Northrise University

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ASSIGNMENT COVER SHEET

Student ID: 1905368

Student Name: Mercy Munalula

Course Code: FIN309

Course Title: Business Finance 2

Instructor Name: Mrs. Jessie Mwewa

Essay/Assignment Title: Discuss the differences between Horizontal, Vertical and Conglomerate mergers.
Are there any referred to divestitures in Zambia?

Due Date: October 24th, 2023

Declaration:
I acknowledge that submitting this document binds me to the following:
To the best of my knowledge, I assert that no part of this assignment has been copied from the work of anyone else, be it
another student or any other author or from any source except where due credit is given in the text below, or has been written
for me by someone else except where the relevant instructors and authorities have explicitly permitted such collaboration .

SIGNATURE: M. Munalula

Instructor’s Comments:

GRADE [ ]
Mergers and Acquisitions 2

Introduction

As defined by Mark (2017), a true merger involves two separate undertakings merging

entirely into a new entity. What is also important to note is that mergers under competition law

include a far broader range of corporate transactions than full mergers of this kind. An example

of this is in an instance where one company acquires the majority number of shares in another,

thus being able to control the affairs of that company. For example, in 2002, Zambian Breweries

PLC acquired the entire issued share capital of Zambia Bottlers. Such an instance would

normally be regarded as a takeover, but the Competition and Consumer Protection Act governs

this too under the definition of mergers. Therefore, this paper will discuss the three types of

mergers, how they differ from each other, the advantages and disadvantages of merges, and

finally the rationale behind merger control

Horizontal Mergers

A merger can be horizontal, vertical, or conglomerate. A horizontal merger is one that

takes place between competitors in the same product and geographical markets and at the same

level of production or distribution cycle (Mishra, 2011). According to Whish (2019), horizontal

mergers pose a greater danger to competition as opposed to vertical mergers. These types of

mergers may generate economies of scale and of scope; however, these types of mergers may

allow for market power to be wielded as it takes place between competitors at the same level.

This envisions a situation in which two independently powerful forces merge, and this may

significantly affect the competition in the industry as these powerhouses would acquire a

dominant position in the market. Horizontal mergers thus have the capacity of creating
Mergers and Acquisitions 3

monopolies and may lessen competition or just merely strengthen the dominant market share

held by the entity’s pre-merger.

Vertical Mergers

A vertical merger, on the other hand, is one that is between firms that operate at different

levels of the market. This is where one firm acquires control or merges with another firm on a

different level of the production or distribution cycle. This thus divides vertical mergers into two,

which is backward integration and forward integration. Backward integration is where an

enterprise acquires control of another enterprise further down the distribution chain, whereas

forward integration is where control of another enterprise further up the distribution chain is

acquired (Rose, 2003). According to Martin (2016, p.114), "Vertical mergers can make entry

more difficult by foreclosing rivals from previously independent firms at either the vertical level

or by increasing capital requirements associated with entry and by promoting product

differentiation. A vertically integrated oligopoly is insulated from competitive pressures that

come from vertically related, competitive levels. This makes oligopolistic output coordination

easier." Even though vertical mergers de-concentrate the market, there is the danger of limiting

competition in that, as pointed out by Martin (2016), vertical mergers may foreclose a market to

competition. Furthermore, vertical mergers have the capacity to change the pattern in which the

market operates.

Conglomerate Merger

A conglomerate merger is one that brings together firms that do not compete with each

other in any product market and which does not entail vertical integration. There are three main
Mergers and Acquisitions 4

types of conglomerate mergers: Product line extensions; this type of conglomerate merger is

where one firm, by acquiring another, adds related items to its existing items. Market extensions;

this is where the firms involved formerly sold the same products in different geographical

markets; and Pure conglomerates; this is where there is no functional link whatsoever between

the merged firms. Conglomerate mergers may affect competition in that they are likely to create

a monopoly, giving the merged firm an upper hand in the market (Rose, 2003).

According to Marks (2018), "conglomerate mergers, however, may lessen future

competition by eliminating the possibility that the acquiring firm would have entered the

acquired firm's market independently. A conglomerate merger also may convert a large firm into

a dominant one with a decisive competitive advantage, or otherwise make it difficult for other

companies to enter the market. This type of merger also may reduce the number of smaller firms

and may increase the merged firm's political power, thereby impairing the social and political

goals of retaining independent decision-making centres, guaranteeing small business

opportunities, and preserving democratic processes."

Advantages of Mergers

The advantages of mergers are to improve company performance and shareholder value

in the long term; they are often used as a tool to enhance profitability by expansion of operations.

