Mergers and Acquisitions: To What Extent Can Regulatory Bodies Weigh Their Social Benefits

Essay by samyslk230University, Bachelor'sA+, December 2006

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Integration: Mergers, Acquisitions and Buyouts

Integration refers to uniting productive resources and often takes place through a merger, in which two or more existing firms unite. In my paper, I have analyzed the different types of integration and evaluated the effectiveness and usefulness of regulatory entities in monitoring merger, acquisition and buyout activities and in controlling their behavior.

Essentially, there are three main types of integration, or mergers: vertical, horizontal, and conglomerate. Mergers are classified as being friendly or hostile and it is often argued that certain types of horizontal integration give rise to hostile mergers. For instance, in highly concentrated or monopolistic markets, where there are only a few competitors, hostile mergers or acquisitions often take place as firms are unwilling to cede management and ownership to rival, takeover firms. More importantly, regulatory bodies, such as, the U.S. Department of Justice, feel that mergers and acquisitions in highly monopolistic industries often result in social costs being incurred by the consumer, primarily due to increased prices and a lack of choice.

Furthermore, the occurrence of a merger often raises concerns in antitrust circles. Devices such as the Herfindahl index can analyze the impact of a merger on a market and what, if any, action could prevent it. Regulatory bodies such as the United States Department of Justice, as aforementioned, may investigate anti-trust cases for monopoly dangers, and have the power to block mergers.

Under its current Merger Guidelines, the U.S. Justice Department views industries with Herfindahl-Hirschman indexes in excess of 1,800 to be highly concentrated and may attempt to block a horizontal merger if it will increase the Herfindahl-Hirschman index by more than 100. However, the Justice Department sometimes permits mergers in industries that have high Herfindahl-Hirschman indexes when there is, for example, evidence of significant foreign competition, an...