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Industrial Organisation 2022

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Question:

The motives for horizontal mergers are many. What does the non profit maximization motive regard?

Author: Hjalmer Pedersen



Answer:

In large modern companies ownership and control often separated (Berle- Mean). Eg. listed companies with many owners, and perhaps weak boards. Often, management will choose a combination of revenue maximization subject to a profit maximization constraint. However, the managers goals might differ from the owners. This can be seen in Williamson’s managerial utility maximization model (See pic) Weak owners and boards might have difficulties controlling management; hence management might be running the firm suboptimal as shown in the figure above. This leads to a threat of being acquired by other firms in the market, as they believe the firm is worth more with the right management. A takeover is likely if the difference between the acquirer's acquisition costs are less than the potential benefits of the acquisition. However, there are still a lot of acquisition costs to consider: Legal costs, stock options for employees to be bought out, severance costs, warranties for employees.


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In large modern companies ownership and control often separated (Berle- Mean). Eg. listed companies with many owners, and perhaps weak boards.

Often, management will choose a combination of revenue maximization subject to a profit maximization constraint. However, the managers goals might differ from the owners.

 This can be seen in Williamson’s managerial utility maximization model (See pic)

Weak owners and boards might have difficulties controlling management; hence management might be running the firm suboptimal as shown in the figure above.

This leads to a threat of being acquired by other firms in the market, as they believe the firm is worth more with the right management. 

A takeover is likely if the difference between the acquirer's acquisition costs are less than the potential benefits of the acquisition. However, there are still a lot of acquisition costs to consider: Legal costs, stock options for employees to be bought out, severance costs, warranties for employees.
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