Minority share acquisitions of a firm by a direct competitor reduce competition and raise prices, many of the same effects as a full takeover, according to a new study from the Tippie College of Business.
Amrita Nain, assistant professor of finance, says that minority share acquisitions are helpful to both firms involved in that they provide numerous operating advantages—they can share technologies and develop joint products, for instance, and reduce costs through efficiencies.
But her study suggests they have many of the same anti-competitive downsides as full takeovers by driving up prices. Yet, she says partial takeovers generally don’t get the intense anti-trust scrutiny from federal regulators as full takeovers to ensure the merger doesn’t lead to less competition and increased prices.
In her study, Nain looks at 774 acquisitions in the U.S. manufacturing industry between 1980 and 2010 in which less than 50 percent of the target’s equity is acquired. She then looked at prices and costs in those industries during ensuing periods and found that prices increased by 2 percent while profit margins increased by 0.7 percent, suggesting that even partial acquisitions increase prices.
Moreover, the study found that when partial acquisitions were announced publicly, the stock prices across the merging firms’ industries jumped as investors anticipated higher prices and higher profits even from competitors. Meanwhile, the stock prices of the merging firms’ customers dropped, as investors anticipate they would have to pay higher prices for products purchased from a less competitive industry.
However, Nain notes that despite the anti-competitive aspects of these types of deals, they are rarely scrutinized by regulatory agencies. Of the 774 deals in the sample only seven—less than 1 percent—were challenged by the Federal Trade Commission or the Department of Justice.
Nain says that anti-trust authorities should approach minority share acquisitions as they do full mergers and carefully weigh efficiency gains against the negative impact the acquisition may have on competitiveness.
Nain’s study, “The Product Market Impact of Minority Stake Acquisitions,” was co-authored by Yan Wang of the Rotterdam School of Management and will be published in a forthcoming edition of the journal Management Science.