Merger Efficiency Research Articles

Merger efficiency and managerial incentives

We consider a two-stage principal-agent model with limited liability in which a CEO is employed as agent to gather information about suitable merger targets and to manage the merged corporation in case of an acquisition. Our results show that the CEO systematically recommends targets with low synergies—even when targets with high synergies are available—to obtain high-powered incentives and, hence, a high personal income at the merger-management stage.

Efficiencies brewed: pricing and consolidation in the US beer industry

Merger efficiencies provide the primary justification for why mergers of competitors may benefit consumers. Surprisingly, there is little evidence that efficiencies can offset incentives to raise prices following mergers. We estimate the effects of increased concentration and efficiencies on pricing by using panel scanner data and geographic variation in how the merger of the brewers Miller and Coors was expected to increase concentration and reduce costs. All else equal, the average predicted increase in concentration led to price increases of 2%, but at the mean this was offset by a nearly equal and opposite efficiency effect.

Delivering the Benefits? Efficiencies and Airline Mergers

The merger of US Airways and American – a deal that will create the largest domestic passenger airline – will be a watershed for antitrust enforcement involving commercial aviation. It is the first contested case in which arguments that the merger would be likely to adversely affect competition and consumers drew upon direct evidence of higher fares and service cutbacks in previous airline mergers. This evidence bolstered the case made by the U.S. Department of Justice (DOJ), along with seven states and the District of Columbia, to enjoin the merger.2 US Airways-American, on the other hand, focused much of their response to the government’s Complaint on how the combination would produce substantial efficiencies, in the form of cost savings and consumer (“network”) benefits.Now that a settlement between the DOJ and the airlines has been reached, the opportunity for the court to explore US Airways-American efficiencies “defense” has passed. That process would likely have relied, in part, on direct evidence of whether promised efficiencies in previous airline mergers actually materialized.4 Indeed, if prior mergers had produced the predicted cost savings and network benefits, other things being equal, airline fares should be lower and consumers the beneficiaries of greater “connectivity.” But mounting evidence indicates that this is not the case.5 Moreover, public backlash to previous mergers is significant, as reflected in criticism of protracted system integrations, service cutbacks, and the deteriorating quality of commercial passenger service.This AAI White Paper explores these issues by examining the record on efficiencies that were promised in previous airline mergers. It goes the extra step to ask whether past mergers created inefficiencies that impose costs on consumers. The paper begins with a brief overview of how efficiencies are treated under the recently revised, 2010 U.S. Department of Justice (DOJ)/Federal Trade Commission (FTC) HORIZONTAL MERGER GUIDELINES (GUIDELINES).6 Next is an analysis of the types of efficiencies that are typically projected in airline mergers. The paper then frames and answers a number of key questions: (1) How do the actual costs of integrating systems in previous mergers of hub-and-spoke network airlines compare to predicted costs? (2) What can be said about whether network benefits such as increased “connectivity” projected in previous mergers have materialized? (3) Do mergers of large hub-and-spoke network airlines produce inefficiencies that impose costs on consumers? The final section draws conclusions and offers some insight into the implications of the recent US Airways-American settlement for airline efficiencies analysis. Major themes that emerge from the analysis include: Skepticism about projected efficiencies has likely caused airlines to load most of their projected efficiencies onto consumer (network) benefits, which are harder for antitrust enforcers to verify. System integration (e.g., integrating reservation and IT systems and combining workforces) in some past mergers has been difficult, protracted, and more costly than what was predicted by the airlines. Promises of network benefits involving increased “connectivity” in past mergers appear not to have fully materialized. Airlines cut airport-pairs from their systems after their mergers. Changes in carrier-caused delays since the last wave of airline consolidation emphasize the importance of further examining whether more intensive, merger-induced “hubbing” has exacerbated congestion. Expensive system integrations, loss of connectivity, and increased network congestion in the wake of previous airline mergers imply that promised efficiencies were overestimated, have not materialized as predicted, and potentially create inefficiencies. These effects limit cost savings and the potential for lower fares, shrink consumer benefits, and impose additional costs on consumers. In the event future airline mergers are proposed, antitrust enforcers should significantly discount predicted efficiencies and “net” estimated merger- induced inefficiencies from the carrier’s predictions.

