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Flashcards in Chapter 3: Mergers Deck (10)
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What is a merger

(AKA acquisition, takeover etc)

-When 2 independent firms join together to form a single firm.

-Usually clear who is acquiring who


Horizontal merger

Involve firms that produce the same product. This causes a reduction in the number of firms in the market.

American airlines - US Airways merger


Vertical merger

(Vertical Integration) - involve firms operating at different stages of the production process of the same product.

Apply buys mobile security firm Authentec for $356m (fingerprint)


Conglomerate merger

Any other mergers, by firms that have nothing in common and are strategically unrelated (pure CM) or ones that try to employ some element of commonality (mixed CM) to extend a product or geographical range.

Google buys creator of world's fastest running robot company Boston Dynamics


Merger Paradox

Suggests only large mergers are profitable (i.e.close to 100% of market after merging)

Otherwise, free riding outsiders capture most of the benefit of the merger by increasing output and not sharing profit with partner.


Why do small mergers occur?

Merger could facilitate collusion with rivals.

In the SR, the merged firm might have a higher capacity than rivals, the smaller capacity of others might reduce the extent of free riding.

The merged firm could hope to take over some of the rival firms in the future, taking advantage of its stronger financial position.

Better use of EoS due to increased size



Synergies - what and why?

Costs of the merged firm lower than those firms that merged to to create it, being able to produce any Q of output at a lower cost - downward shift of cost function.

Due to: - Coordination of joint operation (no contractual disputes).
-Sharing of complementary skills.
-Improved interoperability and network configuration


Synergies and Social Welfare

Total surplus and consumer surplus fall unless the MC of the merged firm is lower than that of the merging firms.


Clayton Act US 1914

Prohibits any mergers or acquisitions, the effect of which may be to substantially lessen competition, or to lend or create a monopoly (not all mergers). Enforced by the Federal trade commission


Recent FTC behaviour (1992-1997)

FTC has developed merger guidelines for assessing merger proposals on a 'case by case' basis. Per se -> rule of reason.