Why are so many merger deals happening at a record pace? What are the benefits to companies for merger and acquisition? What are the potential benefits and disadvantages for customers? What is government's role in mergers? What is an antitrust regulator? What is their function within the Justice Department? What is the future climate under theTrump administration?
What are a few recent potential recent mergers in the news? What are the potential pros and cons for the company, employees, and customers? Examples (AT&T and Time Warner), (Qualcomm and NXP Semiconductors), etc.
Many companies are eager to buy, or be sold, because the economy and corporate sales and profits are growing slowly and acquisitions help them kick-start additional growth.
Whether the deals end up benefiting employees, consumers and suppliers is another matter. Each transaction is different, but often an immediate goal is to eliminate the combined companies' redundant functions — especially on administrative staffs — and that means job cuts.
Reasons for Mergers & Acquisitions
Some of the reasons why companies merge with or acquire other companies include the following:
1. Synergies: By combining business activities, performance will increase and costs will decrease due to business synergies between the two entities. Essentially, a business will attempt to merge with another business that has complementary strengths and weaknesses.
2. Diversification / Sharpening Business Focus: These two conflicting goals have been used to describe thousands of M&A transactions. A company that merges to diversify may acquire another company in a seemingly unrelated industry to reduce the impact of a particular industry's performance on its profitability. Companies seeking to sharpen their focus often merge with companies that have deeper market penetration in a key area of operations.
3. Growth: Mergers can give the acquiring company an opportunity to grow market share without having to really earn it by doing the work themselves—instead, they buy a competitor's business for a price. Usually, these are called horizontal mergers. For example, a beer company may choose to buy out a smaller competing brewery enabling the smaller company to make more beer and sell more to its brand-loyal customers.
4. Increase Supply-chain Pricing Power: By buying out one of its suppliers or one of the distributors, a business can eliminate a level of costs. If a company buys out one of its suppliers, it is able to save on the margins that the supplier was previously adding to its costs; this is known as a vertical merger. If a company buys out a distributor, it may be able to ship its products at a lower cost.
5. Eliminate Competition: Many M&A deals allow the acquirer to eliminate future competition and gain a larger market share in its product's market. The downside of this is that a large premium is usually required to convince the target company's shareholders to accept the offer. It is not uncommon for the acquiring company's shareholders to sell their shares and push the price lower in response to the company paying too much for the target company.
There are many good reasons for growing your business through an acquisition or merger. These include:
Obtaining quality staff or additional skills, knowledge of your industry or sector and other business intelligence. For instance, a business with good management and process systems will be useful to a buyer who wants to improve their own. Ideally, the business you choose should have systems that complement your own and that will adapt to running a larger business.
Accessing funds or valuable assets for new development. Better production or distribution facilities are often less expensive to buy than to build. Look for target businesses that are only marginally profitable and have large unused capacity which can be bought at a small premium to net asset value.
Your business underperforming. For example, if you are struggling with regional or national growth it may well be less expensive to buy an existing business than to expand internally.
Accessing a wider customer base and increasing your market share. Your target business may have distribution channels and systems you can use for your own offers.
Diversification of the products, services and long-term prospects of your business. A target business may be able to offer you products or services which you can sell through your own distribution channels.
Reducing your costs and overheads through shared marketing budgets, increased purchasing power and lower costs.
Reducing competition. Buying up new intellectual property, products or services may be cheaper than developing these yourself.
Organic growth, ie the existing business plan for growth, needs to be accelerated. Businesses in the same sector or location can combine resources to reduce costs, eliminate duplicated facilities or departments and increase revenue.
Small and large businesses merge to achieve cost savings, gain market share and become financially stronger. Merged companies achieve savings by spreading their fixed costs over larger production volumes, which reduces unit costs and increases margins, and by negotiating lower input prices with suppliers. The effect of mergers on consumers can be positive or negative, depending on the industry and the market competition.
