PROF HARVEY PONIACHEK, ASSIGNMENT, M&A, FALL 2013 APPLICATION OF ANTITRUST GUIDELINES FOR HORIZONTAL MERGERS

ASSESSING THE LIKELIHHOD OF DOJ / FTC ANTITRUST APPROVAL OF A PROPOSED M

1. FACTS: THERE ARE 10 FIRMS IN THE U.S. MARKET WITH THE FOLLOWING MARKET SHARES: S1=30% MARKET SHARE, S2=20%, S3=15%, S4=10%, S5=5%, AND THE REST OF THE MARKET IS EQUALLY DIVIDED AMONG THE REST OF THE FIRMS. COMPANY 2 IS PROPOSING TO MERGE WITH COMPANY 4. THE US MARKET IS SUBJECT TO KEEN COMPETITION FROM ABROAD, PARTICULARLY FROM IMPORTS FROM CHINA, S. KOREA, TAIWAN AND THAILAND. CONSUMERS HAVE DISPLAYED ABILITY TO SUBSTITUT IMPORTS FOR SAME DOMESTIC GOODS. ECONOMISTS SUGGEST THAT THE PRICE ELASTICITY OF 1.2. INDUSTRY REPORTS SUGGEST THAT THE MERGER WOULD YIELD CONSIDERABLE SYNERGIES. THE SYNERGIES COULD AMOUNT TO OVER $2 BILLION FROM YR 2 ONWARD, THANKS TO ECONOMIES OF SCALE FROM LARGER OPERATION AND REDUCED AVERAGE COST. THE MERGER WAS INITIATED BY COMPANY 4 WHICH IS IN FINANCIAL DISTRESS AFTER A POOR CHRISTMAS SEASON. CO 4 EMPLOYS 50,000 PEOPLE, AND ITS EXPECTED THAT SOME 15,000 EMPLOYEES MIGHT FIRED IF CH 11 IS FILED. COMPANY 2 & 4 FILED UNDER THE HSR ACT REQUESTING THE GOVERNMENT APPROVAL OF THE PROPOSED TRANSACTION. 2. ASSIGNMENT: ASSESS THE ANTITRUST IMPLICATIONS OF THE MERGER ACCORDING TO THE DOJ/FTC MODEL'S 5 CRITERIA, AND THE LIKELIHOOD TO OBTAIN AN APPROVAL . ADDRESS THIS ASSIGNMENT WITH YOUR TEAM AND BE READY TO ADDRESS IN CLASS. THE ASSIHNMENT IS DUE ON 2/27

3. THE MODEL & merger guidelines (1992 & 1997): 1. Concentration (HHI) in Relevant Market, 2. Price Effect (5%), 3. Barrier to Enter, 4. Offsetting Efficiency, 5. Risk of Failure

4. SUGGESTIONS: Some suggestions on how to perform the assignment: To derive the overall benefit-cost associated with the proposed merger create a composite (w weight to each variable/factor (equal or non-equal), but recall that the impact of each variab positive or negative. If the composite is below 50 you may suggest to reject it. For instance, HHI at 1,000 gets 20 points, while above above 1,000 scores below 20 (e.g., 1 you may, however, assign different benchmarks, such as hhi=1,000 etc. You may, however, use other methods to create more realistic weights with positive and neg or through multiple regression analysis or judgmental) Additionally, if variable #2 is unitary elastic (at 1.00), assign it 20 points, if its below at, say 0.9 No barriers to enter, assign 20 points, barries to enter assign 10 points (but bariers are always If offsetting effeciency exist--such as economies and synergies--assign 20, absent efficiencies Risk of failure--high risk assign 20, low risk 10, no risk 0.

