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Antitrust regulators use Herfindahl-Hirschman Index (HHI) which is a measure of the

size of firms in relationship to the industry and an indicator of the amount of competition among
them. It is defined as the sum of the squares of the market shares of each individual firm.
Decreases in the HHI generally indicate a loss of pricing power and an increase in competition,
whereas increases imply the opposite. It is a good measure in merger related market then simple
concentration ratios. In simple words,
If postmerger HHI is less than 1,, then the market is said to !e unconcentrated. "hus,
it is unlikely cause antitrust challenge.
If postmerger HHI is !etween 1, and 1,#, then it indicates moderate concentration.
If postmerger HHI is greater than 1,#, then it is called highly concentrated market. If
the merger raises the inde$ !y more than % points, it leads to antitrust challenge.
A small inde$ indicates a competitive industry with no dominant players. "he closer a market is
to !eing a monopoly, the higher the market&s concentration.
In order to evaluate the competitive effects of mergers regulators also use the %' test which
(udges on the effects of a potential, %' increase in the price of each product of each merging
firm. "he %' test needs to !e (udged with the com!ination of price elasticity. If demand is
inelastic over the %' price change range, it means greater market power for the merge firms) if
demand is elastic, consumers are not affected !y the merger adversely.
*$ample+ "he ,ewsmedia industry has most important tool newspaper, which is dominated !y
-.A "oday which controls #' of the market. "he remaining /' is controlled !y four firms
0all .treet (ournal, ,ew 1ork "imes, 2os Angeles "imes and 0ashington 3ost with a %' market
.o, 45firm concentration ratio 6 # 7 % 7 % 7 % 6 8%'
HHI 6 19#:
7 49%:
6 ;,4 7 1 6 ;,%
"hus, whatever the measure of concentration, this market would !e classified as highly
concentrated and -.A "oday en(oys monopoly.
,ow suppose that two of the smaller firms 9i.e. 2os Angeles "imes and 0ashington 3ost: in
this industry merge.
.o, 45firm concentration ratio 6 # 7 1 7 % 7 % 6 1'
HHI 6 19#:
7 191:
7 /9%:
6 ;,4 7 1 7 % 6 ;,%%
<oth measures of concentration have increased. However, the increase in the HHI is only %
point. .o, under the 18#/ merger guidelines, a challenge of the merger !etween two of the
smaller newspapers 9here, 2os Angeles "imes and 0ashington 3ost: would not necessarily occur.
/. "he main driving factors 9motives: for mergers and acquisitions include growth, synergy
9operating and financial:, diversification, !enefits of vertical and horizontal integration, hu!ris or
pride of management, improved management, improve research and development, improve
distri!ution and ta$ !enefits.
(Note: To avoid overlap in other answers (i.e. questions 3 and ) I have explained s!ner"! in
#rief in this answer$ and not included vertical and hori%ontal inte"ration)
&rowth: It is one of the most fundamental motives for =>As. ?ompany may choose internal or
9organic growth: or growth through =>As 9non5organic growth: to e$pand. "hough !oth growth
strategies have their own uncertainties, growth through =>As is considered as a faster process.
If a company seeks to e$pand within its own industry it may conclude that internal growth is not
an accepta!le alternative. Internal growth is feasi!le when there is less competition in a
particular industry segment. "his is !ecause the slow and risky nature of the internal e$pansion
process and competitive factors may make such internal growth difficult and ineffective. =>As
provide a means where!y a company can grow quickly. @irms may acquire another firm with
hope of e$periencing economic gains in terms of economies of scale 9reductions in per unit costs
in terms of increased revenues or unit production: and economies of scope 9offer !roader range
of services to customers:. In case of international e$pansion, it may !e quicker and less risky to
e$pand geographically through =>As than through internal development. "hus, a company
having successful products in one market may achieve greater revenues and profits as a result of
cross5!order acquisitions. =>As !ring not only revenue growth !ut also profits and returns to
shareholders through synergetic gains.
'!ner"!: It is the term used to descri!e a situation where the final outcome of a system is greater
than the sum of its parts. <ut in terms of merger it refers to a financial !enefit that a corporation
e$pects to realize when it merges with or acquires another corporation. (inancial s!ner"!: It
refers to the impact of the =>As on the cost of capital of the acquiring firm or merging partners.