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Benefits to Consumers:
Enjoy low prices:
By eliminating at least one competitor, a merger may allow the remaining companies to implement coordinated price increases. For example, a merger of gas station operators could leave a market with fewer gas stations, which could tacitly coordinate price increases. However, a merged entity may also pass on cost savings to consumers through lower prices. For example, the merger of two small computer retailers could lead to lower procurement costs for the combined entity, which could pass on these savings to consumers. However, if the merger results in only one or two retailers serving the entire market, individual and small-business customers may pay more.
Variety of products:
Mergers can decrease or increase the choices available to consumers. For example, a merger between two airline companies can reduce the number of options on particular routes, but it may also allow the combined company to save costs and compete with discount airlines on other routes. Small-business mergers can also affect consumer choices. For example, if two small auto parts suppliers merge, consumers may have access to parts for a wider selection of makes and models of automobiles. On the other hand, a merger between two money-losing retail stores may lead to a reduction in the number of items on sale as the combined entity looks to reduce overhead costs and drive profits.
Better service:
Mergers can affect the level of customer service. For example, a merger of two small real estate companies may lead to the termination of sales positions, lost client relationships and confusion over new commission rates. Mergers of service companies, such as Internet service providers, may lead to billing errors and overwhelmed customer service staff, which leads to unhappy customers and lower profits. However, customer service could also improve in some cases. For example, the merger of two small inbound call centers can improve call response times, as the combined center would have additional resource flexibility for scheduling customer calls.
Maintain Quality:
Mergers may improve product quality, which benefits consumers. For example, the merger of two start-up software companies could result in better quality products and faster time-to-market as the merged entity takes advantage of the research capabilities and facilities of their legacy companies. These quality improvements may come at lower costs because the merged entity may be able to eliminate certain overhead expenditures, such as facility rental and administrative support.
Governent's role in Mergers:
Many mergers benefit competition and consumers by allowing firms to operate more efficiently. But some mergers change market dynamics in ways that can lead to higher prices, fewer or lower-quality goods or services, or less innovation.
Section 7 of the Clayton Act prohibits mergers and acquisitions when the effect "may be substantially to lessen competition, or to tend to create a monopoly." The key question the agency asks is whether the proposed merger is likely to create or enhance market power or facilitate its exercise. The greatest antitrust concern arises with proposed mergers between direct competitors (horizontal mergers). The FTC and the DOJ have developed Horizontal Merger Guidelines that set out the agencies' analytical framework for answering that key question, and have provided a Commentary on the Horizontal Merger Guidelines that provides many specific examples of how those principles have been applied in actual mergers reviewed by the agencies.
Merger law is generally forward-looking: it bars mergers that may lead to harmful effects. The premerger notification requirements of the Hart-Scott-Rodino Act allow the antitrust agencies to examine the likely effects of proposed mergers before they take place. This advance notice avoids the difficult and potentially ineffective "unscrambling of the eggs" once an anticompetitive merger has been completed. The agencies also investigate some completed mergers that subsequently appear to have harmed customers.
Each year, the FTC and Department of Justice review over a thousand merger filings. Fully 95 percent of merger filings present no competitive issues. For those deals requiring more in-depth investigation, the FTC has developed Merger Best Practices to help streamline the merger review process and more quickly identify deals that present competitive problems. For those, it is often possible to resolve competitive concerns by consent agreement with the parties, which allows the beneficial aspects of the deal to go forward while eliminating the competitive threat. In a few cases, the agency and the parties cannot agree on a way to fix the competitive problems, and the agency may go to federal court to prevent the merger pending an administrative trial on the merits of the deal.
By law, all information provided to, or obtained by, the agencies in a merger investigation is confidential, and the agencies have very strict rules against disclosing it. These rules prevent the agencies from even disclosing the existence of an investigation. In some situations, however, the parties themselves may announce their merger plans, and the FTC may then confirm the existence of an investigation.
What Are Antitrust Laws?
