Merger Analysis: The Staples-Office Depot Case - Term Paper Example

Merger Analysis: The Staples-Office Depot Case Facilitator Introduction Management of mergers and amalgamations is a challenging endeavor for both the government, the investors, and their competitors. Mergers are very risky to handle and stand as the greatest gambles in the business world. Mergers first have to go through the legal procedures in order to certify that they do not break any authorized provisions. It is possible for the merger to sail through the process in the first instance. However, with the market dissatisfied, a merger may still be halted by the courts. The Staples-Office Depot case presents an ideal scenario of a merger that may receive substantial opposition from the market. The competitors are the most worried in a case where a merger makes them inferior in the market. A merger between two of the best three companies in a particular sector is creating a near-monopoly, which is greatly feared by the competitors. More so, such a merger (like the Staples-Office Depot case) is likely to affect prices thus it is not economical to the customers (Wilke & Pereira, 1997). The two companies are at the top of the stationeries and supplies market, thus merging them present a very challenging case, which sets precedence for the behavior of many other firms in the market depending on how the regulators handle the situation. This paper analyzes the merger with the view of uncovering various factors that made it hit the headlines and analyzing the effect of such a merger. Market definition The affected market in the case of this merger is the office-supply superstore chains market. This market is greatly affected because the merger creates a contestable monopoly in the market. Economically, the merger will be hard to maintain due to the adverse effects it brings on the people and their economic patterns. The market will face huge competition with the merger as it unites companies that own the largest share of the market. They will simply form a formidable entity that is difficult to compete against; hence the office-supply superstore chains market faces a huge test from the merger (Breen, 2004). Analysis of the general effect of the merger on the market is incomplete without assessment of various market factors that it would affect. Some of them include demand patterns, competition, pricing strategies and strength, nature of the market, and cost of operation in the market. Competition effects The merger affects competition in the market in the greatest way that any single operation would affect the sector. When the top two firms in any sector in terms of market share come together to form one large entity, the effect is felt by smaller firms. Many of them may exit the market, as they cannot cope with the competition. The office-supply superstore chains merger case is no different (Ashenfelter et al, 2006, p.270). The first effect that the competition will face is market share. The merger has the ability to create a complete monopoly in terms of the market share. With majority of the market already on their side, the office-supply superstore chains merger can only strategize to get the rest of the market to their customer base and freeze out the competitors. The merger is likely to be deemed as unfair to the other firms in the sector as they can foresee the loss of a substantial number of customers (Lee, 2005). Creating a near monopoly reduces the insight of other stakeholders in the market and thus they will likely call for the merger to be aborted for any possible reason. The second competitive factor that is used in assessing the merger is pricing strength and influence in the market. When a company owns majority of the market share, it has the liberty to alter the prices and influence competitors to follow the trend. The office-supply superstore chains case gives the merger a chance to be exclusive price leaders in the market. In situations where the costs of production are extremely hard, the merger may cause the entities to desist from lowering the prices because they have a lower effect per unit of production or supply with bulk supplies. The merger will also enjoy economies of large-scale operations, as it is likely to have many clients operating in bulk supplies thus limiting its cost. However, for the other players in the market, such a trend will hurt them, as the effect of such a cost per unit of sales is relatively high. The other scenario would come when the merger decides to lower their selling prices for internal reasons. The main reason may even be an intention to freeze the competition out of the market (Ryan, 2000). However, the other firms in the same sector cannot follow the trend as it might take some of their customers away. Such a move is highly expensive and tough to maintain by the competitors. With such advantages over the other firms in the market, the merger will make it impossible for other firms to operate profitable businesses. In the long run, they may be forced to sell their stock to the merging entities, quit the industry, and make office-supply superstore chains a total monopoly in the market. The merger is a potential hindrance to growth in the sector, which is an anticompetitive strategy that inhibits growth in the sector. With one firm that owns majority of the market, the cost of entry and the possibility of success in the market will be very high and very low respectively. First, the monopoly features that the merger will bring in the market block the cost of entry (Bernile, 2006). It is likely to allow the companies to control the sources of raw materials due to their scale