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

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