Impacts of Keystone Holdings, LLCs Merger with Compagnie de Saint-Gobain - Assignment Example

Impacts of Keystone Holdings, LLC’s Merger with Compagnie de Saint-Gobain Abstract This essay is an attempt to figure out the impacts of Keystone Holdings, LLC’s acquisition of Advanced Ceramics Business of Compagnie de Saint-Gobain. Both these firms operate in alumina wear tile industry. Alumina wear tile is used to line material-handling equipment to protect against abrasion and premature wear caused by the materials that pass through the equipment, extending the life of the equipment for years. In North America and Britain, all types of acquisition which eliminate competition from the market and leads to monopoly are prohibited by law. The Keystone Holdings tried to acquire the Advanced Ceramics Business of Saint- Gobain and thereby eliminate the competitor from the market for alumina wear tile. Government tries to ensure competition in the market and thereby maximum choice and minimum price to the customers. My goal in this essay is to portrait the impact of acquisition on society and firms. . Introduction Keystone is the holding company of CoorsTek, Inc. (CoorsTek), which is a leading technical ceramics manufacturer, supplying ceramics based products for use in defense, medical, automotive, semiconductor, and power generation applications, among others. Keystone is headquartered in Golden, Colorado with facilities in North America, Europe and Asia. Keystone manufactures and sells alumina wear tile for use in high wear applications at its facilities in Golden, Colorado. Saint-Gobain is a highly diversified, multinational company, headquartered in Courbevoie, France. The Advanced Ceramics Business includes ceramic components such as hot surface igniters, electro-ceramic parts for household appliances, ceramic balls for high-performance bearings, automobile water pump seals, special components for the semiconductor industry, agricultural spray nozzles, and other dense alumina components, such as alumina wear tile. Saint-Gobain manufactures and sells alumina wear tile out of its Latrobe, Pennsylvania facility. Oligopoly Markets and Cartels Oligopoly is a market organization in which there are only few sellers of a product. So the actions of each seller affect other sellers also. Mergers and acquisitions are mainly a part of oligopolistic market. The alumina wear tile market in North America can be considered as an oligopolistic market as there are very few firms in the industry. As the alumina wear tile market is an oligopolistic market, any action that the Advanced Ceramics Business takes has an impact on other competitors like Keystone Holdings. If Advanced Ceramics reduces the price of their product, the other players in the market are forced to reduce their prices also. As this interdependency is very high, Keystone Holdings decided to acquire Advanced Ceramics and become the market leader. In North American market, there were only three alumina wear tile producers including Advanced Ceramics and Keystone Holdings. Advanced Ceramics Business has facilities in Europe, North America, South America, and Asia. As originally structured, the assets acquired by Keystone would have included the Latrobe facility and other assets relating to the manufacture and sale of alumina wear tiles. On December 2, 2010, however, in an effort to resolve competitive concerns relating to the original transaction, Keystone and Saint-Gobain amended their agreement to exclude from the sale Saint-Gobain's North American alumina wear tile business. Market Penetration and Sales Advanced ceramics is a subsidiary of Saint-Gobain and the parent company is present in almost 64 countries. Advanced ceramics’s sales revenue differs largely from country to country but the main source is North America with around 1 billion dollars (Ceramics and plastics). Its revenue in 2009 was 153.3 million in Check Republic and 8.7 million euro in central and northern Europe (2009). Saint Gobain’s net sales figures are 37,786 euros in 2009 and 43800 euros in 2008. The company earns 42% of the income from North America. The following table shows 2009 net sales and operating income of Saint- Gobain Flat Glass High Performance Materials Construction Products Building Distribution Packaging 12 8 26 45 9 Net Sales 7 10 44 19 20 Operating Income *Figures are given in percentages Incentives for Consolidation Following are the important incentives for consolidation from the company’s point of view: 1- Economies of scale. It occurs due to large scale operation. Company can make the best use of machinery, R& D facility and its plants. Economies of scale implies the reduction in average cost as the total production increases. 2- Access to new markets. A company which acquires a new one with presence in many markets is directly acquiring the market base to increase its operations. 3- New technology. A company like Advance Ceramic spends huge amount on research and development. So, the acquiring company is purchasing not only the machinery but also the know-how of the company. 4- Experienced Labor Force. When a company acquires another one, it hires the experienced labor force of the acquired company together with other assets. The new company does not want to hire new employees and provide tem training. 5- Market Leadership. The main intention of Keystone Holdings might be to ensure the market leadership. Once the Advanced Ceramics becomes a part of Keystone Holdings, it becomes the market leader and the only remaining company becomes a follower. Arguments against the Proposed Merger Following are the some of the important arguments against the proposed merger from the public interest: 1. Merger reduces competition in the industry. The deal as originally structured would have reduced competition in the relevant markets by eliminating direct competition between Keystone and Saint-Gobain. 2. Merger increases the market power of the acquiring company. The deal between CoorsTek and Saint Gobain would increase the former company’s market share substantially by eliminating CoorsTek’s most significant alumina wear tile competitor in North America. 3. The combined company may raise prices for alumina wear tile, and increase the likelihood that the remaining firms could act together to raise consumer prices for alumina wear tile. Market Entry The easiness with which a new firm can enter into an existing industry determines the structure of the market. In oligopoly markets, it is very difficult for new firms to enter and compete with existing firms. In case of the alumina wear tile market in North America, entry would not be timely, likely, or sufficient to prevent or defeat the anticompetitive effects of the proposed merger. It is because entry into the relevant markets is costly, difficult, and unlikely. The time and cost required to construct an alumina wear tile manufacturing facility, develop and manufacture quality alumina wear tile products, and achieve customer acceptance are very difficult and time consuming processes. The size of the investment necessary to enter into the market is substantial in relation to the size of the overall markets. In addition, the uncertainty that an entrant could secure the distribution necessary to make the investment profitable is highly unlikely. Concentration Ratios Concentration ratios show firm’s control over market in the industry. In other words, it shows the total contribution of the selected firms to the total industry output. The commonly used two concentration ratios are CR4 and CR8; the former shows the market share of the largest four firms and the latter shows the market share of the largest 8. The concentration ratio and the market share are directly related. It means, if the market share of the firms is more, the concentration ratio is also more. If the market share of the firms is less, the concentration ratio is also less. If the concentration ratio is zero, the firms have no control over the market, but if the concentration ratio is 100, firms have full control over the market. Herfindahl Index Herfindahl Index is a measure used by economists to show the size of firm in relation to the industry. It reveals the firm’s market share and the competition among firms in the industry. Herfindahl Index is the sum of the squares of the market shares of the 50 largest firms in the industry (the market shares are expressed as fractions). This value can vary among 0 to 1. If the value is 0, it means the firm cannot influence the industry at all but if the value is 1, it is a monopoly industry (industry is under the full control of the firm). References “Federal Register.”1st May 2010. Web. 07 March 2011. Retrieved from (http://www.federalregister.gov/articles/2011/01/05/2010-33245/keystone-holdings-llc-and-compagnie-de-saint-gobain-analysis-of-proposed-agreement-containing#p-19) Read More