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Finally, the acquisition of a competitor may increase market share and allow the merged firm to
charge higher prices. By itself, this motive is not valid justification for initiating a merger, and any
deal done solely to garner monopolistic power would be challenged by global regulators on antitrust
grounds. However, market power may be a by-product of a merger done for other reasons. The XM-
Sirius merger was a matter of financial survival, as neither company had the critical mass of
subscribers needed to become profitable. The resultant near-monopoly market share of the merged
corporation was a by-product of the economic reality.
Cost Reductions
Improved efficiency from cost savings is one of the most often cited reasons for mergers. This is
especially true in the banking industry, as the 2000 merger between JPMorgan and Chase Manhattan
makes clear.
The key to executing the merger, say analysts, will be how quickly Chase can trim its expenses. It
plans to save $500 million through job cuts, $500 million by consolidating the processing
systems of the two institutions and $500 million by selling off excess real estate. In London, for
example, the two banks have 21 buildings, and they won‟t need all of them.
—Wall Street Journal, September 21, 2000, C22
In total, there was an estimated $1.5 billion of annual savings. The link between this and value
creation is easy for investors to understand, and the benefits from cost reductions are relatively easy to
quantify. These benefits can come from economies of scale, vertical integration, complementary
resources, and the elimination of inefficient management.
Economies of scale result when a certain percentage increase in output results in a smaller increase
in total costs, resulting in reduced average cost. It doesn‟t matter whether this increased output is
generated internally or acquired externally. When the firm grows to its optimal size, average costs are
minimized and no further benefits are possible. There are many potential sources of economies of
scale in acquisitions, the most common being the ability to spread fixed overhead (e.g., corporate
headquarters expenses, executive salaries, and the operating costs of central computing systems) over
additional output.
Vertical integration acquisitions can reduce costs by removing supplier volatility, by reducing
inventory costs, or by gaining control of a distribution network. Such benefits can come in any
industry and for firms of all sizes. Waste Systems International, a regional trash hauler in the United
States, acquired 41 collection and disposal operations between October 1996 and July 1999 with the
goal of enhancing profitability.
The business model is fairly straightforward. Waste Systems aims to own the garbage trucks that
pick up the trash at curbside, the transfer stations that consolidate the trash and the landfills