Conglomerate Merger

5 Key excerpts on "Conglomerate Merger"

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  Federal Antitrust and EC Competition Law Analysis

  • Femi Alese(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  Chapter 16 Conglomerate and Vertical Mergers

  Unlike horizontal mergers, conglomerate and vertical mergers do not result in the elimination of direct rivals on the same level of the supply chain, and therefore could not increase market concentration. Different theories of injury to competition should therefore apply to these transactions. The purpose of this chapter is to address competition/antitrust law concerns relating to vertical and Conglomerate Mergers and acquisitions, particularly through the analysis of case law, relevant Guidelines and enforcement agencies’ approaches to these types of mergers.

  I. Conglomerate Mergers

  Conglomerate Mergers are not categorized as either horizontal or vertical, but they usually involve firms in unrelated lines of business merging their operations in a new entity. This type of merger, however, can also involve firms trading in related products (product extension or range effects), or operating in the same areas of business but in different geographic markets (market extension acquisitions). The competition concerns over Conglomerate Mergers primarily relate to the ability of the parties to enter the market independently on their own – that is, by not independently engaging in such an internal expansion, the combined entity is regarded as posing a significant threat of eliminating potential competition in its new markets (particularly when it enters them through amalgamation with a major supplier already in that market).1

  Where an acquiring firm remains on the fence or does not enter the market de novo, unless an opportunity for profit emerges, the threat of entry is generally classified as perceived.2 The gist here is that entry might be kept in abeyance because of factors such as firms already in the market engaging in limit pricing. Where, on the other hand, firms within a market are aware of the threat of de novo entry by a firm outside that market, the latter would be regarded as posing an ‘actual’ potential threat to the former.3

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  Contemporary Industrial Organization

  A Quantitative Approach

  • Lynne Pepall, Dan Richards, George Norman(Authors)
  • 2011(Publication Date)
  • Wiley

    (Publisher)

  In any event, as discussed above in the context of the Salinger (1990) model, even when integrated firms choose to foreclose independent rivals, it is still possible that the merger puts downward pressure on the final price to consumers. These considerations suggest why many economists thought the ruling a mistake. 11 12.5 A NOTE ON Conglomerate MergerS Before considering a recent empirical study of vertical integration, we mention briefly a third type of merger: the conglomerate. Such mergers bring under common control firms whose products are neither direct substitutes nor complements. The result is a set of firms producing a diversified range of products with little or nothing in common. Because these products are neither substitutes nor complements, the competitive impact of such mergers is limited. For much the same reason, however, it is difficult to provide an economic rationale for Conglomerate Mergers at all. Scope economies and savings on transaction costs are two possible advantages that may accrue to conglomerate firms. However, the data on conglomerates do not appear to support the idea that these firms exhibit significant scope economies. Nathanson and Cassano (1982), for example, found that there are at least as many conglomerate firms that produce goods with little in common as there are firms that have relatively low product and market diversity. By transaction costs we mean the costs that are incurred by firms when they use external markets in order to procure goods and services. 12 These include, for example, the costs of searching for the desired inputs, negotiating supply contracts, monitoring and enforcing these contracts, and the risk associated with unforeseen changes in supply conditions. However, the argument that economies based on transaction costs underlie Conglomerate Mergers is also suspect. Part of the reason is that, again, such economies would most likely be present if there were some commonality in the production lines.

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  Strategy, Structure and Corporate Governance

  Expressing inter-firm networks and group-affiliated companies

  • Nabyla Daidj(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  “The main feature of this wave was a very high number of diversifying takeovers that led to the development of large conglomerates. By building conglomerates, companies intended to benefit from growth opportunities in new product markets unrelated to their primary business. This allowed them to enhance value, reduce their earnings volatility, and to overcome imperfections in external capital markets. The third wave peaked in 1968 and collapsed in 1973, when the oil crisis pushed the world economy into a recession” (Martynova, Renneboog, 2008, p. 2150).

  Conglomerate Mergers were also supposed to be a strategy to protect firms from anti-trust laws and related provisions. The anti-trust legislation was further strengthened with the Celler-Kefauver Act, passed in 1950, which reformed and amended the Clayton Antitrust Act of 1914 in order to restrict anti-competitive mergers.