5. Sources SOURCE: SEE OUR TEXTBOOK ON ANTITRUST, AND CLASS NOTES ITS SUGGESTED THAT YOU REVIEW THE FOLLOWING DOCUMENT--U.S. DEPT OF JUSTICE & THE FEDERAL TRADE COMMISSION, HORIZONTAL MERGER GUIDELEINES, 199 THE DOCUMENT COULD BE OBTAINED FROM THE FOLLOWING SITE: http://www.usdoj.gov/atr/public/guidelines/horiz_book/hmg1.html

&A, FALL 2013

OVAL OF A PROPOSED MERGER

RIZONTAL MERGERS

NG MARKET SHARES: T OF THE MARKET IS EQUALLY MERGE WITH COMPANY 4. TICULARLY FROM IMPORTS LAYED ABILITY TO SUBSTITUTE HE PRICE ELASTICITY OF 1.2. DERABLE SYNERGIES. RD, THANKS TO

RESS AFTER A CTED THAT SOME

ENT APPROVAL OF THE

ER ACCORDING TO THE

SS IN CLASS.

erger create a composite (weighted) index of the above 5 factors by assigning at the impact of each variable on the total score could be st to reject it. 00 scores below 20 (e.g., 1000/1500)*20=13.3).

ights with positive and negative weights;

oints, if its below at, say 0.90, assign (0.9/1.0)*(20); if above, say at 11.2, assign (1.2/1.0)*20 oints (but bariers are always a matter of degree, rather than either or) sign 20, absent efficiencies assign below 10 or 0.

L MERGER GUIDELEINES, 1992 AND REVISED IN 1997

EX# 1 ILLUSTRATES THE DERIVATION OF THE HHI BEFORE & AFTER THE MERGER. EX. #2 APPLIES THE MODEL FOR VARIOUS ASSUMPTIONS. HOWEVER, IN REALITY THE VARIABLES WOULD BE QUANTIFIED

EX. #1: DERIVATION OF THE HHI BEFORE AND AFTER THE MERGER
A COMPANIES 1 2 3 4 5 6 7 8 9 10 TOTAL B MKT SHARE, I 30 20 15 10 5 4 4 4 4 4 100 C Si**2 900 400 225 100 25 16 16 16 16 16 D MKT SHARE, II 30 30 15 5 4 4 4 4 4 100

1730

EX. # 2. THE MODEL & MERGER GUIDELINES (1992 & 1997): 1. Concentration (HHI) in Relevant Market, 2. Price Effect (5%), 3. Barrier to Enter, 4. Offsetting Efficiency, 5. Risk of Failure

SUGGESTIONS: Some suggestions on how to perform the assignment:

To derive the overall benefit-cost associated with the proposed merger create a composite (weighted) weight to each variable/factor (equal or non-equal), but recall that the impact of each variable on the positive or negative. If the composite is below 50 you may suggest to reject it. For instance, HHI at 1,000 gets 20 points, while above 1,000 it scores below 20 (e.g., 1000/1500)*20=

you may, however, assign different benchmarks, such as hhi=1,000 etc. You may, however, use other methods to create more realistic weights with positive and negative weig or through multiple regression analysis or judgmental) Additionally, if variable #2 is unitary elastic (at 1.00), assign it 20 points, if its below at, say 0.90, assign No barriers to enter, assign 20 points, barries to enter assign 10 points (but bariers are always a matter If offsetting effeciency exist--such as economies and synergies--assign 20, absent efficiencies assign b Risk of failure--high risk assign 20, low risk 10, no risk 0.

HE MERGER
E Sii**2 900 900 225 0 25 16 16 16 16 16 F dHHI

2130

400

WEIGHTS, % 20 20 20 20 20

VARIABLE (1) 2130 0.9 0.75 0.5 0

WEIGHT SCORE 9.39 18.00 15.00 10.00 0.00

52.39
NOTE: 1. VARIABLE 1 WAS DERIVED; ALL OTHERS WERE ASSUMED

composite (weighted) index of the above 5 factors by assigning each variable on the total score could be

(e.g., 1000/1500)*20=13.3).

tive and negative weights;

w at, say 0.90, assign (0.9/1.0)*(20); if above, say at 11.2, assign (1.2/1.0)*20 s are always a matter of degree, rather than either or) t efficiencies assign below 10 or 0.