Mergers And Aquisitions

MERGERS AND AQUISITIONS

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Strategic planning of Organizations • Strategic planning is behavior and way of thinking, •

requiring diverse inputs from all segments of the organization. The chief executive officer (CEO or group) is responsible for the strategic planning process for the firm as a whole.

• Essential elements in strategic planning process: – – – –

Assessment of changes in the environments. Evaluation of companies capabilities and limitations. Assessment of expectations of the shareholders. Analysis of company, competitors, industry, domestic economy, and international economies. – Formulation of mission, goals, and policies for the master strategy

Diversification Strategy • Growth and diversification may be achieved both internally •

and externally, careful analysis may reveal sound business reasons for diversification. Factors favoring external growth and diversification through mergers and acquisitions include the following: – Some goals and objectives may be achieved more speedily through an external acquisition. – There may be fewer risks, lower costs, or shorter time requirements involves in achieving an economically feasible market share by the external route. – There may be tax advantages.

Driving forces for M & A

• M & A activity is always business driven; that is a simple •

truism. The driving forces are: – – – – –

Financial or Stock market pressure. Company size and competitiveness. Company growth, particularly in market presence and share. Company asset base considered too small or is underutilized. Change in regulatory climate.

Types of Mergers • Horizontal mergers: – A horizontal merger involves two firms operating and competing in the same kind of business activity.

• Vertical mergers: –

Vertical mergers occur between firms in different stages of production operation.

• Conglomerate Mergers: –

Conglomerate mergers involve firms engaged in unrelated types of business activity.

Horizontal mergers • • •

Horizontal mergers are regulated by government for their potential negative effect on competition. horizontal mergers take place to gain from collusion or to increase monopoly power of the combined firm. integration of two firms can result in socially beneficial cost savings

Benefits and costs

Effects of horizontal mergers • • •

Industry-Wide Effects Technological Progress Technological Progress

Some cases of horizontal mergers • The Brown Shoe Case of 1962 • Von’s supermarket chain, 1966

Vertical mergers • There are many reasons why firms might want to integrate vertically between different stages.

• The efficiency an affirmative rationale of vertical integration rests primarily on the costliness of the market exchange and contracting.

Benefits of vertical mergers • Technological Economies. • Reducing Transaction Costs: – search costs, contract negotiation costs – the cost of reduced flexibility • Eliminating Successive Monopolies

Anti-Competitive Effects

1. Foreclosure with No Market Power

2. Foreclosure with Market Power at One or Both Levels

3. Extension of Market Power to the Other Level • alleged to have squeezed independent fabricators by •

charging a high price for ingot and low prices for fabricated products. explained as an attempt to protect its fabrication market from competition from steel, a close substitute, rather than an attempt to squeeze independent fabricators.

4. Facilitating Collusion in High-Concentration Markets

• Facilitating price monitoring easier. • The anti-competitive effects of vertical integration are

unlikely to occur unless there is prior market power at one or both levels, which suggests that the real problem is horizontal market power.

Vertical Restrictions • Resale Price Maintenance (RPM): • RPM is either a minimum or maximum resale price.