemberStates
– Still,manybigmergershavetobenotifiedto10–20differentcompetitionauthorities
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Notification
• Notificationcontainsinformationone.g.– Affectedmarkets(preliminarymarketdefinitionsbytheparties)
– Partiesmarketshares– HHI
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Decisionrights
• EU– Commissiondecides– Firmscanappealtocourts
• Sweden– KKV=“prosecutor”– Courtsdecide
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Timelimits
• PhaseI– 25workingdays
• PhaseII(3%ofcases)– 90workingdays
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Competitiontest
• Now:“Significantimpedimentofcompetition”– Typically:createsorstrengthensdominantposition(=highlevelofmarketpower)
– Includes:• Singlefirmdominance=“similartomonopoly”• Jointdominance=“similartocartel”• Butalsoregularoligopoly
• Previously:Dominance– Unclearifregularoligopolywasincluded
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Competitiontest
• Definemarkets– Productmarket/geographicalmarkets
• Estimateeffectoncompetition– Marketsharesandconcentration(veryimportant)– Diversionratios(=measureofsubstitutability)– Strengthofbrand(awell-knownbrandismorelikelytobepeople’ssecondchoice)
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Competitiontest
• Presumption:Noproblemif– Partiesmarketshare<25%– Post-mergerHHI<1000– Post-mergerHHI<2000&ΔHHI<250– ΔHHI<150
• Recall– HHImax=10000(=1002)– 1000=tensymmetricfirms(=10x102)
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EntryandBuyerPower
• Entry– Likely=assessmentofentrybarriers– Timely=normallywithin2years– Sufficient=eliminatepriceincrease
• Buyerpower– Sizeofbuyer– Abilitytointegrate– Sponsorupstreamentry
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Efficiencies
• Benefitconsumers– Lowerprices
• Largereductionsinmarginalcost• Incentivetopasson
– Neworimprovedproducts
• Mergerspecific– Cannotbeachievedwithoutreductionincompetition
• Verifiability– FirmsmustbeabletoensureCommission
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Failingfirmdefense
• Noimpedimenttocompetitionif– Onefirmwouldbecomebankrupt– Assetswouldexitthemarket– Nolessanti-competitivealternativetothemerger
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Remedies
• Usualsolutionsolutionifproblems• Typesofremedies
– Divestitureofoverlappingbusinesses– Accesstoanessentialfacility– Licensingoftechnology
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Evidence
• Burdenofproof– Commissionhasburdentoprove
• Anti-competitiveeffects• Nobuyerpower• Noentry
– Firmshaveburdentoprove• Efficiencies• Failingfirmdefense
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Evidence
• Differentstandardsofproof– “Onthebalanceofprobabilities”or– “Beyondreasonabledoubt”
• Mergerpolicy– Convincingevidence(=balanceofprobabilities,ifIunderstanditright)
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Statistics1990-2017
• Notifications:6522• OK
– PhaseI:5803– PhaseII:62
• Interventions– Withdrawn:177– OKwithcommitments:121– Prohibitions:26
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Useofeconomicsinmergerpolicy
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Theoryofcompetitiveharm
• Fundamentaldifficulty– Assessingnotifiedmergers=predictingthefuture– Mustbuildoneconomictheory– Competitionauthoritiesmustpresentatheoryofcompetitiveharmineverycase
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Theoryofcompetitiveharm
• Theoryofcompetitiveharm– Unilateraleffects– Coordinatedeffects– Verticaleffects
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Counterfactual
• Effect=Differencebetween– Marketoutcomewithmerger– Marketoutcomewithoutmerger=Counterfactual
• Possiblecounterfactuals– Mostoften:StatusQuo– Sometimes:Failingfirm– Possible:Alternativemergers(Volvo/Scania)
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Economicevidence
• Competitionauthoritymustpresentevidenceinsupportofits“theoryofharm”
• Examplesofsophisticatedeconomics– Estimationofcross-priceelasticities– Pricecorrelations– Mergersimulations
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WelfareTradeoff(somedetails)
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Unilateraleffects
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Twoaspects
– “Internalization”
• Mergingfirms’initialincentivetoincreaseprices
• Tostudythisincentiveassumethatcompetitorskeeptheirpricesfixed
– Outsiderresponse
• Competitors’reactiontoinitialpricechange
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Internalization
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Internalization
• Increasedpricebeforemerger+ Increasedmarkup(pA–cA)- Somecustomersleavethemarket- SomecustomersbuyproductBinstead
• Increasedpriceaftermerger+ Increasedmarkup(pA–cA)- Somecustomersleavethemarket0 SomecustomersbuyproductBinstead
Ø Morebeneficialtoincreaseprice
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Internalization
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Before mergerπ A = pA − cA( ) ⋅DA pA , pB( )
FOC∂π A
∂pA= DA pA , pB( ) + pA − cA( ) ∂DA
∂pA= 0
Internalization
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After mergerπ A + π B = pA − cA( ) ⋅DA pA , pB( ) + pB − cB( ) ⋅DB pA , pB( )
FOC∂π A + π B
∂pA= DA pA , pB( ) + pA − cA( ) ∂DA
∂pA+ pB − cB( ) ∂DB
∂pA= 0
Internalization
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Before merger∂πA