Quality Enhancing Merger Efficiencies

The appropriate role of merger efficiencies remains unresolved in US antitrust law and policy. The Patient Protection and Affordable Care Act (ACA) has led to a significant shift in health care delivery. The ACA promises that increased integration and a shift from quantity of performance through increased competition will create a system in which quality will go up and prices will go down. Increasingly, due to the economic trends that respond to the ACA, including considerable consolidation both horizontally and vertically, it is imperative that the antitrust agencies provide an economically sound and administrable legal approach to efficiency enhancing mergers. In this regard, horizontal hospital mergers present particularly challenges for antitrust. Most hospital merger cases focus on cost based efficiencies, as does most of the academic empirical literature. Yet, government policy seems out of synch with quality analysis. This essay proceeds as follows. First, it provides a discussion of the welfare effects on quality and its implications for antitrust analysis. In the next part, the article explores quality analysis both in the 2010 Horizontal Merger Guidelines and in antitrust case law. In doing so, the essay identifies areas both of clarity and ambiguity regarding quality enhancing efficiencies policy. In the subsequent part, the essay draws parallels to an efficiency analysis of quality under rule of reason analysis, in which the essay offers examples of resale price maintenance and tying of franchising contracts. Thereafter, in the next part, the essay addresses how agencies and courts should treat quality efficiencies in mergers. In doing so, the essay draws upon the existing academic literature in empirical industrial organization economics and public health on measurements of what is hospital quality in a consolidating healthcare marketplace. In its concluding section, the essay advocates a more robust use of quality measurements as a guiding principle of merger law and policy that is flexible enough for case by case analysis and that will provide for ease of adminstrability and outcomes more in line with sound economic analysis than the current system.

Outside in or Inside Out?: Counting Merger Efficiencies Inside and Out of the Relevant Market

Despite relatively successful efforts to modernize the analytical approach for assessing the potential anticompetitive effects of a merger in the United States, antitrust doctrine and agency practice unfortunately have not similarly incorporated advances in economics with respect to the analysis of efficiencies justifications. Current antitrust doctrine and agency practice in the United States permits the antitrust agencies to challenge, and the federal courts to block, a transaction when there is a substantial risk that the merger may cause anticompetitive harm in one market even when those harms are far outweighed by efficiencies benefits in another market. Rejection of out-of-market efficiencies is an obsolete approach to a welfare-based antitrust regime that was born out of an era in which efficiencies justifications in merger cases generally were viewed with considerable skepticism.. In this contribution to a tribute to William E. Kovacic, who both as a scholar and public servant studied how enforcement programs are shaped by the evolution of antitrust norms, we discuss the evolution of the treatment of out-of-market efficiencies in the United States and around the world, and we argue that the United States courts and antitrust agencies should update antitrust doctrine and agency practice to require a serious and committed consideration of out-of-market efficiencies.

Market Power, Efficiencies, and Entry Evidence from an Airline Merger

We investigate the competitive effects of the merger between Delta Air Lines and Northwest Airlines (2009) in the domestic US airline industry. Applying fixed‐effects regression models, we find that the transaction led to short‐term price increases of about 11% on overlapping routes and about 10% on routes that experienced a merger‐induced switch of the operating carrier. Over a longer period, however, our estimation results are consistent with the hypothesis that both merger efficiencies and postmerger entry by competitors initiated a downward trend in price, leaving consumers with a small net price increase of about 3% on the affected routes. Copyright © 2014 John Wiley & Sons, Ltd.

The Efficiency of Merger and Acquisition in Telcom Sector of Pakistan

The researcher has analyzed that how the technical efficiency of total assets, current assets model, expenses model of the telecom industry in Pakistan. For this purpose the researcher has used two stages in which one is the CCR model which has calculated the efficiency by the technology in the time spam of 5008-2012 and multiple regression is being used to analyze second stage factors just like the intensity of acquisition, sequence of acquisition and more important is the efficiency which tells us about the efficiency of the companies. As the results tell that there is negative value between sequence of acquisition and TE in both total asset model and current model asset. Further findings also showed that there is a significant positive relationship between size and TE in total Asset model and the in the total asset model but the former holds a positive relationship while the later showed negative relationship. Based on the regression analysis, none of the mentioned factors can explain the changes in TE model. In the future research areas, it is recommended the other variables like existence of government lined corporation among the telecommunication companies and the role of regulatory as they might also affect companies which are involved in M&A.

