10-30-09 - Economics 448 Class Notes Early and mid part of...

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Economics 448 – Class Notes – 10/30/09 Early and mid part of the 1920s Firms’ production costs were so low due to improvements in technology that trusts formed to control supply. Prices were really low and the firms needed to push prices up in order to avoid going out of business Clayton Act – a way to close loopholes in the Sherman Anti-trust laws U.S government started to realize that maybe there are efficiencies achievable through mergers Why do firms merge? 1. Reduce competition 2. Vertical integration - Reduce transaction costs 3. Replace management (in a poorly-run firm) important reason for mergers according to Henry Manne ************* IMPORTANT FOR THIS ARTICLE BY MANNE. o Install new management 4. To enter into a new market o Horizontal integration 5. Purchase a scarce input o Happens a lot in biotechnology EXAMPLE: Company A Company B Well-run Poorly-run Stock price will increase because it is so well- run Stock price will decrease because it is poorly run Turn-around specialist – “Wow, if I had all of company B’s resources, I could make a big profit” how could I take-over this company so that I can install BETTER management and make a profit Take-over specialist one who buys a poorly run company, installs new management, makes the company better
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How to take over a company (ACQUISITION): Direct purchase of shares o Open market purchase all shares at a price above the currently traded market price o Tender offer Make an offer at a specific price and quantity enough stock to take control of the company A price and quantity combination o Go to other large shareholders and try to purchase their shares in the stock keep it private UNTIL it’s necessary to reveal your position (that you are
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10-30-09 - Economics 448 Class Notes Early and mid part of...

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