∂pA= DA pA , pB( ) + pA − cA( )∂DA
∂pA= 0
After merger∂πA + πB
∂pA= DA pA , pB( ) + pA − cA( )∂DA
∂pA+ pB − cB( )∂DB
∂pA= 0
Q:WhatistheeffectofmergeronpA?ExplainhowyoucandeducethisfromFOC
Internalization
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Before merger∂πA
∂pA= DA pA , pB( ) + pA − cA( )∂DA
∂pA= 0
After merger∂πA + πB
∂pA= DA pA , pB( ) + pA − cA( )∂DA
∂pA+ pB − cB( )∂DB
∂pA= 0
At old equilibrium price:
∂πA + πB
∂pA= pB − cB( )∂DB
∂pA> 0
Internalization
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At old equilibrium price:
∂πA + πB
∂pA= pB − cB( )∂DB
∂pA> 0
Strength of effectMarket power before merger : pB − cB( )
How close competitors are A and B : ∂DB
∂pA
Internalization
• DiversionRatio(fromAtoB)- Definition:Howmuchofthedisplaceddemand
forproductAswitchestoproductB,whenthepriceofAisincreased
- Intuitive:FractionofproductA:sconsumerswhohaveproductBasasecondchoice
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δAB ≡ −pB ⋅
∂DB
∂pApA ⋅
∂DA
∂pA
∈ 0,1[ ]
Internalization
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After merger∂π A + π B
∂pA= DA pA , pB( ) + pA − cA( ) ∂DA
∂pA+ pB − cB( ) ∂DB
∂pA= 0
pA − cApA
⎛⎝⎜
⎞⎠⎟−
pB − cBpB
⎛⎝⎜
⎞⎠⎟δAB = −
1εAA
SymmetrypA − cApA
= −1εAA
11− δAB
Hence
ΔpA − cApA
= −1εAA
⎛⎝⎜
⎞⎠⎟
δAB
1− δAB
⎛⎝⎜
⎞⎠⎟
Internalization
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After merger∂π A + π B
∂pA= DA pA , pB( ) + pA − cA( ) ∂DA
∂pA+ pB − cB( ) ∂DB
∂pA= 0
pA − cApA
⎛⎝⎜
⎞⎠⎟−
pB − cBpB
⎛⎝⎜
⎞⎠⎟δAB = −
1εAA
SymmetrypA − cApA
= −1εAA
11− δAB
Hence
ΔpA − cApA
= −1εAA
⎛⎝⎜
⎞⎠⎟
δAB
1− δAB
⎛⎝⎜
⎞⎠⎟
Marketpowerincreasesmuchif� Demandelasticitylow(highmarketpoweralreadybeforemerger)� Diversionratiohigh(productsclosesubstitutescomparedtootherproducts)
Outsiders’Response
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Outsiders’Response
• Response- Insidersincreasepriceandreduceoutput- Outsiders’residualdemandincrease- Outsidersrespondby
• Increasingprice• Increasingoutput
• Keyissue– Willoutsidersmainlyincreasepriceoroutput?
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Outsiders’Response
• Outsidersincreaseoutputmuchif- Outsiders’conductcompetitive
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Outsiders’Response
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Mergerincreasescompetitors’residualdemand
Outsiders’Response
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Intensecompetitionamongoutsiders-perfectcompetition-Bertrand
Outsiders’Response
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Outsider=monopolyorcartel
Outsiders’Response
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Ifoutsidershavemorecompetitiveconduct,theyexpandoutputmoreinreactiontoincreaseinresidualdemand
Outsiders’Response
• Outsidersincreaseoutputmuchif- Outsiders’conductcompetitive- Outsiders’costslow- Outsidershavenocapacityconstraints- Easytoswitchbetweengeographicalmarkets- Entrycostslow
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UnilateralEffect
• Twoaspects– Internalization
• Increaseprice&reduceoutput
– Outsiders’response• Increaseprice&increaseoutput
– Needformalmodeltostudybothatthesametime
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Efficiencies
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Efficiencies
• Rationalization- Reallocateproductiontoefficientplants
• Economiesofscale- Avoidduplicationofvariousactivities- Coordinationofnewinvestments- Specialization-lengthenproductionruns
• Technologicalprogress- Poolingexistingknow-how- CoordinateR&D
• Reducingslack- Replaceinefficientmanagement
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Efficiencies
• Butmergersmayalsocauseinefficiencies- Lesscompetitionmayleadtomoreslack
- Largerorganizationmaybemoredifficulttocontrol
- Problemsmeltingculturestogether
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Totalwelfareandconsumerwelfare
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Totalwelfare
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pd=cd
pm(cd)
MergerfromBertrandduopolytoMonopoly
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2
Totalwelfare
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A
cd
pm(cd)
cm
pm(cm)
B
1
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CostsavingA=LessresourcesconsumedB=Eliminatespartofdwlcausedbymerger
Totalwelfare
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pd=cd
pm(cd)
cm
pm(cm)
1
3
Sufficientlylargereductioninmarginalcostoffsetsthedeadweightlossduetomonopoly
Totalwelfare
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pd=cd
pm(cd)
cm
pm(cm)
Ifyouknowthemarketdata,theminimumrequiredcostreductioncanbecomputed
Consumerwelfare
• Pricemaygodown
• ΔMCmustbelarge
• Marginalcost,notfixed
• Canbecomputed,ifweknowdemand
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pd=cd
cm
pm(cm)
Economicissuesinmergerpolicy
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Issues• Appropriategoal
– Consumerwelfarestandard– Totalwelfare
• Ismergercontrolnecessary?– Anticompetitivemergersoftenunprofitable– Bettertobeoutsider– Otherpolicies:abuseofdominance;fightcartels
• Canmergerpolicybeevaluated,I– Deterrenceofanticompetitivemergers=>onlygoodor“marginally
bad”mergersproposed– Deterrencecannotbeobserved
• Canmergerpolicybeevaluated,II– Cannotobservetheeffectsofblockedmergers– Counter-argument:eventstudies
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