Question

Based only on the knowledge that the premerger market share of two firms proposing to merge was 30 percent each, an economist working for the Justice Department was able to determine that, if approved, the postmerger HHI would increase by 1,800. Which of the following equations is a general rule explaining how the Herfindahl-Hirschman index is affected when exactly two firms (Firm i and Firm j) in the market merge, where Si is the market share of firm i and Sj. is the market share of firm j? (Hint: Compare a2 + b2 with (a + b)2.)

Answer 1

Answer:

A merger is an agreement that unites two existing companies into one new company. There are several types of mergers and also several reasons why companies complete mergers. Mergers and acquisitions are commonly done to expand a company's reach, expand into new segments, or gain market share.

When firms merge together, we have a synergy effect.

A synergy arises in a merger or acquisition when the combined value of the two firms is higher than the pre-merger value of both firms combined. For example, if firm A has a value of $500M, firm B has a value of $75M, and the merged firm has a value of $625M, there is a $50M synergy for this merger.

Synergy effect explains 2(a + b) can be greater than 2a + 2b. 2a + 2b is the market share of the two companies before merger which is $500m + $75m = $575m compared against the newly formed company's value after merger which is $625m. The synergy effect is additional $50m.

This is caused by cost reductions, due to efficiencies in the newly combined firm. Alternatively, they may arise due to new net incremental revenues brought about by the merged firm.