"he com!inations of two firms may reduce risk if the cash flow steams of the firms are not
perfectly correlated. If the acquisition or merger lowers the volatility of the cash flows, suppliers
of capital may consider the firm less risky. "he risk of !ankruptcy would !e less and there wonAt
!e wide swings up and down in the com!ined firmAs cash flows. As a result of acquisition,
financial economies of scale are also possi!le in the form of lower flotation and transaction costs.
In financial markets, a larger company has certain advantages that may lower the cost of capital
to the firm. It has !etter access to financial markets and has lower costs of raising capital. In
general, larger firms are less risky and !ear a lower pro!a!ility of !ankruptcy and financial
)iversification: It means growing outside a companyAs current industry category. Beneral
*lectric is a good e$ample of successful diversification. It is now a diversified conglomerate
with operations in different industries through a pattern of acquisitions and divestitures. A
successful diversification strategy is to acquire leading positions in the various industries in
which the firm owns !usinesses. Also !y e$panding through acquisition of a num!er of firms, the
acquiring corporation attempts to achieve !enefits that investors receive !y diversifying their
portfolio. A diversified corporation which acquires different !usiness areas facilitates with
dividend sta!ility. Diversified e$pansion is the means to enter industries that are more profita!le
than the acquiring firmAs current industry. Diversification has the !enefits of coinsurance effect.
"his occurs when firms with imperfectly correlated earnings com!ine and derive a com!ined
earnings stream that is less volatile than either of the individual firmsA earnings stream.
Improved mana"ement: "his motive can !e an important for some takeovers, when an
acquiring firm !elieves that its management can !etter manage the targetAs resources. "he !idder
may also !elieve that its management skills are such that the value of the target would rise under
its control. "his has validity in cases of large companies making offers for smaller, growing
companies !ecause small companies lack managerial e$pertise. A takeover may !e the most cost5
efficient way to !ring a!out a management change.
Tax motives: .everal possi!le ta$ !enefits accrue from takeovers. If one of the firms has ta$
deductions that it cannot use !ecause it is losing money, whereas the other firm has income on
which it pays significant ta$es, com!ining the two firms can result in ta$ !enefits that can !e
shared !y the two firms. "he value of this synergy is the present value of the ta$ savings that
result from this merger. In addition, the assets of the firm !eing taken over can !e written up to
reflect new market values in some forms of mergers, leading to higher ta$ savings from
depreciation in future years
C. Hori%ontal inte"ration is an acquisition of additional !usiness activities at the same
level of the value chain. Horizontal growth can !e achieved !y internal e$pansion or e$ternal
e$pansion through =>As of firms offering similar products and services. <idders get !enefitted
in terms of economies of scale which is defined as reductions in per unit costs in terms of
3atrick A. Baughan, =ergers, Acquisitions, and ?orporate Destructuring, p. 14
revenues or unit production, increases, economies of scope: offer !roader range of services to
customers in a !usiness, increase market power: the a!ility set and maintain price a!ove
competitive levels, increase negotiation power: get more leverage over powerful suppliers or
customers and reduction in cost of international trade and broader product line.
=erger !etween "A"A and Eaguar and is a good e$ample of horizontal merger, !oth are
in automo!ile industry. "A"A is one of oldest, largest, most respected !usiness conglomerates
and is the automaker from India and Eaguar is the automaker of cars in -nited .tates. "hey !oth
have merged together to launch car in the India, so Eaguar will get the !enefit of local company
and can launch its product internationally and "A"A can get !enefit of !rand name of Eaguar.
"his is a very good e$ample of horizontal integration in terms of synergy or economies of scope.
*ertical inte"ration is the degree to which a firm owns its upstream suppliers and its
downstream !uyers. In other words vertical merger is the one in which a firm com!ines with its
suppliers or distri!utors. "he company sets up su!sidiaries that distri!ute or market products to
customers or use the products themselves is known as forward integration while the company
sets up su!sidiaries that produce some of the inputs used in the production of its products is
known as !ackward integration.
<enefits to !idders from vertical integration include reduced transportation costs,
improve supply chain coordination, leads to e$pansion of core competencies, provide more
opportunities to differentiate !y means of increased control over inputs, capture upstream or
downstream profit margins, gain access to downstream distri!ution channels, capture profit
margin of supplier