The Business Case for Mergers and Acquisitions
Here's how business mergers and acquisitions stimulate the economy and what role the government plays in regulating them.
Air Date: February 17, 2022
Featured Guests: Sean Heather, Senior Vice President, International Regulatory Affairs & Antitrust, U.S. Chamber of Commerce
To stay competitive and adapt to new trends, businesses of all sizes and throughout industries may seek to merge with or acquire one another. Mergers and acquisitions (M&A) happen regularly in the business world, and when executed well, they can promote competition amongst businesses, empower entrepreneurship, and protect consumers while allowing for increased freedom.
Two Common Types of M&As
While there are five major types of business mergers, the two most common ones are horizontal mergers and vertical mergers.
A horizontal merger is when two competing companies in the same industry form a single entity. A recent example of this is when the Walt Disney Company acquired 21st Century Fox. Both Disney and Fox were large media conglomerates with recognizable film and television brands. Disney’s acquisition of Fox made them a stronger media presence overall. When such large corporations merge, the government may step in and intervene.
“They often draw some antitrust scrutiny,” said Sean Heather, the SVP for antitrust at the U.S. Chamber of Commerce. “If you think about the first and second-largest competitors in a marketplace and they try to merge, the government might step in and say, ‘that's not a good idea.’”
A vertical merger happens when a company is in a certain space and acquires another to move up its supply chain. In 2015, Swedish furniture company Ikea bought forests in Romania and the Baltics to control the timber costs for wood production.
“Rather than continuing to buy from another company, to aid your manufacturing process, you want to go and actually become the producer of those inputs,” explained Heather.
The Economic Analysis of M&As
Every year, thousands of mergers and acquisitions take place, from national corporations to regional companies. M&As strengthen the economy as a whole, as these transactions improve products and services and fuel beneficial efficiencies.
The Federal Trade Commission and the Department of Justice have the power to block deals they believe are likely to harm consumers and the economy. The government will make its argument in court through economic analysis, which looks at any potential negative implications the transaction may have.
“Economic analysis is really what is important from the consumer’s view,” said Heather. “Oftentimes [the government is] looking at what happens to price or what happens to output. If two companies merge and the price goes up, that's a red flag. If two companies merge and output goes down — when there's less output — there's likely going to be an effect on price.”
The Government Monitors Harm to Competition
When a merger or acquisition is proposed, the government can challenge it. However, it only challenges about 3 percent of these deals. If it does, all parties are required to turn over data and interview competitors to understand the market dynamics.
“The burden is on the government to show that the merger sometimes creates harm to competition,” said Heather. “But what does harm to competition mean? It doesn't mean what happens to the other competitors. It means what happens to the consumer.”
The Government Should Play an Important But Limited Role in M&As
Government oversight in M&As is important to protect the consumer and the economy from a single business having a monopoly on a market sector and controlling prices. However, Heather argues that its role should be limited.
“Government doesn't always know best, the idea that the government can stand in and micromanage the economy will lead to a disastrous result,” he said.
“If the government started to scrutinize mergers in a way that looked at things beyond consumers and the interest of consumers, then all of a sudden you'd be bringing in all kinds of other factors into merger analysis,” Heather continued. “That kind of government oversight is overbearing, and it really limits economic freedom.”