A potential merger of the Latvian fixed-line operator Lattelecom and the wireless Latvijas Mobilais Telefons (LMT) has been under discussion in Latvia for several years. Many pro and contra arguments have been put forward. Supporters of the merger point out potential gains from economies of scale and new product development, while opponents are concerned about potential abuse of market power and increased cost inefficiencies due to suboptimal firm size. No clear consensus on the economic and social desirability of the merger has been reached. The complex nature of the problem is an obvious reason for this.
The best way to resolve the debate is a comprehensive market analysis. State competition authorities, which are typically in charge of safeguarding healthy competition, routinely check mergers among large firms. However, such checks often require substantial resources. Recently, for example, the UK Competition and Market Authority (2016) undertook a broad study of a telecom merger between BT Group and EE Limited. The merger was given a green light in January 2016 as the analysis showed no threat to competition. The study included analysis of the telecom products, market players, current regulations, trends in the industry, the merger itself and the counterfactual situation if the two firms would continue to operate in the current market. The inquiry was performed on each of the relevant markets, i.e., retail mobile and fixed broadband, wholesale mobile, etc. Many market players provided not only their opinions about the merger, but also relevant internal business documentation. The entire investigation took around one year to complete.
While such extensive analysis is beyond the scope of this study, it is worthwhile to discuss the major effects of the merger, and to sketch potential ways to measure them. We take three complementary approaches to assess the effects of the merger:
- Firstly, we review studies of the economic impact of telecom mergers which look at both company-specific and wider socio-economic effects.
- Secondly, we perform a stock market response analysis of the most recent telecom mergers in the EU and some non-EU OECD countries over the 2010-2016 period. We compare the stock prices during the time period right before and after the public merger announcement. Moreover, we check the performance of the general stock market indices and compare it with that of the telecom firms.
- Thirdly, we also overview competition authority’s responses to the proposed merger agreements
The main advantage of the literature review is its broad scope – researchers typically look at many aspects of mergers, including changes in firm profits, competition structure, and social welfare. The drawback is the limited number of relevant studies in the telecom industry. The key difficulty in a merger analysis is identification of the causal effect of the merger. It is important to set the causal effect aside from the changes which are due to other factors which are not related to the merger, for example, general growth of the economy or technological progress. This is usually done by employing various econometric techniques and large statistical datasets. Failure to account for other factors that could potentially affect firm performance might yield the wrong conclusions. In our literature review we select studies that attempt to gauge exactly the causal effect of the merger, and do not merely describe before/after merger statistics.
The second approach analyses stock market responses. Probably one of the most straightforward ways to examine the economic effect of a merger on firms is to observe their historical stock fluctuations before and after merger announcements. Economists often assume that a stock market in developed economies aggregates information and expectations of all market participants and thus stock prices reflect expected economic performances and future profits of firms. Comparison of stock prices over time should yield evidences on whether merger is expected to be successful or not, both in the short and medium run. To account for the other potential economic effects we compare changes in stock prices of merged firms with various counterfactuals, such as country economic indices and non-merged firms.
The third analysis focuses on the competition authority response to merger announcements. Mergers among large firms are often seen as a threat to competition thus authorities frequently impose preventive measures to make sure no market players (competitors and customers) are disadvantaged. We overview such measures or conditions to see what the main trends are on examples of the recent telecom mergers.
The aim of this study is to present lessons learnt from previous telecom mergers, and overview the responses of the stock markets as well as the competition authorities. The next subsection focuses on the main effects that telecom firms might reap from a merger. At first, we consider previous telecom merger studies, and then we turn to stock market responses. Further section looks at the competition authority’s point of view on mergers.
 One way to identify causal effect of a certain event on subsequent firm performance is to find relevant counterfactual group with which to compare performance of the firm. Examples of such techniques are difference-in-differences and quasi-experimental approaches.