210 Part 2: Strategic Actions: Strategy Formulation
7-2a Increased Market Power
Achieving greater market power is a primary reason for acquisitions.^15 Defined in Chapter 6,
market power exists when a firm is able to sell its goods or services above competitive levels
or when the costs of its primary or support activities are lower than those of its competi-
tors. Market power usually is derived from the size of the firm, the quality of the resources
it uses to compete, and its share of the market(s) in which it competes.^16 Therefore, most
acquisitions that are designed to achieve greater market power entail buying a competitor,
a supplier, a distributor, or a business in a highly related industry so a core competence can
be used to gain competitive advantage in the acquiring firm’s primary market.
Next, we discuss how firms use horizontal, vertical, and related types of acquisitions
to increase their market power. Active acquirers simultaneously pursue two or all three
types of acquisitions in order to do this. Evidence suggests, for example, that Amazon
“for years has been expanding the scale and scope of its operation, both horizontally and
vertically.”^17 These three types of acquisitions, and proposed mergers as well, are subject
to regulatory review by various governmental entities. Sometimes these reviews bring
about the dissolution of proposed transactions. In 2015 for example, Comcast abandoned
its effort to acquire Time Warner for $45.2 billion in light of opposition to the transaction,
primarily from the U.S. Department of Justice.^18Horizontal Acquisitions
The acquisition of a company competing in the same industry as the acquiring firm is a
horizontal acquisition. Horizontal acquisitions increase a firm’s market power by exploit-
ing cost-based and revenue-based synergies.^19 Horizontal acquisitions occur frequently in
the pharmaceutical industry. An indication of this is the fact that, in the first few months
of 2015, intended or completed horizontal acquisitions reached a combined value of
roughly $180 billion. With respect to a specific firm, Mylan N.V. became the second larg-
est generic drug seller in the United States by acquiring a number of firms in its industry
over the past few years.^20 Research suggests that horizontal acquisitions result in higher
performance when the firms have similar characteristics,^21 such as strategy, managerial
styles, and resource allocation patterns. Similarities in these characteristics, as well as pre-
vious alliance management experience, support efforts to integrate the acquiring and the
acquired firm. Horizontal acquisitions are often most effective when the acquiring firm
effectively integrates the acquired firm’s assets with its own, but only after evaluating and
divesting excess capacity and assets that do not complement the newly combined firm’s
core competencies.^22Vertical Acquisitions
A vertical acquisition refers to a firm acquiring a supplier or distributor of one or more
of its products. Through a vertical acquisition, the newly formed firm controls addi-
tional parts of the value chain (see Chapter 3),^23 which is how vertical acquisitions lead to
increased market power.
Through vertical integration, a firm has an opportunity to appropriate value being
generated in a part of the value chain in which it does not currently compete and to better
control its own destiny in terms of costs and access. These factors influenced Delta Air
Lines’ decision in 2012 to purchase a refinery.^24 Owning access to a source of what could
become jet fuel reduces the likelihood that a raw material critical to the firm’s operations
would become unavailable to it or that Delta would be subjected to market forces in
terms of having access to the raw material. Identical logic explains Italian confectionary
giant Ferrero’s purchase of Oltan Gida, Turkey’s largest hazelnut company, because having
ready access to a steady flow of a key ingredient at an attractive price has the potential to
positively affect the firm’s efforts to earn above-returns.^25