Concentration of entrepreneur

Concentration of entrepreneurs is a natural economic phenomenon that does not interfere – in principle – with competition in the market. As a result, entrepreneurs have a chance to strengthen their market position, e.g. by increasing their market share or expanding their offer to new markets. Business consolidation can also have a number of positive effects on functioning of the entire economy and on all consumers i.a. thanks to increased availability and novelty of products and their diversification. Acquisition or merger may also lead to restructuring of unprofitable entities, or may constitute a reaction to competition from another company with high potential.

There are two basic groups of business activities²², which are of a concentration nature – merger (consolidation) and acquisition. The essence of business mergers is the creation of one entity out of two or more entities. Examples of consolidation may be mergers or incorporations. However, in the event of an acquisition control over the functioning of one economic entity is transferred to another. Transfer f control has two dimensions. Firstly, it concerns the control over activity of the enterprise and, secondly, the control over the enterprise itself. A factor that qualifies a transaction as a concentration is the change of control over the entrepreneur or entrepreneurs, regardless of the fact whether it is made through acquisition or merger.

The forms of concentration include:

• merger (consolidation) – it takes place when two or more independent entrepreneurs combine to form a new legal entity (as a result they lose their former legal personality and cease to formally exist) or as a result of the transfer of all the assets of the company (acquired) to another company (acquiring) for shares that the acquiring company issues to shareholders in the acquiring company (the acquired company ceases to exist);

• acquisition of control – the entrepreneur obtains the possibility to exercise a decisive influence on economic activity conducted by another independent entity. Most often, it takes place in the form of acquisition of a majority stake or share;

• creation of a joint venture by two or more independent entrepreneurs while preserving their existing subjectivity;

22 Mergers and Acquisitions, CFA Institut, New York 2015, p. 4.

• acquisition by an entrepreneur of part or entire property of another entrepreneur – if the turnover realized by that property in any of the two financial years preceding the registration exceeded the equivalent of EUR 10 million in Poland.

From the point of view of the market level in which the merging companies operate and the portfolio of their products and services, the following types of concentrations can be distinguished²³:

• horizontal – a transaction involving entrepreneurs working in the same industry up to now (e.g. cosmetics manufacturers for women). As a result, an entity with significant market power may emerge or few entrepreneurs shall remain on the market who shall stop competing and are satisfied with the existing status quo;

• vertical – transaction between entrepreneurs operating on different levels of marketing with the same product (e.g. between manufacturer and distributor of paints). In such a situation, the potential threat to competition may be hampering competitors’ access to products or services offered by the entrepreneur participating in concentration, operating at a lower higher level of trading;

• conglomerate – a transaction in which there are neither horizontal nor vertical relations between its participants. The products or services they offer are usually complementary and are purchased by consumers for a similar purpose (e.g. washing powder and fabric softener). Possible consequence of such concentration may be appearance of the phenomenon of the so-called cross selling i.e. making purchase of one product subjected to the purchase of other products as well as the opportunity to offer several products at attractive prices.

Taking into account the company’s strategic objectives, we can distinguish defensive and aggressive concentrations²⁴. Due to motives of the entity’s activity, strategic and speculative concentrations can be distinguished, and from a territorial dimension of the transaction, concentrations are divided into national and international (transnational). For antitrust analysis, the first division is of the utmost importance because the various types of concentration are differently classified due to their effects on the structure of the market and consumers.

23 F. Röder, Strategic Benefits and Risks of Vertical Integration in International Media Conglomerates and Their Effect on Firm Performance, University of St. Gallen, Graduate School of Business Administration, Economics, Law and Social Sciences (HSG), St. Gallen, October 15, 2007, p. 38.

24 A. Kaleta, Strategia konkurencji we współczesnym przemyśle, in: Współdziałanie strategiczne w gospodarce. Materiały konferencyjne, Akademia Ekonomiczna, Wrocław 1998, p. 78–90.

Unlike vertical or conglomerate concentrations, the immediate effects of horizontal concentration, i.e. transactions involving competitors operating in the same market, are:

• decrease in the number of market participants after concentration,

• increase in the market share of the acquiring entity, in relation to the pre-concentration situation.

In addition, the acquiring company gains more market power, allowing it to use higher prices (sometimes even monopoly ones). Increased market concentration makes it possible to enter into explicit or implicit agreements that violate competition rules. But there are potential opportunities, and the horizontal concentration itself does not necessarily threaten competition, although it undoubtedly limits it. On the contrary, threats can be seen in the occurrence of unilateral and coordinated effects.

Unilateral effects refer directly to the position of the entrepreneur itself as a result of the concentration. Thanks to this transaction, it receives individually very high market power, which it can use to limit competition. In particular, thanks to this market power, it can unilaterally raise prices, reduce production, deteriorate quality or reduce product choice and innovation. Coordinated effects concern change in the market structure. After concentration, the number of competitors decreases, thus they gain the ability to coordinate their activities to achieve additional profits.

The mechanism of competition is replaced by the coordination mechanism.

Thanks to such cooperation opponents gain collective market power, which allows to take actions that reduce social welfare. This collective coordination may be the result of a conscious or non-cooperative oligopoly.

Concentrations can lead to formation of large industrial conglomerates. From a political point of view, the strength of such groups is likely to be significant, and thus may jeopardize the existence of civil society and contribute to barriers to the proper functioning of the democratic system. Importantly, the existence of such strong economic entities will likely adversely affect the possibility of other entities to function, making them unable to benefit from their economic freedoms. An example of such thinking is one of the judgements of the US Supreme Court, which considering concentration of two entrepreneurs as illegal, pointed out that one of the objectives of anti-trust activity is to protect small family businesses even if it were to take place at the expense of higher prices for consumers. Another version of this view is the opinion that in corporate mergers sees the mechanism of concentration of welfare and violation of social equilibrium.

From the above findings, it is clear that from the point of view of knowledge transfer both the notion of merger and acquisition can be taken into account. The latter, provided that it will lead to a real merger of enterprises, because only then can knowledge transfer can occur. Of course, also after take over without consolidation,

knowledge transfer may occur under certain circumstances, but these are relatively rare situations when it comes to obtaining valuable inventions, patents, etc. In this case, however, certain organizational actions are required to achieve them. Consequently, when in the text a transfer of knowledge within a merger or acquisition context shall be referred, it will always be a situation in which an organizational action is taken, aimed at real consolidation of enterprises.