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BACKGROUND TO MERGERS

Mergers are when two firms join together, or combine forces in order to develop new products more efficiently or to reduce production or distribution costs.(1) Regulatory bodies have the power to control the outcome of a proposed merger, the main bodies for the UK market and the European markets are: the Office of Fair Trade (OFT) (2) the Competition Commission (CC) (3) the European Commission (EC) (4)

(1) (2) (3) (4)

http://ec.europa.eu/competition/mergers/overview_en.html http://www.oft.gov.uk/OFTwork/mergers/ http://www.competition-commission.org.uk/our-work http://ec.europa.eu/competition/mergers/overview_en.html

REJECTING AND ACCEPTING PROPOSALS


Regulators make decisions on merger depending on the likely effect it will have to its market and other related markets.

Reasons for accepting a merger (2):


Increased competition in the market (UK and abroad) Reduction in costs of production (economies of scale) Greater chance of R&D Protect a market from closing down Enable greater ability to compete at an international level (e.g. European Single Market)

(2) http://www.economicshelp.org/microessays/competition/benefitsmergers.html

REJECTING AND ACCEPTING PROPOSALS


Reasons for refusing a merger: Mergers may create a monopoly within a market leading to decline in competition May lead to monopsony Larger firms who merger may be more able to create barriers to entry

Reduction in consumer choice if there becomes a few dominant firms


Increase in prices paid as dominant firms can restrict supply Possible fall in innovation as mergers can reduce competition

WHY DOES THE EUROPEAN COMMISSION GET INVOLVED?


The reason for the EC becoming involved in mergers is that if mergers are beyond nation borders in Europe, the EC will investigate the possible effects on the single market in Europe. More specific reasons to examine mergers are: If proposed company turnovers exceed a certain threshold Companies which are based outside of the EU but trade within it If the OFT or CC refer a case to the EC

If the follow factors are likely to occur from a proposed merger: competition declines, standard of living in the EU is affected or growth is affected

then these are reasons for the EC to decline a merger on a European scale in order to maintain international competition.

CONDITIONAL ACCEPTANCES OF MERGERS


There are cases where the EC may find a merger to lead to undesirable consequences however they may still allow the merger to go through if there are positive factors evident. In order to make the merger successful, the EC place conditional terms on the newly merging firms, conditions can include: Selling off a select number of stores Consistent funding for innovation Price cap agreements