Baby-Food Makers Heinz, Beech-Nut Call Off Merger Following Court RulingWall Street Journal 27apr01U.S. Court Injunction Impedes H.J. Heinz in Bid for Beech-NutWall Street Journal 9nov00FTC Aims to Block Heinz's Bid For Beech-Nut Baby-Food ProductsMichael Schroeder and Jonathan Eig / Wall Street Journal 10jul00Econ 601: Managerial EconomicsDr. Shawkat HammoudehDiscussion # 2: Mergers in the Baby Food IndustryQuestions for Discussion1. Specify the market shares of the three firms in this industry. Ho much is C3 in thiscase?2. What is the shelf presence in all grocery stores for each of these companies?3. What is the HHI for the baby food industry? What does it say about the baby foodindustry? How many points would the merger increase HHI? How would government see this merger?“The FTC and DOJ have established Merger Guidelines. See http://www.ftc.gov/bc/docs/horizmer.htmAn extract for this case is:The U.S. Department of Justice ("Department") and Federal Trade Commission ("Commission") today jointly issued Horizontal Merger Guidelines revising the Department's 1984 Merger Guidelines and the Commission's 1982 Statement Concerning Horizontal Merger Guidelines. The release marks the first time that the two federal agencies that share antitrust enforcement jurisdiction have issued joint guidelines.c) Post-Merger HHI Above 1800. The Agency regards markets in this region to be highly concentrated. Mergers producing an increase in the HHI of less than 50 points, even in highly concentrated markets post-merger, are unlikely to have adversecompetitive consequences and ordinarily require no further analysis. Mergers producing an increase in the HHI of more than 50 points in highly concentrated markets post-merger potentially raise significant competitive concerns, depending on the factors set forth in Sections 2-5 of the Guidelines. Where the post-merger HHI exceeds 1800, it will be presumed that mergers producing an increase in the HHI of 1more than 100 points are likely to create or enhance market power or facilitate its exercise. The presumption may be overcome by a showing that factors set forth in Sections 2-5 of the Guidelines make it unlikely that the merger will create or enhance market power or facilitate its exercise, in light of market concentration and market shares.”"Prof. John Kwoka of Northeastern University presented the following information at the FTC/DOJ workshop on merger enforcement in 2004.Based on the the FTC/DOJ data on mergers between 1999 and 2003 that were subject to agency challenge, several inferences can be drawn:• Few mergers with HHIs less than 2000 are challenged. The lowest HHI for any challenged merger is said to be about 1400. The median HHI among these 1263 reported markets is approximately 4500.• Few mergers with changes in HHI less than 300 are challenged. The smallest change in the data base is said to be 85. The median change is approximately 1200.• More than three-fourths of all challenged mergers (991 out of 1263) involve markets with HHIs in excess of 2400 and simultaneous changes that are in excess of 500.• These values vary by industry. Breakouts for the dairy, grocery, petroleum, telecommunications, banking, pharmaceutical, waste disposal, and other industries reveal significant differences in the frequency of challenge by HHI and changes in HHI.Prof. Kwoka also developed the following equation to estimate the probability of an enforcement action against the merger. For this case, the probability of enforcement against was about 69%.PROB = 41.2 + .00575 HHI + .00850 ÄHHIwww.usdoj.gov/atr/public/workshops/docs/202602.htm" 4. There are three arguments that make up the anticompetitive arguments against themerger? What are they? (hint: own document?)5. At the wholesale level the competition is tough and “fierce”. What are fixed and variable trade spendings? Who receives the manufacturer’s coupons? What’s their purpose?6. How many options did Heinz consider to end the competition with Beechnut?7. Why did Heinz choose this option….? 8. Heinz used at least three arguments to support the merger. What are they? (C, E &I)29. Heinz produces at 40% of its capacity. How can Heinz use this to argue in supportof the merger? Can the cost of production (variable conversion cost) at Beech-Nutbe reduced after the merger? Explain. How can Heinz and Beech-Nut use “innovation” to defend the merger? Is this a good defense? What is ACV? What isthe cutoff point cited by Heinz?10. If the merger goes through, are there factors that are conducive to “price/output coordination”?11. Did the merger go through? Who was the public prosecutor?Baby-Food Makers Heinz, Beech-Nut CallOff Merger Following Court Ruling Wall Street Journal 27apr01WASHINGTON -- H.J. Heinz Co. has called off its $185 million acquisition of Milnot Holding Co.'s Beech-Nut after a U.S. Court of Appeals temporarily blocked the proposed combination of the nation's No. 2 and No. 3 baby-food makers on antitrust grounds.Heinz said it will have to re-evaluate its U.S. infant-food strategy in the wake of Friday's decision and added that it is keen on remaining a global leader in the category. "Infant feeding is a billion-dollar global business for Heinz," Heinz Chairman, President and Chief Executive William R. Johnson said in a written statement. "Half of the world's infant foods are still home-prepared, which represents significant upside opportunity for strong global brands like Heinz."Last summer, the Federal Trade Commission voted 3-2 to file a preliminary injunction blocking Pittsburgh-based Heinz's acquisition of the unit of Milnot, a closely held company whose headquarters are in St. Louis. The agency said it was concern that the combination could violate federal antitrust laws by reducing the number U.S. baby-food marketers from three to two.3Combined, Heinz and Beech-Nut would control 25% to 30% of the market. Fremont, Mich., baby-food maker Gerber Products Co., a unit ofSwitzerland's Novartis AG, controls 70% of the market.But the U.S. District Court for the District of Columbia denied the FTC's request for the injunction, pending conclusion of the agency's investigation. The court said the merger will increase competition in jarred baby food.The appeals court disagreed, however, saying the FTC raised questions"so serious, substantial, difficult and doubtful" that an injunction was warranted pending final determination by the agency.The FTC has said that a merger would