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Announcing mergers or acquisitions generally receive positive combined stock market revaluations.

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Introduction

Introduction Firms announcing mergers or acquisitions generally receive positive combined stock market revaluations. Additionally, horizontal mergers elicit larger revaluations than do conglomerate mergers on average. Although it seems likely that the significant average gains to horizontal mergers represent, at least in part, anticipated improvements in production efficiency, empirical evidence to this effect is mixed. It has also been posited that horizontal mergers might allow the merging firms to gain at the expense of other parties including suppliers and/or customers by exercising their increased market power. For example, merging firms may be able to increase their bargaining power over suppliers by pooling their purchasing. Also, merging firms may more easily collude with rival firms to coordinate production rates and prices at the expense of their customers. While these types of gains are not necessarily mutually exclusive of improved production efficiency, they are distinct in that they may arise even if no real improvements in production efficiency are realized as a result of a merger. Further, these types of gains are expected to not only affect the post-merger performance of the merging firms but also the performance of other firms that share a product market relationship with the merging firms. In this paper, we will investigate the issues that have to be considered by the regulators in a horizontal merger in the British food retailing market. 1. Description of the British food retailing industry Britain's food retailing is the most concentrated in Europe, with the top five supermarket chains-Asda, Morrison, Safeway, Sainsbury and Tesco-controlling 70 percent of all food purchased. This trade was valued at �76.78 billion in 2000, an increase of 4.5 percent over the previous year. The UK also enjoys a pre-eminent position in European food manufacturing, with 13 of the top 20 continental food manufacturers being British-based. The purchasing power of these supermarket chains is such that it has forced margins down at many food suppliers. ...read more.

Middle

So, they will look at market share and market capitalisation. Besides, regulators should look at such business policies as pricing and make certain that no discrimination is taking place. They would also look at evidence to stop any predatory pricing, vertical price squeezing (where a vertically integrated firm controls the supply of a good and charges a higher price for that input to rivals) and tie in sales (where a firm controlling the supply of a first product insists that its customers buy a second product from it rather that its rivals). 4. Where to look? Hence, there are several issues that have to be examined by the regulators before approving a merger. The first problem confronting a competition authority is determining the appropriate definition of the market, and specifically how narrowly or broadly this is defined. There are two key dimensions which need consideration: the geographic extent of the market and the substitutability between products offering similar services. In fact, regulators have especially to investigate the supermarkets' drive into the non-food market and the impact any acquisition would have on small and convenience stores. For instance, Tesco and Asda generate substantial sales from home wares and clothing and have been developing that side very significantly. Tesco and Asda have been pouring investment into non-food merchandise, which generates much higher margins than the traditional food lines. Also, Sainsbury is following their lead and plans a big non-food launch in September. It's therefore essential to ask whether there are any impacts that relate to the non-grocery offering. The regulators may look at all parts of the market, including c-stores and taking in the impact of non-food sales, petrol sales and Internet home shopping Another issue related to market definition is whether to consider one-stop superstore shopping and convenience store shopping as two separate markets or not. Regulators have to look for any adverse impacts a grocery merger would have on small and convenience stores. ...read more.

Conclusion

A recent survey found that supermarkets are the most expensive place to buy apples, with market stalls and greengrocers beating the supermarkets, including Tesco, on price. A survey for Sustain in 2000 found that fruit and vegetables were around 30 per cent cheaper at market stalls than supermarkets. The Competition Commission found that supermarkets put prices up in areas where they don't have strong competition. Therefore, the proposed takeover of Safeway might reduce competition among supermarkets but is also likely to lead to further closure of local shops which better serve local communities. 5. The break-up option In our opinion, putting Morrisons and Safeway together is the dream solution for the watchdogs. In fact, it would create a new fourth force in UK supermarkets - and give Tesco, Sainsbury and Asda a stronger run for their money. Nevertheless, in some parts of the country, putting them together wouldn't create a fourth force - it would create a giant. According to retail experts, Morrisons and Safeway between them capture 29% of grocery shopping in Yorkshire and 31% of the market in the north east of England. In both parts of the country, a merged group would be the biggest supermarket chain by far. By contrast, the Tesco and Safeway combination would only have 24% in both regions - well below that 25% threshold. Therefore, if we look look beyond the simple UK-wide figures, we can find a reason to block all these bids - from Asda, Sainsbury, Tesco and Morrison. That increases the chances of a full-blown enquiry, and an eventual break up of Safeway. And if any of the supermarkets wins the battle - and that's a big if - the chances are high that it will have to sell off some stores. So, the competition authorities should accept all the bids but have to tell each bidder how many Safeway stores it could be allowed to buy - and where. Mergers and Acquisitions MBA ENPC The battle for Safeway Question 2: The Main issues for the regulator to consider & Recommendations 1/11 ...read more.

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