Antitrust laws also referred to as competition laws, are statutes developed by the U.S. government to protect consumers from predatory business practices. They ensure that fair competition exists in an open-market economy. These laws have evolved along with the market, vigilantly guarding against would-be monopolies and disruptions to the productive ebb and flow of competition.
Antitrust laws are applied to a wide range of questionable business activities, including but not limited to market allocation, bid rigging, price fixing, and monopolies. Below, we take a look at the activities these laws protect against.
If these laws didn't exist, consumers would not benefit from different options or competition in the marketplace. Furthermore, consumers would be forced to pay higher prices and would have access to a limited supply of products and services.
No introduction to antitrust legislation would be complete without addressing mergers and acquisitions. We can divide these into horizontal, vertical and potential competition mergers.
Horizontal Mergers: When firms with dominant market shares prepare to enter a merger, the FTC must decide whether the new entity will be able to exert monopolistic and anti-competitive pressures on the remaining firms. For example, the company that makes Malibu Rum and had an 8% market share of total rum sales, proposed buying the company that makes Captain Morgan’s rums, which had a 33% of total sales to form a new company holding 41% market share.
Meanwhile, the incumbent dominant firm held over 54% of sales. This would mean the premium rum market would be composed of two competitors together responsible for over 95% of sales in total. The FTC challenged the merger on the grounds that the two remaining companies could collude to raise prices and forced Malibu to divest its rum business.
Unilateral Effects. The FTC will often challenge mergers between rival firms that offer close substitutes, on the grounds that the merger will eliminate beneficial competition and innovation. In 2004, the FTC did just that, by challenging a merger between General Electric and a rival firm, as the rival firm manufactured competitive non-destructive testing equipment. In order to go forward with the merger, GE agreed to divest its non-destructive testing equipment business.
Vertical Mergers. Mergers between buyers and sellers can improve cost savings and business synergies, which can translate to competitive prices for consumers. But when the vertical merger can have a negative effect on competition due to a competitor’s inability to access supplies, the FTC may require certain provisions prior to the completion of the merger. For example, Valero Energy had to divest certain businesses and form an informational firewall when it acquired an ethanol terminator operator.
Potential Competition Mergers. Over the years, the FTC has challenged rampant preemptive merger activity in the pharmaceutical industry between dominant firms and would-be or new market entrants to facilitate competition and entry into the industry.
United States Department of Justice Antitrust Division:
The United States Department of Justice Antitrust Division is a law enforcement agency responsible for enforcing the antitrust laws of the United States. It shares jurisdiction over civil antitrust cases with the Federal Trade Commission (FTC) and often works jointly with the FTC to provide regulatory guidance to businesses. However, the Antitrust Division also has the power to file criminal cases against willful violators of the antitrust laws. The Antitrust Division also works with competition regulators in other countries.
The Merger guidelines are a set of internal rules promulgated by the Antitrust Division of the United States Department of Justice(DOJ) in conjunction with the Federal Trade Commission (FTC). These rules, which have been revised a number of times in the past four decades, govern the extent to which these two regulatory bodies will scrutinize and/or challenge a potential merger on grounds of market concentration or threat to competition within a relevant market.
Deal makers took notice last month when Donald J. Trump declared that he would seek to block AT&T’s $85.4 billion bid for Time Warner on the grounds that it would radically concentrate power in too few companies.
But after an initial period of turmoil, deal advisers say that it is unclear whether a Trump administration — led by an avowedly pro-business real estate mogul — would really make life difficult for mega-mergers.
At the moment, AT&T’s planned takeover of Time Warner,one of the biggest mergers and one that is poised to reshape the world of media and telecommunications, appears to be the most likely candidate for hazing. The president-elect was among the first politicians to criticize the deal, vowing to block it if he became president.
Mr. Trump said it was “an example of the power structure I’m fighting.” He also opposed a similar union between Comcast and NBCUniversal in 2013, which he called “poison.”
Why are so many merger deals happening at a record pace? What are the benefits to...