Economics

Study Notes

Do takeovers improve economic efficiency?

Last updated 21 Mar 2021

A study note looking at some of the arguments for and against the statement that takeovers help to improve economic efficiency.

Key points:

Many takeovers are driven by managerial motives
Most mergers / takeovers are cleared on competition grounds – but the Three-O2 Merger was blocked by European Commission (May 2016)
Market structure following a takeover is perhaps less important than the actual behaviour of firms in terms of pricing, non-price competition etc.
Horizontal integration is most likely to raise concerns about the concentration of market power
But most industries are contestable with a threat of fresh competition + some disruptive smaller entrants

Arguments in support - benefits from takeovers

Economies of scale from horizontal integration (productive efficiency)
Higher supernormal profits lead to increased R&D spending and more innovation (dynamic efficiency)
Firms with monopoly power still face competition in contestable markets (charging allocatively efficient prices)

Counter-arguments

Increased market power can lead to X-inefficiency (managerial slack, waste)
Risks of diseconomies of scale (rising long run AC)
Many takeovers fail to achieve forecast cost gains
Growing number of de-mergers points to limited impact of takeovers on overall economic efficiency