Building Patent Portfolios to Facilitate Cross-Licensing Agreements: Implications for Merger Efficiency Analysis

One important issue at the cross section of antitrust and patent law is the patent holdup problem, which arises when one party makes relationship-specific investments ex ante that incentivizes the other party to engage in opportunistic behavior ex post. Firms facing the potential for holdup can be expected to make investments aimed at minimizing this potential. Merger is an important, but thus far little-discussed, method by which firms can attempt to solve potential holdup problems. Merger internalizes the externalities that allow for patent holdup. By merging, two firms with relatively undeveloped patent portfolios may gain meaningfully increased bargaining power in licensing negotiations, which they may use to facilitate cross-licensing agreements — thereby decreasing transactions costs and reducing the risk of opportunistism. For purposes of antitrust analysis, courts, agencies, and economists have long recognized that significant efficiencies often derive from cross licensing, including increases in output arising from the diminished marginal costs of production. As the Google-Motorola acquisition exemplifies, merger may provide an important alternative solution to holdup problems, despite being largely overlooked in the contemporary patent holdup debate. This acquisition potentially provides Google with leverage and ownership rights to protect the entire Android ecosystem that cannot be accomplished by alternative contractual structures. Such a merger — which increases output that cannot be achieved by alternative structures — appears to satisfy the basic definition of a merger efficiency. Whether these benefits — which presumably would increase output — are cognizable efficiencies in merger analysis is thus an important question. Part I of this Article discusses the economics of patent portfolios and cross licensing, addressing both their procompetitive tendencies and their anticompetitive possibilities. Part II demonstrates that merging to build a patent portfolio, and thereby to induce cross licenses, is consistent with traditional economic rationales underlying the ownership-contract tradeoff. Part III examines the treatment of efficiencies within antitrust law, articulating and analyzing the Guidelines’ framework for evaluating proffered efficiencies. Part IV then investigates whether building patent portfolios in order to facilitate cross-licensing agreements — and accordingly to increase output — satisfies the requirements of this framework. Part V concludes.

Building Patent Portfolios to Facilitate Cross-Licensing Agreements: Implications for Merger Efficiency Analysis

The intersection of antitrust and patent law has increased in scope and importance over the past several decades. One important issue at this cross-section is the patent holdup problem, which arises when one party makes relationship-specific investments ex ante that incentivizes the other party to engage in opportunistic behavior ex post. Firms facing the potential for holdup can be expected to make investments aimed at minimizing this potential. Numerous methods of solving the holdup problem exist, including using ex ante auctions to identify and alleviate holdup problems, as well as patent reform. Merger is another important, but thus far little-discussed, method by which firms can attempt to solve potential holdup problems. Merger internalizes the externalities that allow for patent holdup. By merging, two firms with relatively undeveloped patent portfolios may gain meaningfully increased bargaining power in licensing negotiations, which they may use to facilitate cross-licensing agreements—thereby decreasing transactions costs and reducing the risk of opportunistism. For purposes of antitrust analysis, courts, agencies, and economists have long recognized that significant efficiencies often derive from cross licensing, including increases in output arising from the diminished marginal costs of production. As the Google-Motorola acquisition exemplifies, merger may provide an important alternative solution to holdup problems, despite being largely overlooked in the contemporary patent holdup debate. This acquisition potentially provides Google with leverage and ownership rights to protect the entire Android ecosystem that cannot be accomplished by alternative contractual structures. Such a merger—which increases output that cannot be achieved by alternative structures—appears to satisfy the basic definition of a merger efficiency. Whether these benefits—which presumably would increase output—are cognizable efficiencies in merger analysis is thus an important question.

The competitive effects of firm exit: Evidence from the U.S. airline industry

We study the competitive effects of five liquidations and six mergers in the domestic U.S. airline industry between 1995 and 2010. Applying fixed effects regression models, we find that route exits due to liquidation lead to substantially larger price increases than merger-related exits. Within the merger category, our analysis reveals significant price increases on all affected routes immediately after the exit events. In the medium and long-run, however, realized merger efficiencies and entry-inducing effects are found to be strong enough to drive prices down to pre-exit levels.

Euronext Stock Exchange Merger and Market Efficiency

This paper is among the first to examine the effect of Euronext stock exchange merger with Amsterdam Stock Exchange, Brussels Stock Exchange, Paris Bourse and Bolsa de Valores de Lisboa e Porto in terms of market efficiency improvement. Mean-variance, CAPM statistics, multiple variance ratio test, runs test, ranks and signs tests and stochastic dominance approach are employed to test the market efficiency of these four stock exchanges before and after the merger. We find that the Bolsa de Valores de Lisboa e Porto is more efficient in the post merger period. For the rest of stock exchanges, the merger process did not change the inefficient markets to efficient but we can see some improvements of efficiency.

