Conglomerate Mergers

5 Key excerpts on "Conglomerate Mergers"

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  eBook - ePub

  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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  Maximizing Corporate Value through Mergers and Acquisitions

  A Strategic Growth Guide

  • Patrick A. Gaughan(Author)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  CHAPTER 4 Diversification

  Diversification means growing outside a company's current industry category. Many companies pursue diversification to varying degrees. In this chapter, we examine pros and cons of a merger and acquisition (M&A) diversification strategy. In doing so, we look at the performance of companies that have pursued diversifying acquisitions.

  In Chapter 3 , we discussed synergy and companies' efforts to derive synergistic benefits from M&A. Can companies derive similar synergistic benefits from diversifying acquisitions? This is a question we will explore. We will also explore the troubling instances where diversification destroys value. This may be surprising to readers, as we will see that companies across the developed and less developed world have a long history of creating very diversified companies. If, and it is a big if that we want to explore in detail, diversification does not add to corporate value, and if it sometimes destroys value, then why does it occur? We will see that the question is a complex one that requires lengthy exploration.

  While we regularly see examples of companies doing diversifying acquisitions, one time period in the United States, the late 1960s, provides many examples of large companies built through diversifying acquisitions. Thus, it makes sense to begin our discussion of such deals with a look back at the conglomerate era.

  DIVERSIFYING M&A IN THE CONGLOMERATE ERA

  The 1960s in the United States provide us with numerous examples of large-scale diversification. The 1950s and 1960s in the United States were a period of intense antitrust enforcement. Companies that wanted to expand through M&A found that the Justice Department and the Federal Trade Commission challenged many horizontal and even vertical M&A. During this period, deals were challenged that would have quickly qualified for early approval today. Companies that wanted to expand were forced to pursue M&A totally outside their own industry. The absurd antitrust regulatory policies of the U.S. government, policies that regulators would laugh at now, prevented large companies from doing meaningful synergistic acquisitions. Ironically, the government eliminated the possibility of being able to realize synergy on a large scale. The absurdity of such policies is amusing. While we still have poor regulatory policies throughout the world, at least we no longer have such policies in the United States.

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  Mergers, Sell-Offs, and Economic Efficiency

  • David J. Ravenscraft, F. M. Scherer(Authors)
  • 2011(Publication Date)
  • Brookings Institution Press

    (Publisher)

  Most of their many acquisitions were of a diversifying character, adding, or adding to, previously unoccupied lines of business and vaulting the acquirers to positions among the most diversified of U.S. corporations. They will play a prominent role in the case studies of chapter 5. Table 2-8 underrepresents the population of conglomerate acquirers in two respects. For one, other Line of Business sample members made smaller but still significant numbers of diversifying mergers, and in some cases, the conglomerate acquirer appellation can be assigned to companies making only a few acquisitions of considerable size. Also, not all active conglomerate acquirers survived to be included in the Line of Business sample. Some stumbled and were acquired themselves or were forced to sell off such a large fraction of their previous conquests that they were too small to qualify for inclusion. Thus, although the exact bounds of the conglomerate acquirer group cannot be defined precisely, table 2-8 does not encompass it entirely. On the other hand, the table also includes some corporations that, despite an extensive merger history, were arguably not conglomerates. The most notable among them are the forest products companies such as Georgia Pacific, Boise Cascade, Champion International, and St. Regis Paper, which made many acquisitions to augment their timber reserves and wood or paper fabrication activities; petroleum companies such as Ashland Oil and Sun Oil, which acquired numerous crude oil reserve holders and gasoline retailers along with petrochemical operations; and publishing companies such as Gannett, Times Mirror, and Macmillan, which ex-panded by buying up other newspapers, magazines, publishing houses, and the like along with diversifying into less closely related media such as broadcasting. With at most a dozen exceptions, however, the com-panies in table 2-8 did achieve wide-ranging diversification through merger. THE CONTOURS OF MERGER ACTIVITY SINCE 1950 37

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  Mergers, Acquisitions, and Corporate Restructurings

  • Patrick A. Gaughan(Author)
  • 2002(Publication Date)
  • Wiley

    (Publisher)

  These firms made a decision that the company could be better managed and could achieve greater profits if its operations were concen- trated in fewer areas. Positive Evidence of Benefits of Conglomerates The Scherer and Ravenscraft study downplays the risk-reduction benefits of conglomer- ates. Other research studies, however, cast the wealth effects of conglomerates in a bet- ter light. For example, one research study has shown that returns to stockholders in con- glomerate acquisitions are greater than in nonconglomerate acquisitions. 20 The study, which examined 337 mergers between 1957 and 1975, found that con- glomerate mergers provided superior gains relative to nonConglomerate Mergers. The researchers reported these gains for both buyer and seller firms, with substantial gains registered by stockholders of seller firms and moderate gains for buying company stockholders. This finding was confirmed by later research that focused on 52 noncon- glomerate and 151 Conglomerate Mergers. It was also found, however, that returns to shareholders were larger in horizontal and vertical acquisitions than in conglomerate acquisitions. 21 More Recent Evidence on the Effects of Diversification in Firm Value Using a large sample of firms over the 1986–91 sample period, a study found that di- versification resulted in a loss of firm value that averaged between 13% and 15%. 22 This study estimated the imputed value of a diversified firm’s segments as if they were separate firms. The results found that the loss of firm value was not affected by firm size but was less when the diversification occurred within related industries. The loss of firm value results were buttressed by the fact that the diversified segments showed lower operating profitability than single-line businesses. The results also showed that diversified firms overinvested in the diversified segments more than single-line busi- nesses.

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