Merger Analysis Under the Antitrust Laws

Merger Analysis under the Antitrust Laws Today, the United States is in the midst of a merger wave.

The number of mergers and acquisitions reported has increased dramatically as a direct result of the past financial crisis and economic downturn. During the period, the Federal Trade Commission along with the Justice Department has blocked a great number of potential mergers and acquisitions, helping save consumers “millions of dollars that they would otherwise have paid in higher prices. (Vachris 223) Thus, to recognize and challenge anticompetitive mergers and acquisitions is such a difficult task that needs us to have a good understanding of the antitrust laws. What is antitrust law? Antitrust laws, also known as competition laws, are “laws that promote or maintain market competition by regulating anti-competitive conduct.

” (Elhauge) First of all, the legislative purpose of antitrust laws is to maintain the effective competition in the market economy.Because effective competition requires operators to continue to pursue greater efficiency, develop more advanced technology and provide more high quality and inexpensive products to the market, it will let companies to gain opportunities to survive and develop in the market economy. Then, based on the past experience, people have a relatively clear consensus that monopoly behaviors may restrain and harm the market effective competition.For example, in 2009, when rumors were widely spread that Microsoft Corporation, the largest software manufacture in the world, would deploy the so called “black screen tactic” around the world, especially in China, it made me and various personal computer users worried. The reason “why Microsoft can be so arrogant is that it owns almost ninety percent of market share in the personal operating system market.

”(Tan B2) relying on its flagship Windows operating system. Thus, I’m deeply aware of that the monopoly can restrain and harm the efficiency of the market as well as the well-being of consumers.Generally, the types of merger and acquisition that were prohibited fall into two broad categories: horizontal merger and vertical merger. What is horizontal merger? A horizontal merger is when two companies competing in the same market merge and join together.

“Because the direct consequence of horizontal merger is the decline in the number of competitors in the market, it has the most direct and serious impacts on the market competition. ”(Green and Cromley 359) This type of merger can either have a very large effect or little to no effect on the market.When two extremely small companies horizontally combine, the results of the merger are less noticeable. These smaller horizontal merger and acquisition are very common.

For instance, if a small local drug store were to horizontally merge with another local drug store, the impact of this combination on the drug distribution market would be minimal. However, in a large horizontal merger, the resulting effects can be felt throughout the domestic market and sometimes even throughout the global market. Large horizontal mergers are often recognized as anti-competition.If one company holding forty percent of the market share combines with another company which also holds forty percent of market share, their combined share holding will then increase to eighty percent. This large horizontal merger has now given the new company an unfair market advantage over its competitors. For example, if General Electric Company were to horizontally merge with Rolls-Royce Group plc, the impacts of this combination on the aerospace engine market would be substantial since both companies hold almost 40 percent of market share in the commercial aircraft engine market.

Then what is vertical merger? A vertical merger is one in which a company combine with a supplier or distributor. The reason why this type of merger can be viewed as anti-competition is that “it can often rob supply business from its competition. ”(Higgens 193) If a manufacture has been receiving material from two separate firms, and then decides to acquire the two supplying firms, the vertical merger incurs. The vertical merger could cause the manufacture’s competitors to go out of business.For instance, if General Motors were to take over Goodyear Tyres, Bridgestone Tyres and Michelin Tyres, it will cause severe hardship to other automakers such as Ford Motors and Toyota Motors and lead them out of businesses. The Federal Trade Commission along with the Justice Department can rule to prevent mergers if they believe they violate antitrust laws.

Besides, vertical mergers can also involve a manufacture forming a partnership with a distributor. This makes it hard for competing companies to compete with this newly combined company because of the advantages that the combination brings. These benefits occur because the distributor no longer has to pay the supplier for material since the supplier and distributor are now forming one entity. ”(Higgens) Formally, the distributor would have had to pay the supplier enough money to cover the cost of the material plus the amount of money the supplier charged in order to make a profit on the transaction. With the two companies merged, the distributor is free to get the material at the base cost and does not have to pay any extra money to another company that is looking to make a profit. This allows for the combined company to have less money tied up in production of a product.

”(Higgens) One such merger occurred between Time Warner Incorporated, a major cable operator, and the Turner Corporation, which produ ce CNN, TBS and other TV programs. In this merger, the Federal Trade Commission was alarmed by the fact that such a merger would allow Time Warner to monopolize much of the programming on television. Eventually, the Federal Trade Commission voted to allow the merger but order that the merger could not act the in the interests of anti-competition to the extent at which the public was harmed.Anticompetitive mergers can best be understood from examining the following two real world deals. In September 3, 2008, Atlantic Industries Limited, one of Coca Cola Company’s subsidiaries, offered to acquire China’s Huiyuan Juice Group Ltd. for approximately 17.