The Efficiency of Mergers and Acquisitions in Malaysia Based Telecommunication Companies

This paper analyses the technical efficiencies (TE) of total asset model, current asset model and expense model of the mergers and acquisition (M&A) activities in Malaysia based telecommunication companies. For the purpose of this research, a two-stage analysis has been used. For the first stage, a CCR model is used to calculate the technical efficiency of individual companies during the period 2005-2010 and the multiple regression analysis is adopted in the second stage to examine factors such as intensity of acquisitions, sequence of acquisitions and size which influence the efficiency of the companies. As a result of the regression analysis, there is an existence of significant relationship which is of negative value between sequence of acquisitions and TE in both total asset model and current asset model. Further findings also showed that there is a significant relationship between size and TE in the current asset model and in the total asset model but the former holds a positive relationship while the latter has a negative relationship. Based on the regression analysis, none of the said factors above could explain the variation in TE in the expense model. At the end of this research, it is recommended that a further study should be done on this area by including additional variables namely the existence of the government linked corporations (GLCs) among the telecommunication companies and role of regulatory as they might also affect companies which are involved in M&A.

AT&T AND T-MOBILE: ECONOMIES AS AN ANTITRUST DEFENSE APPLIED

From the beginning, the debate on the likely results of the proposed acquisition of T-Mobile USA by AT&T focused more on the claims of the parties that “immense” merger efficiencies would overwhelm any apparent losses of competition than on the presence or absence of those losses, and the factors that might affect them, such as market definition. The merging companies based their “economic model” of the merger on estimates of efficiencies derived from AT&T's “engineering model,” without addressing the credibility of the results of the latter in the context of the economics literature on the telecommunications sector. This article argues that the economics literature on economies of scale (especially) and economies of density in mobile telephony and elsewhere suggests caution in expecting such massive cost reductions from increasing the size of an already very large firm. It closes with an argument for the application of this perspective, where appropriate, in future discussions of merger efficiencies.

Market Power, Efficiencies, and Entry - Evidence from an Airline Merger

We investigate the competitive effects of the merger between Delta Air Lines and Northwest Airlines (2009) in the domestic U.S. airline industry. Applying fixed effects regression models we find that the transaction led to short term price increases of about 11 percent on overlapping routes and about 10 percent on routes which experienced a merger-induced switch of the operating carrier. Over a longer period, however, our analysis reveals that both merger efficiencies and post-merger entry by competitors initiated a downward trend in prices leaving consumers with a small net price increase of about 3 percent on the affected routes.

Systematic review of the pharmacological agents for infants in the treatment of gastroesophageal reflux

Objective This system review for the medicine of children gastroesophageal reflux disease(GERD) will provide the latest evidence based medicine evidence for pediatric clinical medication.Methods The documents of randomized controlled clinical trials of children GERD,which had been published in domestic and foreign journals from the year 2000 to 2010,had been retrieved and screened by the study inclusion criteria.According to the Jadad evaluation questionaire,the documents' quality had been evaluated.The efficiency rates of treatment were calculated respectively by the merger of same medicines,and the meta-analysis of different drugs had been done for evaluating the effect of different pharmacological therapeutic agents.In addition,the adverse events occurred during treatment were analyzed.Results There were 31 documents fitting inclusion criteria.2 015 cases of children ( 1039 cases in treatment groups and 976 cases in control groups) had been included in these randomized controlled clinical trials.In these documents the agents included:cisapride ( 18 articles ),erythromycin ( 8 articles ),motilium ( 5 articles ).The merger efficiency rates of these medicines were cisapride (93.43％ ),erythromycin (92.86％ ),motilium (93.06％) respectively.There were no significant difference in the efficiencies of the three drugs in the treatment of GERD ( P＞0.05 ).In addition,the results of meta-analysis about treatment inefficiency,used with the postures therapy and support therapy as controls,were cisapride OR=0.15 ( OR 95％ CI0.11～0.20),erythromycin OR =0.08 ( OR 95％ CI 0.04～0.14 ),motilium OR=0.03 ( OR 95％ CI 0.01～0.07).Furthermore,their adverse effect rates were cisapride 0.72％ ( diarrhea 0.58％,somnolence 0.14％ ),erythromycin 0.96％ ( drug rashes 0.48％,slight increase of GOT 0.48％ ),motilium 1.50％ (diarrhea 1.50％ ).Conclusion The efficiencies of smaller doses of erythromycin were better than cisapride,and not better than motilium;but the adverse effect rates were better than cisapride,and not better than motilium.In summary,smaller doses of erythromycin is better currently in the treatment of GERD.Attention should be paid in the use of erythromycin,since it accounted for slight increases in GOT or drug rashes approximately. Key words: Gastroesophageal reflux; Drug therapy; Meta-analysis; Systematic review; Infant

