What is a good strategy when you are in a two-firm oligopoly market and your share is much smaller than that of the competitor’s? Being that it would be very difficult (legally) to merge with the only other competitor (as we see with XM and Sirius), you can merge with a similar firm to increase economies of scale, innovation, and profits. This is exactly what AMD did on October 24th 2006. The transaction involved a $5.4 billion purchase of ATI in what can be considered a Horizontal Merger. ATI basically shares the high-end GPU (graphics processing unit) market with NVIDIA, its main competitor. Even though ATI and AMD produce different products, they will benefit from decreasing costs in R&D, materials, and overall PPE (property, plant and equipment).
The main reason this merger was accepted is because Intel holds a much larger share of the CPU (central processing unit) market than AMD; they had sales in 2006 of $31.5 billion and $7.5 billion respectively. AMD wants to create a physical integration called “Fusion” between its CPU and newly acquired GPU unit’s. This is a large technological step in the computing world, because it will be the first integrated CPU/GPU system in the market. The merger is healthy for competition because it will create an incentive for Intel to come up with a similar technology and then a subsequent price war between the two which benefits consumers, “AMD believes that these integrated platform innovations will bring customers improved system stability, better time-to-market, increased performance and energy-efficiency and overall, an enhanced user experience.”
In sum, this merger will help advance computing technology which leads to more R&D, and thus, more competitiveness in the market; not to mention (probable) higher profits for the AMD/ATI combo.
Adam, Amy, Braden and Fabio.
1 comment:
This is a really interesting case to analyze from the point of view of the Merger Guidelines. If the merger is to be considered a horizontal one, and thus subject to greater scrutiny by the folks at the FTC, it must be because (and I know nothing about technology so bear with me) the GPUs that ATI was producing and the processors and other items produced by AMD were thought to be in the same market. Or in MG lingo, in AMD were acting as a monopolist and instituted a "small but significant and non-transitory increase in price," normally thought to be about 5%, people would begin switching to ATI's products, so they must be included in the market.
Then, once you establish that ATI and AMD produce items in the same market, you look at the expected increase in the HHI as a result of the merger. I imagine that this did not present much of a hurdle for the companies. Although the merger occurred in an already concentrated industry, where mergers automatically "raise significant competitive concern," the increase to the HHI fom two small companies merging was probably negligible.
Nice blog guys!
-Helen, Katie, JungIn, Pam
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