What are Mergers?
In accordance to the Fair Competition Act 2009 “merger” means the acquisition or establishment, direct or indirect, by one or more enterprise, whether by purchase of shares or assets, lease of assets, amalgamation or combination, of control over the whole or part of the business of an immediate competitor, supplier, consumer or other enterprise.
Mergers are dealt with under Sections 21 to 24 of the Fair Competition Act 2009. Moreover, Article 22 of the Act states that where an enterprise is desirous of effecting a merger, it shall apply to the Commission for permission to effect the merger. Such an application should be made in the prescribed form and accompanied by prescribed information.
What are the different types of mergers?
The different types of mergers include:
- vertical mergers
- horizontal mergers
- conglomerate mergers
a) Vertical Mergers
A vertical merger is one of the most common types of mergers. It typically occurs between enterprises which operate at different stages of the production or distribution chain such as a wholesaler and retailer or manufacturer and distributor. When an enterprise merges with either a supplier or a customer to create an extension of the supply process, it is known as a vertical merger or integration.
Example of Vertical Merger
An example of a vertical merger may be a wholesaler of goods merging with a retailer of goods. Where previously the wholesaler was selling in bulk to the retailer after the merger they would become one entity for the wholesaling and retailing of goods.
b) Horizontal Mergers
Horizontal mergers are types of mergers that involve enterprises which operate in the same market and are therefore in direct competition with one another. Horizontal mergers raise three basic anti-competitive issues:
i) the elimination of competition between the merging firms depending on their size.
ii) the union of the merging firms operation might create significant market power and might enable the merged enterprises to raise prices.
iii) by increasing powers in the relevant market, the transaction might strengthen the ability of other enterprises in the market to coordinate their pricing and output.
Example of Horizontal Merger
An example of a horizontal merger is the combination of two construction enterprises. Following the merger instead of having two enterprises there is only one.
c) Conglomerate Mergers
Conglomerate mergers are types of mergers that are in different and unrelated markets. There is no relationship between the types of business one enterprise is in and the type the other is in. The merger is typically part of a desire on the part of one enterprise to grow its financial means. By merging with a completely unrelated, but often equally profitable enterprise, the resulting conglomerate gains a revenue flow in many types of industries.
Conglomerate mergers however may reduce future competition by eliminating the possibility that the acquiring firm would have entered the market independently. A conglomerate merger also may convert a large firm into a dominant one with a decisive competitive advantage, or otherwise make it difficult for other enterprises to enter the market. Conglomerate mergers present less anti-competitive risk to the market and are most likely to be approved by the Commission.
Example of Conglomerate Merger
An example of a conglomerate merger is that between an athletic shoe enterprise and a soft drink enterprise. The firms are not competitors producing similar products (which would make it a horizontal
merger) nor do they have an input-output relation.
Whichever type or combination of types of merger, the analysis compares the anticipated state of competition with the merger with the counterfactual.
Possible Effects of Mergers
- Lower the quality of its products without a compensating reduction in price.
- Reduce the range or variety of its product
- Lower customer service standards
- Change any other parameters relevant to how it competes in the market.
- Increase efficiency thus lowering the prices of goods and services
- Production of more specialized products
- Benefits from economies of scale and scope