Econ Written Assignment

Running Head: CASE ANALYSIS 1

Case Analysis

Name

Econ 500, SNHU

February 9, 2017

Introduction

The proposed merger case between the Heinz Corporation and Beech-Nut Corporation depicts it is facing a problem in realizing the goal. A merger implies two or more firms combining to form a single entity. Mergers and acquisition are some of the strategic undertakings by firms in their attempt to enhance their competitiveness in the market. The merging of the two firms is expected to promote their operational capacity. Thus, the emerging entity will have an added competitive advantage in the jarred baby food industry they operate. The case study given indicates the industry has currently three main competitors namely Gerber, Heinz, and Beech-Nut. The two firms proposing for the merger are Heinz and Beech-Nut. They possess 17.4% and 15.4% of the market share respectively while Gerber has a market share of 65%. Thus, the merger between Heinz and Beech-Nut will give the new entity a market share of 32.4%, which will promote sales generation. This new market share will give Heinz Corporation a higher position in the market. The Heinz Corporation has opted for the merger strategy to control the vigorous competition it has been facing at the wholesale level from Beech-Nut Company. This strategy will be instrumental in enabling Heinz Corporation to promote its profitability due to the high control it will have at the wholesale level trading. Indeed, the slot fees it pays to the grocery stores to have their products displayed will be eliminated with the reduction of competition pressure that will promote the profit generation significantly in the future.

Problem Statement

However, the merger decision is facing a critical problem towards its realization. Even though mergers and acquisitions are legally allowed, they are controlled under the law to protect consumers from mergers that can be exploitive. Indeed, a merger or acquisition has the potential of creating a monopoly competition that will disadvantage the choice of the consumers (Hall & Lieberman, 2009). This protection is provided under the antitrust regulations (Schlossberg, 2008). A highly concentrated market is considered to be restraining the trade by enhancing the monopoly power. Thus, the justice department has defined a market with over 2,500 HHI points as a concentrated market. The general rule applied in assessing if a merger is increasing marketplace concentration is 200 points increase of the Herfindahl-Hirschman Index (HHI) (Schlossberg, 2008). The merger between Heinz Corporation and Beech-Nut Corporation faces the problem under the given scenario due to its antitrust concerns. The current HHI scale of the industry stands at 4,775 points, which is an indication of a highly concentrated market. Consequently, the merger of the two firms will be viewed as fueling the monopoly power in the market that is against the antitrust laws. Equally, the merger between Heinz and Beech-Nut is expected to raise the HHI scale by 510 points against the limit of 200 points by the justice commission. This situation means the merger has the possibility of being disallowed by the justice department (Cleaver, 2012).

Accordingly, the scenario given indicates the problem facing Heinz Corporation in realizing its objective is the anti-competition concerns at the marketplace (Cleaver, 2012). The anti-competition concerns is the major problem frustrating the merger decision by the management of Heinz Corporation since it is likely to be blocked. The management of Heinz has argued the two firm’s products are not substitutes and the merger will enhance operational efficiency, the petitioners against the merger have a higher position of frustrating the merger undertaking. The petitioners will argue the merger will give Heinz the potential of increasing prices or reduce the quality of the products due to the unilateral effects of the merger undertaking (Schlossberg, 2008). The anticompetitive effect of 510 points addition under the current highly concentrated industry disadvantages Heinz in realizing its merger objective under the current antitrust laws and the horizontal merger guidelines under section 5.3 by the Federal Trade Commission and the Justice Department (Schlossberg, 2008). Consequently, the success of the merger between Heinz and Beech-Nut Company has high potential of been hindered by the market structure it is facing currently.

Economic Model

The anticompetitive effect problem facing Heinz Corporation from realizing its merger with Beech-Nut Company has been contributed to by the supply-side issue. The supply-side aspect implies the number of the suppliers in the industry competing against Heinz Corporation (Hall & Lieberman, 2009). The baby food industry Heinz Corporation operates has only three competitors, which makes the industry highly concentrated. Equally, the merger between Heinz Company and Beech-Nut Company will reduce the competition further to two firms that enhances the market power of the firms further. Accordingly, the anticompetitive argument hindering the merger objective of the firm has been caused by the low number of suppliers in the industry. The merger would have faced less hindrance if the industry has several competitors since the market concentration will be lower. Accordingly, the problem may be faced by diversifying to a different market that has a low concentration.

References

Cleaver, T. (2012). Economics: The Basics. New York: Routledge.

Hall, R. E., & Lieberman, M. (2009). Economics: Principles and applications. Mason, Ohio: Thomson/South-Western.

Schlossberg, R. S. (2008). Mergers and acquisitions: Understanding the antitrust issues. Chicago, Ill: ABA.