University of California
Type of paper: Thesis/Dissertation Chapter
Mergers occur when one business firm buys or acquires another business firm (the acquired firm) and the combined firm maintains the identity of the acquiring firm. Business firms merge for a variety of reasons, both financial and non-financial. There are a number of types of mergers. Horizontal and non-horizontal are just two of many types. WHAT IS HORIZONTAL MERGER?
A merger occurring between companies in the same industry. Horizontal merger is a business consolidation that occurs between firms who operate in the same space, often as competitors offering the same good or service. Horizontal mergers are often a type of non-financial merger. In other words, a horizontal merger is undertaken for reason that have little to do with money, at least directly. Simply stated, a horizontal merger is usually the acquisition of a competitor who is in the same line of business as the acquiring business. By acquiring the competitor, the acquiring company is reducing the competition in the marketplace. Suppose, for example, that Pepsi were to buy Coca-Cola. This would be a horizontal merger. Horizontal mergers are common in industries with fewer firms, as competition tends to be higher and the synergies and potential gains in market share are much greater for merging firms in such an industry. Many businesses use this strategy when one is failing to perform. They merge as a last ditch effort to keep from going completely out of business. NON-HORIZONTAL MERGER
A non-horizontal merger is the opposite of horizontal mergers. A merger between companies in different industry. It is a business consolidation that occurs between firms who operate in different space offering different goods and services. They involve firms who do not operate in the same market. It necessarily follows that such mergers produce no immediate change in the level of concentration in any relevant market. Although non-horizontal mergers are less likely than horizontal mergers to create competitive problems, they are not invariably innocuous. FORMS OF HORIZONTAL MERGERS
There are two basic forms of non-horizontal mergers: vertical mergers and conglomerate mergers. Vertical mergers are mergers between firms that
operate at different but complementary levels in the chain of production. Vertical mergers or vertical integration happens when the acquiring firm buys buyers or sellers of goods and services to the company. In other words, a vertical merger is usually between a manufacturer and a supplier. It is a merger between two companies that produce different products or services along the supply chain toward the production of some final product. Vertical mergers usually happen in order to increase efficiency along the supply chain which, in turn, increases profits for the acquiring company. In vertical mergers there is no direct loss in competition as in horizontal mergers because the parties’ product did not compete in the same relevant market. Just like horizontal mergers, vertical mergers can result in anti-trust problems in the marketplace by reducing competition. An example would be if an automobile manufacturing company was to buy up other businesses that exist along its supply chain. It takes many different types of businesses to support automobile manufacturing. If an automobile company bought a seat belt manufacturing company, companies that manufactured different parts of the engine block and the transmission, as well as sources of its raw materials, transportation, technology, and sales (dealerships), imagine the market power that would accrue to that automobile manufacturing company. It would effectively totally control the price for its vehicles without having to consider any other factors. That is the kind of market power that anti-trust laws are meant to control.
However, it should be noted that in general vertical merger concerns are likely to arise only if market power already exists in one or more markets along the supply chain. Conglomerate mergers involve firms that operate in different product markets, without a vertical relationship. They may be product extension mergers, i.e. mergers between firms that produce different but related products or pure conglomerate mergers. Conglomerate mergers generally involve the union of two companies that have no type of common interest, are not in competition with any of the same competitors, and do not make use of the same suppliers or vendors. Essentially, the conglomerate merger usually brings together two companies with no connections whatsoever under one corporate umbrella. This type of arrangement can be very desirable when the investors for the newly created conglomerate wish to create a strong presence in two different markets. In practice, the focus is on mergers between companies that are active in related or neighboring markets, e.g., mergers involving suppliers of complementary products or of products belonging to a range of products that is generally sold to the same set of customers in a manner that lessens competition. Proponents of conglomerate theories of harm argue that in a small number of cases, where the parties to the merger have strong market positions in their respective markets, potential harm may arise when the merging group is likely to foreclose other rivals from the market in a way similar to vertical mergers, particularly by means of tying and bundling their products. When as a result of foreclosure rival companies become less effective competitors, consumer harm may result. However, it should be stressed that in these cases there is a real risk of foregoing efficiency gains that benefits consumer welfare and thus the theory of competitive harm needs to be supported by substantial evidence