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Beech Nut Case

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Submitted By adrian04
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Proposed Merger Between Heinz and Beech-Nut

6/16/2012

EMT 606 - Heinz - Beech-Nut Merger Case

1

Is the Merger necessary to develop efficiency ?
Supporting Argument #1
Efficient plants & efficient distribution system

Better Recipe Saving in terms of operating costs and salary expenses between 9.4 million to 12 million.
6/16/2012 EMT 606 - Heinz - Beech-Nut Merger Case 2

Is the Merger necessary to develop efficiency ?
Flaws in argument

Heinz could achieve the efficiency of merger without eliminating Beach Nut as competitor. Although beach nut has inefficient distribution system , it can enhance it without merger.
6/16/2012 EMT 606 - Heinz - Beech-Nut Merger Case 3

Is the Merger necessary to develop efficiency ?
Supporting Argument #2

G -100%

Heinz -40%

Beech-Nut – 45%

Lacks a sufficient shelf presence or All Commodity Volume (ACV). Heinz and Beech-Nut claim new product launches are cost-effective only when a firm's ACV is 70% or greater
6/16/2012 EMT 606 - Heinz - Beech-Nut Merger Case 4

Is the Merger necessary to develop efficiency ?
Flaws in argument
All that the chart plotted was revenue against ACV ,Because the graph did not plot the profitability , does not prove that 70% ACV is required for a launch to be "successful" in an economic sense. The number of data points on the chart was few; they were limited to launches in a single year. They involved launches of all new grocery products rather than of baby food alone.
6/16/2012 EMT 606 - Heinz - Beech-Nut Merger Case 5

Arguments Supporting AntiCompetitiveness of Merger
Pre-Merger
Company Gerber Heinz Beech-Nut Other Total Market Share 65% 17.4% 15.4% 2.2% 100% HHI 4225 303 237 5 4772

Post-Merger
Company Gerber Heinz & Beach-Nut Other Market Share 65% 32.8% 2.2% HHI 4225 1075 2

Total

100%

5302

Increase in HHI = 535
6/16/2012 EMT 606 - Heinz - Beech-Nut Merger Case 6

Arguments Supporting AntiCompetitiveness of Merger
Eliminate the wholesale level competition between H and BN
3 -> 2 merger results in duopoly

High Entry barrier market with high HHI
H & G can collude and exercise market power H and BN may stop innovating for new product as they no longer have to compete with each other
6/16/2012 EMT 606 - Heinz - Beech-Nut Merger Case 7

Heinz Arguments for After Merger Scenario
Wholesale market competition does not impact consumer price
Both H and BN are not in the same market at the same time so it is not 3 -> 2 merger Higher competition with Gerber will benefit customer

Higher ATC will help H and BN to launch new product in broad market
6/16/2012 EMT 606 - Heinz - Beech-Nut Merger Case 8

Merger TimeLine
Feb 28, 2000 H agreed to acquire BN
July 7th 2000 FTC voted, 3 to 2 to seek preliminary injunction to prevent the merger

District court denied the FTC’s request on October 18, 2000
FTC appealed again on April 27, 2001 and appellate court reversed the decision of the district court
6/16/2012

H & BN abandoned the merger agreement
EMT 606 - Heinz - Beech-Nut Merger Case

9

Change in Ownership Since 2000

6/16/2012

EMT 606 - Heinz - Beech-Nut Merger Case Source: http://www.ftc.gov/be/workpapers/wp297.pdf

10

Market Share/Price since 2000
Market Share

Average Price 16oz Jar

No significant Price change
HHI (802 + 122 + 62 + 22) = 6584 (higher than predicted after merger HHI)
6/16/2012 EMT 606 - Heinz - Beech-Nut Merger Case 11

Source: http://www.ftc.gov/be/workpapers/wp297.pdf

Conclusion
Overall baby food market is stable in last 30-40 year
It is hard to analysis situation what could have happen if Merger was successful in 2000 Industry is highly concentrated with Gerber having 80% market share Prices are still at the same level where it was in 2000 Only one more firm entered into the market and Heinz exited the baby food market
6/16/2012 EMT 606 - Heinz - Beech-Nut Merger Case 12

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