Page: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
analysis five forces of framework
133 (1990).
DRAFT VERSION: 07/22/02
Page 19
IV. EVALUATING MERGERS AND JOINT VENTURES
IV.1. Why mergers should be of particular concern for antitrust
Where productivity growth is the central goal of antitrust, it becomes clear that
mergers should be treated with special caution compared to other corporate growth
strategies. This is true for five reasons:
First, mergers raise almost inevitable issues for the health of competition by removing
independent competitors from the market. The question is not whether there is a risk to
competition, but how much. This risk stems from the potential lessening of competitive
pressure among firms in the industry, the potential reduction in product choice and
variety, and the reduction in the number of different approaches being pursued to
product/process development and hence the likelihood of innovation.
Second, a merger requires no “skill, foresight, and industry,”21 only financial
resources. It demands no new strategy, and yields no automatic productivity
improvements. By contrast, introducing a new product, changing a distribution model, or
building a new plant are far more likely to boost productivity. Society, then, should be
biased in favor of independent company actions over mergers.
Third, the empirical evidence is striking that mergers have a low success rate. A wide
range of studies finds that most mergers do not meet expectations, and most of the profits
are captured by the seller, not the buyer.
Fourth, the strategy literature suggests that smaller, focused acquisitions are more
likely to improve productivity than mergers among leaders. When a large company buys
a small company and integrates it into its strategy, major productivity gains are possible.
Mergers among large companies appear to rarely yield such benefits, though they may
produce reduction in joint overhead and eliminate major competitors from a market.
Fifth, there are strong financial market pressures favoring mergers over other growth
strategies. These arise at least in part from agency problems afflicting both investment
managers compensated based on near term stock price appreciation, and company
executives given incentives with stock options.
Finally, accounting rules make merger a vehicle for distorted performance
measurement, creating artificial pressures for companies to merge.
We cannot assume that a merger will be efficient and profitable just because
companies propose it. Companies make mistakes. Every merger needs to be weighed
against the productivity growth standard. Indeed, a positive antitrust policy based on
21 U.S. v. Aluminum Co. of America, 148 F.2d 416, 430 (2d Cir. 1945) (Hand, J.).
DRAFT VERSION: 07/22/02
Page 20
productivity growth might actually enhance both the performance of companies and
consumer welfare, which would be even better for society.
IV.2. Towards a New Merger Evaluation Process
In dealing with a proposed merger, the primary concern for antitrust should be how
the merger, if allowed, would affect productivity growth. We must consider both likely
future productivity growth in the industry, as well as the near term productivity impact on
the merged firms. The effect of the merger on the health of competition will be central to
its likely productivity impact, net of any direct positive productivity growth impacts that
can be convincingly demonstrated.
Three Levels of Analysis. In analyzing a merger or joint venture then, the three basic
levels of analysis needed are:
1. Merger significance and baseline productivity growth analysis.
2. The effect of the transaction on the health of competition using the [next page]