Horizontal Mergers

Horizontal Merger - when the acquired firm uses both the same input and output market

Two main reasons for horizontal merging:
 * Efficiency
 * Internalize externalities/increase market power

Efficiency Mergers
 * Methods: Economies of Scale, Increased Purchasing Power with Suppliers, Leveraging Brand Name/Core-Competency/Reputation, One-stop shopping to reduce customer costs, Reducing waste/off-peak capacity/efficient use of waste
 * Common ownership is preferred over joint operation and separate ownership because it reduces transaction(information and coordination) costs and opportunism
 * Mergers are a bad news for competitors overall.

Diversification
 * Mergers that do not share same input or output markets is called unrelated diversification
 * Unrelated diversifications make conglomerates
 * Reasons for profitable diversification:
 * Undervalued market
 * External capital markets = have access to better capital
 * Internal capital markets = allocate capital more efficiently
 * Dominant General Management Market = skills from management applicable in other areas
 * Why merger can be preferable to growth
 * Compensation tied to size of firm
 * Larger firms have more social power, political power, reputation
 * Larger firms have better private cash flows
 * Diversification reasons that are suspect
 * Diversification and risk = shareholders can diversify by diversifying portfolio not necessarily diversification
 * Identifying Undervalued Firms = how would a manager identify an undervalued firm?

Market for Corporate Control
 * Shareholders have to try to reign in managers from diversifying too much
 * They have weak incentive to monitor management so need other methods

Performance of Conglomerates
 * Long-term performance of diversified firms tend to be poor
 * The individual parts perform better than a whole for diversified firms
 * Diversification depends more on the external environment
 * Conglomerates are decent