CASE STUDY

Case Study



Case Study

Introduction

Mergers and acquisitions enable companies to pool assets for creation of value. In order to gain more control and increase the value for business, mergers and acquisitions require solidifying the activities in a given industry. Success of M&A depends on how well a company consolidates the operations in the market. Tactical fit concern of M&A is to seek profit in the short term, to acquire a company with the objective of increasing its value and then selling it at a higher price. The common factor in both cases is the stimulus that adds value to the acquired company. This paper analyzes a case of business acquisition in light of Australian law. The paper first presents the key point of the case and then explains why this acquisition does not violates any provisions of Consumer and Competition Act 2010.

The Case:

The 'Australian Competition and Consumer Commission' has just applied for a divestiture of a merged entity 'WheatMax Limited' that has acquired FruitWheats Pty Ltd. According to the commission the acquisition is likely to substantially affect competition. The Commission also holds the view that this acquisition is likely to initiate an anti-competitive force in the market for cereals. The merged entity already had the largest market share in terms of sales and volume. Other manufacturers, however, had similar market shares. The commission believes that the divestiture claim is valid and that the merger disposal is executable under s.81 of the Competition and Consumer Act 2010. To put a simple picture of the market structure, and to analyse the potential anti-competition threat, we first review the market structure of the product under review. The following table presents the market case as it existed prior to the acquisition:

Cereal Manufacturers

Market Share (%)

WheatMax Limited

40

FruitWheats Pty Ltd

15

Cracklin Rice

15

FruitNuts

15

Oat Bran Surprise

15

Total

100

After the acquisition, the market shares of the different competitors in the cereal market would appear like one given in the table below

Cereal Manufacturers

Market Share (%)

WheatMax Limited (merged entity)

55

Cracklin Rice

15

FruitNuts

15

Oat Bran Surprise

15

Total

100

Other information relating to the case is enumerated as under;

Most firms in the industry make a wide variety of other snack goods, cakes, pastries and biscuits.

The same equipment used for manufacturing processes such as flaking, puffing, extruding, granulation and shredding ready-to-eat cereals can also be used in making snack foods, cakes, pastries and biscuits.

FruitWheats was in decline before the acquisition due to a number of factors including the consumer movement to new, tastier and more complex products, lack of effective advertising, lack of successful product innovations and quality problems.

Ready-to-eat cereal manufactures sell their cereals to retailers, not to consumers.

Retailers typically classify ready-to-eat cereals in one category with hot cereals, such as porridge, granola and other instant breakfast products. Retailers buy large amounts of ready-to-eat cereals (80-90%) pursuant to discounts that cereal manufacturers regularly offer as incentives to retailers.

The retailers decide independently how and when to pass on trade deal savings to its customers.

Shelf space is generally restricted to a few leading brands who are prepared to offer the ...