Horizontal Mergers and Acquisitions

Mergers and acquisitions during the 1980s gained notoriety in the press as corporate raiders, such as Carl Icahn, purchased companies and then sold off their component parts. The raiders justified their activities by saying that they forced companies to be more competitive, and that companies which were effectively run and profitable would not be subject to divestiture. Nonetheless, mergers and acquisitions activity took a severe public relations beating during that time.

The case of American Stores and Lucky Stores, which took place during the late 1980s, is an example of how horizontal mergers and acquisitions were also taking place during the 1980s. When American Stores moved to purchase Lucky, it did not do so in order to sell off Lucky; indeed, some of the management concepts in place at Lucky would later be incorporated at American Stores. Instead, the merger between these two supermarkets represents the traditional merger where competitors come together in order to realize economies of scale and to cement their collective standing in the market.

The supermarket industry is characterized by regional chains and low profit margins. Competition is intense, and barriers to entry in a particular market can be significant because of the capital resources required to enter a new geographic area. Land must be purchased (or leased), distributors found for products, and new relationships formed with suppliers. It is easier for companies to enter a new market by forming an a

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would not sell off underperforming assets, or take advantage of undervalued real estate assets which Lucky may bring to the partnership. The merger and associated cost may also mean that American Stores would also re-evaluate its own holdings and sell off those assets which are not performing well within its former organization. Certainly the company must be able to show a profit within a short period of time to maintain the satisfaction of stockholders, and the high price that the company paid for Lucky brings additional pressure to management. The merger of Lucky and American Stores represents a merger of two competitors who both gain from the transaction. Lucky and American both increase their market share as a result of the transaction, and the combined company can realize economies of scale both in purchasing and in manufacturing which would have been impossible to realize on their own. At the same time, American Stores can benefit from the management techniques used by Lucky, and Lucky may bring undervalued assets to the combined organization which can be used to increase the net value of the company. The question which remains is whether American can justify the high price it paid for Lucky, or whether the price will

Category: Business - H