Merger Activity and Regulation Horizontal Mergers mergers with

Merger Activity and Regulation Horizontal Mergers – mergers with firms producing same product or service Vertical merger TYPE 1 – merger between: 1)one firm that Produces/manufactures a product and 2) another firm that sells product the retail level Vertical merger TYPE 2 – merger between: 1) one firm that produces/manufactures a product and 2) another firm that supplies the producer. Conglomerate merger – no connection- e. g. an oil company merges with a movie theater chain…. auto mfgr. Merges with a clothing mfgr.

Regulation of Mergers in the U. S. Initial Concerns • Restraints of trade • Concentration of Power • Monopolization of markets • Higher prices

Hirsch-Herfindahl Index (HHI INDEX) • Approach currently used by the U. S. Department of Justice to approve or disapprove proposed mergers • Quantitatively based • Sum of the squares of mkt. shares calculation - Square the mkt. share value of each firm before a proposed merger in the industry and add them.

Industry: Eight firms (Candy Producers) – “A”, “B”, “C”, “D”, “E”, “F” “G” and “H” each with a 12. 5% share of the market Candy Producers : A and B decide to merge – Horizontal merger B C D A aa C H E G F Potential Danger and Concern: Restraint of Trade /diminishing of Competition – Restraint of Trade Before Sherman? Allowed…. because there were NO RULES

HHI Calculation –”Sum of the Squares of Mkt. Shares” Calculation BEFORE the Merger • Firm A – 12. 5% x 12. 5% =156 • Firm B – 12. 5% x 12. 5% =156 • Firm C – 12. 5% x 12. 5% =156 • Firm D – 12. 5% x 12. 5% =156 • Firm E - 12. 5% x 12. 5% =156 • Firm F - 12. 5% x 12. 5% =156 • Firm G - 12. 5% x 12. 5% =156 • Firm H - 12. 5% x 12. 5% =156 HHI TOTAL = 1248 Calculation AFTER the Merger Firm A – 25% x 25% (12. 5 +12. 5) = 625 Firm B – 0% ( gone - merged with A) Firm C – 12. 5% x 12. 5% = 156 Firm D – 12. 5% x 12. 5% = 156 Firm E – 12. 5% x 12. 5% = 156 Firm F - 12. 5% x 12. 5 % = 156 Firm G – 12. 5% x 12. 5% = 156 Firm H – 12. 5% x 12. 5% = 156 HHI TOTAL AFTER MERGER = 1, 561

HHI’s and the “ 1800” Rule • If, before a merger an HHI value for an industry was less than 1, 800 – “no eyebrows” would be raised…example merger would be approved. • If, on the other hand an HHI value for an industry was already greater than or equal to 1, 800 before the merger (the case in the proposed candy company merger) the proposed merger would “raise the curiosity” of the U. S. Dept. of Justice” (charged with monitoring proposed mergers) • If the HHI was already above 1, 800 in another proposed merger and the merger increased the HII more than 200 points – disapproved. • “Bells, ringers, and buzzers would go off because of a concern over a resulting unacceptable restraint of trade impact.

Exceptions – Where HHI Values Would be Ignored and Not be Used to Block a Proposed Merger • Exception would allow for any merger/acquisition because one firm is suffering losses or near bankruptcy… a “lifeline merger” would be approved. • “Foreign competition exception” – where the merger would allowfor more effective competition internationally. • Proposed merger would allow for merging firms to realize economies of scale. • Proposed mergers would be allowed if no substantial barriers to entry exist. • Vertical Mergers – e. g. between manufacturers and suppliers