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Conglomerate Mergers - Essay Example
Author : reichelmelisa
Pages 8 (2008 words)
A merger is said to take place when two companies become one by combining all the assets and liabilities and take a new name. The reason for mergers is usually to create value, because the value of combined companies is always higher than that of the individual companies that are combining1…
It is rare indeed for such mergers to lead any substantial reduction in competition, solely due to the conglomerate effect.
In a few cases, especially if the products acquired, complement the acquirer's own products, "potentially adverse effects can be identified related to so-called 'portfolio power'"2. These are mergers between complementary products, neighbouring products, and unrelated products. A "pure" conglomerate merger involves the acquisition of products that are not related on the demand or supply side. It is a merger in which there is neither horizontal, vertical, complementary nor neighbourhood relationship between the products.
Conglomerate mergers involve portfolio power. When the combined market power of a portfolio of brands exceeds the market power of the sum of its parts, a firm is said to have portfolio power. This enables the firm to significantly reduce the competition, as its exercise of market power in the individual markets is much more effective. Portfolio effects could possibly have anti-competitive effects, especially where they affect the structure of the market directly. This increases the possibility of entry preventing strategies and eliminates the competitive restrictions brought to bear upon it by neighbouring markets3.
Frequently, customers get an incentive in the form of reduced transaction costs by purchasing from the portfol ...