  Several conglomerates composed of many unrelated businesses were established during this period. Lazonick and O’Sullivan (2000, p. 16) referred to this period as “the conglomeration mania of the 1960s, from the early 1970s”. Many companies tried to diversify their activities and revenues in order to reduce their risks. During this period, capital markets were not hostile to highly diversified companies; General Electric, which extended its strategic business units, is an example of this. New organizational structures emerged as a response to large firms’ strategy of diversification. The multidivisional structure, often known as the M-F orm, has been analysed by Alfred Chandler in his 1962 book, which focuses on theories of organization and management. This M-F orm differed from previous organizational practice and structure. The other ways to organize large organizations were mainly the U-Form (U stands for unity) and the H-Form (H stands for holding, this form is called also conglomerate).

  The divisions in an M-F orm company are organized by brand or geographical region and not by their function. The M-F orm presented an evolution and adaptation of organizational structure under the conditions of complexity and uncertainty of activity. It was dedicated mainly to large firms or groups of firms, which were different in terms of size, scope and complexity, as compared to previous firms. Most large international businesses adopted M-Form in Europe and in the US. So-called “modern firms” have posed key managerial questions as they hired large numbers of managers and have raised the issue of the separation of ownership and management (see below). Owners become a kind of “ rentier” ( Chandler, 1988, p. 361).

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  Organizational Psychology of Mergers and Acquisitions

  Examining Leadership and Employee Perspectives

  • Camelia Oancea, Caroline Kamau(Authors)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  When two organizations produce similar products reaching the same consumer market and they have equivalent market shares, they engage in a type of merger called a horizontal merger. An example is organization A, a hamburger chain, merging with organization B, also a hamburger chain. This creates organization C, a hamburger chain without the competition between A and B. An example is the £5 billion merger between two online gambling companies, Betfair and Paddy Power, to create a new company called Paddy Power Betfair (Press Association, 2015). This can be classed as a horizontal merger rather than a market extension merger because of the similarity between the two organizations in their geographical reach and type of consumers.

  5. Conglomerate Mergers

  When two organizations produce unrelated products and work in unrelated markets, they engage in a type of merger called a Conglomerate Merger. In a pure Conglomerate Merger, the two organizations are entirely different. For example, organization A is a restaurant chain merging with organization B, a fashion chain, to create organization C that operates in both catering and clothing. In a mixed Conglomerate Merger, the two organizations have the opportunity to extend their products or markets. An example is a restaurant chain merging with an organization that sells baked goods to supermarkets, creating an organization that can sell the baked goods within the restaurants and also advertise the restaurants to consumers who are buying the baked goods from supermarkets. An example of a Conglomerate Merger is that between Carphone Warehouse, which specialised in selling mobile phone products and services, with Dixons, which specialised in selling home electrical products, to create Dixons Carphone, a chain of stores that sell both sets of products and services (Garside & Farrell, 2014).

  Understanding different types of acquisitions

  Whereas mergers can be neatly categorised into one of five types, acquisitions are often far more complex, and best categorised in terms of the extent to which a subsidiary organization is subsumed within its new parent organization. To help you broadly understand what this means, we have created a new method of classifying acquisitions in three ways in Figure 1.2 . We have applied the five common ways of defining mergers, which we discussed in the previous section, to acquisitions while creating a framework that can help you broadly define the extent

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  Advanced Accounting

  • Debra C. Jeter, Paul K. Chaney(Authors)
  • 2022(Publication Date)
  • Wiley

    (Publisher)

  10 Chapter 1 Introduction to Business Combinations and the Conceptual Framework by combining companies in different industries having little, if any, production or market similarities, or possibly to create value by lowering the firm’s cost of capital. One conjecture for the popularity of this type of merger during this time period was the strictness of regulators in limiting combinations of firms in the same industry. One conglomerate may acquire another, as Esmark did when it acquired Norton-Simon, and conglomerates may spin off, or divest themselves of, individual businesses. Management of the conglomerate hopes to smooth earnings over time by counterbalancing the effects of economic forces that affect different industries at different times. In contrast, the 1980s were characterized by a relaxation in antitrust enforcement during the Reagan administration and by the emergence of high-yield junk bonds to finance acquisitions. The dominant type of acquisition during this period and into the 1990s was the strategic acquisition, claiming to benefit from operating syn- ergies. These synergies may arise when the talents or strengths of one of the firms complement the products or needs of the other, or they may arise simply because the firms were former competitors. An argument can be made that the dominant form of acquisition shifted in the 1980s because many of the Conglomerate Mergers of the 1960s and 1970s proved unsuccessful; in fact, some of the takeovers of the 1980s were of a disciplinary nature, intended to break up conglomerates. Deregulation undoubtedly played a role in the popularity of combinations in the 1990s. In industries that were once fragmented because concentration was forbidden, the pace of mergers picked up significantly in the presence of deregulation. These industries include banking, telecommunications, and broadcasting.

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