The Competitive Effects of Firm Exit - Evidence from the U.S. Airline Industry

We study the competitive effects of five liquidations and six mergers in the domestic U.S. airline industry between 1995 and 2010. Applying fixed effects regression models we find that route exits due to liquidation lead to substantially larger price increases than merger-related exits. Within the merger category, our analysis reveals significant price increases on all affected routes immediately after the exit events. In the medium and long-run, however, realized merger efficiencies and entry-inducing effects are found to be strong enough to drive prices down to pre-exit levels.

Size and sector in the efficiency of mergers involving unlisted companies

ABSTRACTAcademic research has mainly focused on merger processes undertaken by large companies listed in financial markets, taking in account principally the information provided by the quotation values. This article studies the merger processes of Spanish unlisted companies (SMEs and large) in the years 1999–2005 through the economic-financial analysis of their accounting data, that provides a better understanding of the variation experienced by companies in terms of efficiency, and explains the reasons that generate value-creation for their owners. From a counterfactual perspective the study compares performances of five indicators in a time span before and after the merger, according to size and sector aggregates. The main results drawn allow us to confirm that those companies resulting from merger processes have improved, or at least not worsened their efficiency and value creation, although the impact is different depending on size and sector. These evidences should have an effect on merger public policies.

Theory and practice in the use of merger remedies: Considering South African experience

There has been considerable debate internationally around the relative advantages and disadvantages of structural and behavioural remedies. In mergers which raise competition concerns, prohibition or divestiture may prevent merger efficiencies from being realised, and therefore behavioural remedies may seem attractive. However, these can prove difficult or impossible to enforce in practice. The merger approval rates of the South African competition authorities are in line with the practice of international agencies, but the number of behavioural remedies imposed is relatively high. This paper briefly considers the international literature on merger remedies before analysing South African merger decisions and making a comparison with other jurisdictions. It then presents a review of a decision made by the Tribunal in the merger between Astral Foods and National Chick in 2001, which was approved with both structural and behavioural conditions. Finally, the paper draws conclusions for the design of remedies in future.

Theory and practice in the use of merger remedies: Considering South African experience

There has been considerable debate internationally around the relative advantages and disadvantages of structural and behavioural remedies. In mergers which raise competition concerns, prohibition or divestiture may prevent merger efficiencies from being realised, and therefore behavioural remedies may seem attractive. However, these can prove difficult or impossible to enforce in practice. The merger approval rates of the South African competition authorities are in line with the practice of international agencies, but the number of behavioural remedies imposed is relatively high. This paper briefly considers the international literature on merger remedies before analysing South African merger decisions and making a comparison with other jurisdictions. It then presents a review of a decision made by the Tribunal in the merger between Astral Foods and National Chick in 2001, which was approved with both structural and behavioural conditions. Finally, the paper draws conclusions for the design of remedies in future.

Merger Efficiency and Welfare Implications of Buyer Power

This paper analyzes the welfare implications of buyer mergers, which are mergers between downstream firms from different markets. We focus on the interaction between the merger's effects on downstream efficiency and on buyer power in a setup where one manufacturer with a non-linear cost function sells to two locally competitive retail markets. We show that size discounts for the merged entity has no impact on consumer prices or on smaller retailers, unless the merger affects the downstream efficiency of the merging parties. When the upstream cost function is convex, we find that there are “waterbed effects,” that is, each small retailer pays a higher average tariff if a buyer merger improves downstream efficiency. We obtain the opposite results, “anti-waterbed effects,” if the merger is inefficient. When the cost function is concave, there are only anti-waterbed effects. In each retail market, the merger decreases the final price if and only if it improves the efficiency of the merging parties, regardless of its impact on the average tariff of small retailers.