Mergers and takeovers result in the boosting of economies of scale, greater sales revenue and

market share in the market, broadened diversification, and increased tax efficiency. Firstly,

mergers are aimed at boosting economies of scale. This entails that, "a firm will produce goods

at the lowest marginal cost where it is able to operate at the minimum efficient scale; if it

operates on a smaller scale than this, marginal cost will increase and there will be a consequent
Mergers and Acquisitions 5

loss of allocative efficiency. Economies of scale may enable a product to be produced more

cheaply or may result in lower overall costs (Rose, 2003).

Disadvantages of Mergers

As a result of increased market power, mergers and takeovers give companies the ability

to restrict outputs and raise prices (Mishra, 2011). A typical example of the role played by

dominant market power was pointed out in 2006 in relation to the sugar industry in Zambia. At

the time, the Zambia sugar industry had an oligopolistic market structure with three main

players, namely Zambia Sugar Plc, Kalungwishi Estates Limited, and Consolidated Farming

Limited. The market was highly concentrated, with Zambia Sugar Plc being the dominant firm

with a monopoly market share of 93.54%, Kalungwishi and Consolidated with a market share of

0.35% and 6.11% respectively. During this period, the Competition and Consumer Protection

Commission (then called the Zambia Competition Commission) noted that the industry was

characterized by exorbitant prices of sugar, periodic shortages of sugar, and frequent variation of

prices.

Why Should Mergers be Controlled by Statute

Merger control is carried out in the public interest. In considering a merger, it is

important to look into whether as a result thereof the market may be less competitive and

therefore be harmful to consumer welfare if the merger is allowed to proceed (Rose, 2003). For

example, in 2001, the then nationally-owned cement manufacturing company was privatized.

Chilanga Cement Company was the only cement-manufacturing firm in Zambia, and it had a

near-total monopoly share in the Zambian market. Lafarge Cement then made a bid to take over
Mergers and Acquisitions 6

Chilanga Cement Company through a regional acquisition. At the time of the bid to take over

Chilanga Cement, the cement market share in Zambia was 82 percent to Chilanga cement, 15

percent to PPC of South Africa, and 3 percent to Unicem of Zimbabwe. On the basis of the

competitive and public interest assessment of the transaction, it was recommended by the

Zambia Competition Commission secretariat that the Board of the Zambia Competition

Commission should not authorize the Lafarge takeover of the Chilanga Cement PLC.

Another concern is the unreasonable differences in retail prices in the southern and

northern parts of the country, which do not correspond to distance or transportation costs. From

this, it can be seen that merger control is very important as it ensures the protection of the

consumers as a whole. Merger control is also concerned with the maintenance of a competitive

market structure. According to Whish (2018), “merger control is not only about preventing a

merged entity from abusing its dominant position in the future, it is also about maintaining a

market structure that is capable of delivering the benefits that follow from competition law." It

should be noted that the Act does not prohibit the existence or the creation of monopolies per se;

the holding of monopoly power is not illegal so long as it was acquired legally.

Conclusion

Though mergers may be defined as the merging of two separate undertakings into one

new entity, it should be noted that under Section 24 (1) of the Act, these include a far broader

range of corporate transactions, including takeovers. The difference between a merger and

takeover is that a true merger involves the mutual decision of two companies; this can be seen as

a decision made between equals, a takeover, on the other hand, is characterized by the purchase

of a smaller enterprise by a much larger enterprise, the most influential factor here is that a
Mergers and Acquisitions 7

takeover does not necessarily have to be by consent, it may also be a hostile takeover. For a

merger, the two companies combine to become one, whereas for a takeover, one company called

the target company is purchased by another company.

Mergers and Acquisitions 8

References

Mishra, D. S. (2019, March 21). Predicting Corporate insolvency. pp. 1-5.

Martin S. Industrial Economies (2nd Edition). New York: Macmillan, 2015.

Marks, Mitchell Lee. Charging Back up the Hill: Workplace Recovery after Mergers,

Acquisitions, and Down-Sizings. San Francisco: Jossey-Bass, 2019.

Myers, G. Predatory Behavior in UK Competition Policy. OFT: London, 2010.

Seyuba, A (Corporate Affairs Director, Zambian Breweries). "Enforcement of Competition Law

after Privatization" Private Sector Perspective. Paper Presented at the Regional

Conference on Competition, Competitiveness, and Investment in the Global Economy

(May 2004).

Whish, R. Competition Law (5th Edition). London: LexisNexis, 2018.

WIPO Intellectual Property Hand Book: Law, Policy and Use.

Zambia Competition Commission, Draft report on the Zambian Sugar Industry regarding the

pricing of Industrial sugar on the market, Lusaka, 2006.

Mergers and Acquisitions 9