Week 8

Question 1

What are some of the reasons for merging?

Answer 1

-Concentration of market power
-Efficiency gains
-Expansion (new markets/technology)
-Corporate control

Question 2

Explain how Ovation merged for market power in the pharmaceutical industry:

Answer 2

Ovation bought ‘Indocin’, raising the price by $10 and bought the only substitute for this product, ‘NeoProfen’, raising the price to $500… The FTC sued, however, did not win the case! This was due to the lack of evidence proving that NeoProfen and Indocin were serving the same market… if the markets are separate, the patented drugs are allowed to be sold at a monopoly price

Question 3

Explain how USAir merged for efficiency but failed:

Answer 3

In 1987, USAir acquired Piedmont Aviation for $1.6bn, leading to increased costs and Piedmont salaries increasing to USAir levels! Productivity did not increase and service declined, causing a $2.5bn market cap loss

Question 4

How did IBM merge for technological acquisition:

Answer 4

Platform Solutions were developing a software which had faster processing speeds, compared to IBM, which IB, tried to block… IBM decided to buy out PS and then immediately closed it down!

Question 5

Why may a firm display acquisition for corporate control:

Answer 5

Because of the principal-agent problem that comes about due to separate ownership and control, where people pursue their own agendas
The deviations from profit maximisation are reflected in lower share prices and can become vulnerable to a takeover (manager will lose their job), therefore, managers return to profit maximisation