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Competition and Corporate Control in Partial Ownership Acquisitions

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Abstract

Competition authorities have a growing interest in assessing the effects of partial ownership arrangements. We show that the effects of such agreements on competition and welfare depend on the intensity of competition in the market and on the firms’ governance structure. When assessing the effects of partial ownership, competition policy has to consider both the financial interest and level of control of the acquiring firm in the target firm.

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Notes

  1. In the European Union, it is moreover discussed whether or not to extend the scope of the merger regulation to consider non-controlling minority acquisitions; See http://ec.europa.eu/competition/consultations/2013_merger_control/index_en.html.

  2. We only consider acquisitions of neighboring firms because in case of non-neighboring acquisitions the result is clear. Since prices of non-neighboring firms do not affect the own demand, there is no strategic effect on pricing. Therefore, if firms simultaneously choose prices, a merger is always more profitable than a partial acquisition. This may differ is other settings, for example, where the new entity takes a price-leader position.

  3. We also assume full corporate control in order to compare our result to the results obtained by Foros et al. (2011).

  4. Annex I to the Commission staff working document “Towards more effective EU merger control”, p. 8; http://ec.europa.eu/competition/consultations/2013_merger_control/.

  5. In line with Foros et al. (2011), we assume that firms choose the best offer to maximize profits of maxβ(π1+π2) rather than maxβ(π1 + βπ2). Thus, we also assume firms to choose an ownership stake to maximize joint profits, where the shareholders of Firm 2 will be compensated if the individual profit of Firm 2 decreases. We follow the assumption by Foros et al. (2011) to compare our result to their results.

  6. Technically, \(\frac {\partial p_{3}}{\partial \beta }<0\) and \(\frac {\partial p_{n}}{\partial \beta }>0\) for β not too small.

  7. Together with the best-response function of Eq. 7 this implies that \(|\frac {\partial p_{3}}{\partial \beta }|>|\frac {\partial p_{n}}{\partial \beta }|\) because \(\frac {\partial p_{3}}{\partial p_{2}}=\frac {\partial p_{n}}{\partial p_{1}}=\frac {1}{4}\) (see Eq. 7).

  8. See, e.g., Unilever/Sara Lee (Case COMP/M.5658 Unilever/Sara Lee Body Care).

  9. The case of γ = 1 replicates the previous analysis of Section 2.

  10. Implicitly, we assume that γ(β) = 0| β = 0. This assumption seems reasonable because when Firm 1 does not own any stake in Firm 2, it should also have no control over Firm 2. As argued above, we do not necessarily assume that γ(β) = 1| β = 1 because not all assets might come with voting rights.

  11. In a market with three firms, Firm 3 faces countervailing incentives. On the one hand, it follows that \(\frac {\partial p_{3}}{\partial \beta }>0\) for small β because of \(\frac {\partial p_{1}}{\partial \beta }>0\), but on the other hand, it follows that \(\frac {\partial p_{3}}{\partial \beta }<0\) because of \(\frac {\partial p_{2}}{\partial \beta }<0\). The latter effect dominates for a sufficiently large β.

  12. For details see A. Joint profit of \({\Pi }_{1}^{\ast }+{\Pi }_{2}^{\ast }\) are maximized for β < 1 only if γ > 0.913, otherwise, joint profit is maximized at β = 1.

  13. If α < 0, the goods are strategic substitutes. It is then well known from the literature that neither a merger nor partial ownership may be profitable, see, e.g., Salant et al. (1983) and Kamien and Zhang (1990).

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Authors and Affiliations

  1. Universität Münster, Center for Applied Research in Economics Münster, Am Stadtgraben 9, 48143, Münster, Germany

    Torben Stühmeier

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  1. Torben Stühmeier
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Correspondence to Torben Stühmeier.

Appendix: Corporate Control

Appendix: Corporate Control

In stage 2, the firms maximize prices according to

$$\begin{array}{@{}rcl@{}} \max\limits_{p_{1}} {\Pi}_{1}+\beta {\Pi}_{2} \end{array} $$
(26)
$$\begin{array}{@{}rcl@{}} \max\limits_{p_{2}} \gamma \left( {\Pi}_{1}+\beta {\Pi}_{2} \right)+\left( 1-\gamma\right){\Pi}_{2} \end{array} $$
(27)
$$\begin{array}{@{}rcl@{}} \max\limits_{p_{3}} {\Pi}_{3} \end{array} $$
(28)

yielding equilibrium prices of

$$\begin{array}{@{}rcl@{}} p_{1}^{\ast} &=& \frac{10t(\beta\gamma(4+\gamma)+\beta+5(1-\gamma))}{\Omega} \end{array} $$
(29)
$$\begin{array}{@{}rcl@{}} p_{2}^{\ast} &=& \frac{10t(5(1+\beta\gamma)-4\gamma)}{\Omega} \end{array} $$
(30)
$$\begin{array}{@{}rcl@{}} p_{3}^{\ast} &=& \frac{2t(25(1-\gamma)+24\beta\gamma)}{\Omega} \end{array} $$
(31)

with Ω = 50 − 55γ − 5β + β γ(51 − 5β).

Lemma 1 follows from the observation that \(\frac {\partial p_{3}}{\partial \beta }<0\) only if \(\gamma >\tilde {\gamma }=\frac {5}{9-4\beta }\).

Inserting equilibrium prices, in stage 1 the firms decide on the optimal ownership stake in order to maximize joint profits of

$$ {\Pi}_{1}^{\ast}+{\Pi}_{2}^{\ast}\,=\,\!\frac{50(\gamma^{2}(102-3\beta^{4}+98\beta^{2}-201\beta)-\gamma(205+6\beta^{3}+5\beta^{2}-200\beta)-3\beta^{2}-5\beta+100)}{27(\gamma(5\beta^{2}-51\beta+55)+5\beta-50)^{2}}. $$
(32)

It turns out that joint profits are maximized under partial ownership only if γ > 0.913, i.e., \(\frac {\partial ({\Pi }_{1}^{\ast }+{\Pi }_{2}^{\ast })}{\partial \beta }=0\) for β ∗<1 only if γ > 0.913, otherwise, the firms prefer a merger.

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Stühmeier, T. Competition and Corporate Control in Partial Ownership Acquisitions. J Ind Compet Trade 16, 297–308 (2016). https://doi.org/10.1007/s10842-016-0218-z

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  • DOI: https://doi.org/10.1007/s10842-016-0218-z

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