of demand. When a company controls the source of raw materials, there is a high chance that it will also determine the cost of the raw materials. This means that whenever the company feels threatened by a new entrant in the market, it will raise its prices thus price them out of a possible consideration. More so, even if a company manages to navigate this challenge and enter the market, it is hard for the firm to compete the merger. Operating like a monopoly, the merger is likely to create initiatives that will help send the competitor out of the market thus threatening their survival chances in the market. Cost effects The cost effects of the merger present arguably the greatest effects that it will have on the economy and the sector of operation. It will affect various costs in the market that will change the pricing strategies for the firm and the competitors alike. When the prices are affected, economists argue that the demand levels will go down hence the profit margin is also likely to reduce. This cycle is not good for the customers either as the prices are likely to reach a particular cushions and force the companies to recover them from sales. This simply implies supplies that are more expensive for the companies. However, the monopoly players in the market enjoy such a trend hence the need to analyze various affected prices (Budzinski& Christiansen, 2006). The merger will hugely affect start-up costs. When a merger involves some of the largest companies in a particular sector, it presents a reason to worry for any person or group of people interested in setting up a new business in that sector. The base implication of such a decision is that the entry criteria within the sector changes financially. Capital amassed by the two firms is relatively huge while the systems that they will put in place are sophisticated and complicated in their own way. This makes the cost of entering the market in terms of capital to increase considerately. The graph below shows an example of the cost effects in terms of capital that a big firm may have on entry of other firm until regulations are undertaken to minimize the effects (Newmark, 1990, p.370). Image 1: Entry costs affected by a merger or monopoly (Luz, 1999) The other cost affected by the merger is the operation cost of the business. The business must operate in a sustainable way. For the business to operate in a sustainable way, there are some operation cost that the business must incur, which go a long way in affecting the cash flows and profits of the business (Harty, 1997, p.43). First, the Staples-Office Depot merger case will introduce heavy technology in the sector. With extensive use of technology, the level of efficiency and operational sufficiency in an organization is relatively increased. This causes easier delivery on the expectations of the customers thus the business will deliver better with technological advancement. This level of technology will be easy to attain with the size of the Staples-Office Depot merger. However, there organizations in the sector will be adversely affected by this, as they may not afford the technology applied by the merging entities. Due to this, they cannot compete effectively (Cabral, 2003, 617). The cost of product promotion and marketing will also increase with the merger in place. However, the other organizations may not cope with the change leaving the merger to dominate the competition and the market. When the other organizations find it hard to manage their advertisements, the merger will increase their level of share in the market thus create a solid monopoly with time. Other operational costs that will increase are the labor costs, as the other firms will have the pressure to expand and match the resources resulting from the merger. The costs to the customer face an uncertain future with the merger in place. It has a complete amnesty on what the customers will be charged. With the Staples-Office Depot merger involving two of the top three firms in the sector, there is a huge chance of a monopoly thus the firm will be more of a price setter than a price follower in the sector. This presents a two-sided scenario. First, the firm may lower the production costs to their lowest limit hence lower the selling prices to the consumers. Through this strategy, the consumers will buy at a lower price thus, they will hugely benefit from the merger. However, the other decision that the firm may take which appears increasingly likely, it trying to freeze the competitors out of the market. This will be facilitated by increasing the operational costs to make the competitors avoid the market (Budzinski& Christiansen, 2006). With such decisions, the operational costs will push the selling price for the commodities in the market higher. With higher selling prices, the customers will be on the receiving end, as they will not get favorable terms on their operations. This will cause disequilibrium in the market with demand likely to reduce as customers seek for alternative solution to the ever-expensive supplies. Areas of conflict and their econometric justification The Federal Trade Commission took to the district court to seek a fresh injunction on the merger due to various interest areas that were economically and econometrically safe according to the Federal Trade Commission. The first area was the area of monopoly in the supplies market. The commission argued against the interest of the merger that no organization should be allowed monopoly in the supplied market. The logic of this argument was that the market will affect many consumers with monopolistic forces significantly damaging the economy. Econometrically, the