How does competition forces that determine mergers and acquisitions influence products pricing? How does this influence affect a heavily reliant informal sector? Strathmore Business School’s senior faculty Dr. Simon Wagura Ndiritu, and an alumnus of the Master of Public Policy and Management, Patrick Chege recently published an article in the Emerald Insight, Journal of Agribusiness in Developing and Emerging Economies category.
The article titled; Effects of Mergers on Processed Milk Market in Kenya , uses the Canadian Competition Policy Merger Simulation Model to determine the effects of the mergers and acquisitions on market prices, consumer welfare, and aggregate profit of the merging firms and those of the non-merging firms. Therefore, answering the question on the overall effect of mergers and acquisitions on different performance measures on milk market using data from all the 34 licensed and active milk processors in Kenya.
Competition in the Dairy market in Kenya
Kenya’s per capita consumption of milk is among the highest in Africa. According to USAID (2013) report the dairy sector in Kenya accounts for about 14% of agricultural GDP and 6-8% of the Country’s Gross Domestic Product. The sector generates an estimated one million jobs at farm level, 500000 in the direct waged employment and 750000 opportunities for those in the support service. The dairy sector production in Kenya is characterized by a bigger number of small-scale farmers taking about 70-80% of the total production. With the emergence of the Kenya Cooperative Creameries (KCC), the sector has significantly developed. The main regions that produce the bulk of the milk in the country are the Rift Valley and Central Kenya. However, the Eastern, Nyanza and Western regions also produce significant quantities of milk. According to Kenya Agricultural Research Institute (KARI) (2013), of the total milk produced, about 60% is marketed through traders, cooperatives, hotels and kiosks.
According to the Techno serve Kenya (2008) report for the East Africa dairy development program, the competition in the dairy processing in Kenya was considered strong. In the year 2008 there were over 50 registered dairy processors but only 30 active one, 80% of the processed milk market was controlled by three large companies that were characterized by fierce competition.
The study found that mergers and acquisitions lead to increase in market shares of the merging firms. The study also found that mergers and acquisitions have a significant effect on product price in the processed milk market. From the findings, the study concludes that mergers and acquisition not only leads to increase in market shares of both merging and non-merging processed milk firms but also creates market dominance due to reduction in the number of market players in the industry.
The relationship between the change in price and the merger or acquisition taking place depends on the market share of the merging firms or the firm being acquired. The larger the size of the market share of the merging firms or the firm being acquired the bigger the change in product price.
It can also be concluded from the results of the study that mergers and acquisitions lead to increase in profits levels of the merging and non-merging firms. However, the merging firms records a higher profit than the non-merging firms due to low post-merger marginal cost recorded, while non-merging firms record high marginal cost. The higher the marginal cost of a firm the lower the profit and vice versa. This is a clear indication of cost leadership in the market by the biggest firms by directly lowering their marginal costs while at the same time increasing the marginal cost of their rival non-merging firms. This also bars other potential entrants from accessing the market and therefore, can be considered as a restrictive trade practice.
The results of the findings also show that there are benefits of being left outside as a non-merging rival as none of the non-merging firms recorded any loss after a merger or acquisition have taken
Arising from the result, the study recommends that there is need for all competition policy practitioners to carry out detailed analysis for proposed mergers or acquisitions before approval. Mergers and acquisitions have different effects on products based on the market and product definition. Therefore, a clear definition of the product market should be done before a merger or an acquisition analysis is done.