9 billion in Hong Kong Dollars. According to the deal, if the transaction is finished, Huiyuan Juice will become a wholly owned subsidiary of Atlantic Industries Ltd. Besides, it will remove Huiyuan Juice Group’s status of listing from Hong Kong’s stock exchange.If the takeover is successfully completed, the Coca Cola Company will let Huiyuan Juice continue to operate its business.

Coca Cola Company has made a significant commitment that it would rely on Huiyuan Juice’s advantages of brand and business model in china and help Huiyuan to expand its business and improve its utilization ratio of fixed assets as well as provide more development and promotion space for Huiyuan Juice’s employees. However, in March 18, 2009, China’s Ministry of Finance made an official announcement that it would block Coca Cola’s acquisition of Huiyuan Juice according to China’s antitrust law. This is the first case that the Chinese authority has rejected since the enactment of antimonopoly law in this country. ” (Sun B1) Since the 1990s, the agitation of merger and acquisition between companies has swept the world, which becomes the focus of the academics.

Merger and acquisition have dual influences on the market economy. On the one hand, it can “optimize a company’s structure of organization, help it to realize its economic scale, improve its economic efficiency and enhance its competitiveness in the market. (Weaver, Harris, and Mackenzie 87) On the other hand, the merger and acquisition between companies will lead to monopoly. Monopoly may enable companies to control and market and leads to the manipulation of the price. Besides, monopoly may cause the cessation of production and technology development. The monopoly tendency may also result in corruption.

In a great deal of big supermarkets and small grocery stores among various Chinese cities, customers can take out frozen beverages to drink from refrigerated cabinets marked with the words “Coca Cola” at all times.However, these drinks are all Coca Cola Company’s products. The monopoly of transnational companies in china is in very prominent position. They are using their advantages in technology, brand and economic scale in order to further expand their monopoly. Compared with “traditional monopoly behaviors such as price alliance, market segmentation” (Hemphill 129) and other anti-competition behaviors, the impacts of companies’ merger and acquisition on the market competition are hidden and have more potential.Thus, it makes the analysis and verification of companies’ merger and acquisition more complex and technical.

Considering Huiyuan Juice’s leading position in the Chinese juice market, coupled with the capacities of the two companies’ marketing network, advanced technology, strong balance sheet and so on, like the media said, the merger and acquisition between “Coca Cola and Huiyuan Juice is indeed to join hands in strength. ” (Moody) In other words, this is a win-win co-operation. From the perspective of business operation, this is a happy marriage. However, this is also violating the antitrust laws.

Taking into account other domestic juice makers’ competitiveness and financial position, no wonder the Ministry of Commerce reached the conclusion in its announcement: the merger and acquisition between Coca Cola and Huiyuan Juice will squeeze the survival space of various medium and small size domestic juice makers, restrain the participation and competition of domestic companies in the juice market as well as their capacities of independent innovation. This will give the Chinese juice market adverse impacts on effective competition and is not conducive to sustained and healthy development of the Chinese fruit juice ndustry. Another case involves Office Depot Incorporated and Staples Incorporated, two of the current three super office-supply chains. In 1980s, both Office Depot and Staples opened their first office-supply superstores. The business model that they have been relying on is regarded as a major innovation compared with the traditional low-volume, high margin retailing market. They envisioned a warehouse-style store for office products where customers could purchase in bulk for discounted prices.

Since then, Office Depot and Staples saw steady growth throughout the past two decades and opened more than one thousand retail stores in the United States and around the world. On Sept. 4, 1996, Office Depot and Staples announced their plan to merge. Both believed that the combination would generate economics of scale and further reductions in the price of office supplies. The immediate response by the stock exchange market seemed to confirm this claim. The stock price of Office Max Incorporated, the third super office-supply chain other than Office Depot and Staples, fell as much as 4.

percent on that single day. Right after the announcement, the Federal Trade Commission launched an investigation into the proposed merger. If based on traditional analysis, the authority should not have any doubts about the merger of these two office-supply chains because “the office-supply market is a highly competitive market with thousands of different retailers. ”(Broder) Although Office Depot and Staples together sell about 75 percent of office supplies sold by super chains, but only account for 5 percent of total office supplies in the broad market.In fact, “Wal-Mart alone has about the same sales from office supplies as would the proposed merger. ”(Niskanen) Thus, the combination should not have restrained any competition in the market.

However, after several thorough study and comparison of the sale price and sale volume of every product sold by the two super chains, the FTC’s economists found something that was very interesting. In the area where two or three of the office-supply super chains operated, the sale price was lower than that area where only one of the super chains operated.Thus, the economists at the Federal Trade Commission found very sufficient evidence: the price of office supplies might likely increase after the combination of Staples and Office Depot. Unfortunately, on the basis of this analysis, the Federal Trade Commission later announced that that “it would seek a preliminary injunction against the merger.

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