marginal cost for the merger will reduce significantly below all the other costs thus allowing the total cost to lower (Marcia, 2015). This is evident in the excitement of the investors who purchase stock of the company at friendly prices. The effect of this is that the regulated price weighs higher than the efficient price causing losses for the other companies in the sector (Hausman& Leonard, 1997). However, the monopoly sets its own prices thus lowering demand in the sector, as the monopoly price is higher than the regulated price as shown in the figure below. Image2: Effect of a monopoly on economic variables (Coppi& Walker, 2004) The second area of conflict was customer jurisdiction and econometric definition of the market in which the companies in the merger operated. The definition of the market by stock was found to favor the consumers as the supplies market was redefined to put the merger as a monopoly (Kwoka& White, 1997). This meant that the firm would enjoy exclusive economies of scale and operational rights in the sector. This move was viewed as ill informed and meant to harm the customers. The economists interpreted it as a move that could make the prices to skyrocket in the sector and block other firms from joining the sector. More so, the stock definition of a monopoly was taken as quickly appreciating with potential to close at very high prices as the investors look at the possible returns from the business. The stock for the merger stood at $9.48 on Friday, just short of its 52-week high of $9.77 (Baker, 2003, p.42). This shows the increased investment in the merger, which was considered economically unfriendly. Inquest into the merger also showed that prices were lower in areas where suppliers exceeded more than two mergers in economies with ideal monopolies. This meant that the definition of the merger as an entity that aimed at reducing consumer prices is unacceptable. The profit targets for monopolies are very high hence, they have to charge enough and cover the cost. That is shown through the concept of partial price discrimination as shown in the graph. Image 3: Partial price discrimination as per the merger (Kendall, 2015) Benchmark with the authority and relevant counterfactual When benchmarked against the economic laws and others that guide mergers across economic field, the intentions of the merger are correctly aligned to the goals of any economic policy. It aims at reducing the prices for the customers and making their choice range shorter in terms of customer experience. On their side, the merger hoped that they would gain through enjoying economies of scale in their operations and purchases. This meant that they could be able to sell at lower prices without incurring losses (Warren-Boulton&Dalkir, 2001, p.467). However, the Federal Trade Commission felt that this would hurt the other firms in the sector while it went further to find the merger as a monopoly. On the counterfactual, however, a different scenario is displayed both to the consumers and to businesses. In case the merger was not there, the customers would still demand the supplies although they would retail at higher prices according to the merger intentions. However, the Federal Trade Commission argues that the prices would actually be lower than the market price with one firm exclusively dealing in a product. In case the merger did not exist, the constituent firms could still operate although their operational costs would be higher than they are with the merger (Kwoka& White, 1997). The main aim for the merger was for the firm that would enjoy economies of scale in the course of its operations and trickle it down to the pricing strategies in order to help the consumers. However, the Federal Trade Commission argue that the economies of scale are helping the merger more than the other firms and the customers hence they did not meet their intentions (Mehler, 2000). The stock for the merger stood at $9.48 on Friday, just short of its 52-week high of $9.77. This shows the increased investment in the merger, which was considered economically unfriendly. Inquest into the merger also showed that prices were lower in areas where suppliers exceeded two than in economies with ideal monopolies. In such a case, the cost of entry for new firms is higher than the operational costs thus discouraging them. Conclusion Mergers are very risky to handle and first have to go through the legal procedures in order to certify that they do not break laws.. The market will face huge competition times with the merger as it unites the companies owning the largest share of the market. They will simply form an entity that is tasking to compete against hence the office-supply superstore chains market faces a huge test from the merger. When a company owns majority of the market share, it has the liberty to alter the prices and influence competitors to follow the trend. The office-supply superstore chains case gives the merger a chance to be exclusive price leaders in the market. However, there organizations in the sector will be adversely affected by this, as they will not enjoy the economies of scale and sophisticated technology and may end u going out of business. The cost of product promotion and marketing will also increase with the merger in place. Reference List Ashenfelter, O., Ashmore, D., Baker, J. & Gleason, S., 2006. Empirical methods in merger analysis: econometric analysis of pricing in FTC v. Staples. 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Wilke, J.R. & Pereira, J. 1997.Staples, huddling with OfficeMax, scrambles to save Office Depot merger, Eastern edition edn, New York, N.Y. Read More