Market Reactions to Killing the Kroger - Albertsons Deal

On 10 Dec. 2024, Kroger’s proposed $25 billion merger with Albertsons was blocked in rulings that the largest merger in US supermarket history would limit competition and harm consumers. A day later, Albertsons called off the merger. How does the change in the stock market value of competitors to Albertsons and Kroger around the collapse of this deal inform us about the foregone competitive effects of the deal? 

A merger that allows firms to enjoy greater efficiencies would lower costs, potentially resulting in lower prices to customers. A merger that increases the market power of firms would result in the ability to increase price-cost margins. Large mergers usually include a little of both efficiencies and market power. A merger where the net effect is to reduces prices is usually good for consumers and one that raises prices is usually bad for consumers. Unfortunately, it is difficult to predict the net effect on prices of lower marginal costs and higher margins on those marginal costs. Fortunately, we can use hindsight of a merger event to get an idea of what stock market participants thought the effect would be. But you can't look at the merging parties, it is assumed they will benefit. You must look at the effect on third party competitors.

Competing firms love it when competitors increase prices (if this is the only change). When a competitor raises prices, some of the competitor's customers will become more inclined to purchase from you. This should boost your profits which would be reflected in an increase in your share price. But if competitors reduce price (and this is the only change), you can expect the opposite. Competing supermarkets would love a Kroger/Albertsons merger that increased prices and hate one that decreased prices. 

When the merger that would result in lower prices is called off, competitors rejoice and enjoy higher stock market returns. Likewise, calling off a merger that would increase prices causes them to lament and suffer lower stock market returns. So were they rejoicing or lamenting on the 10 December and 11 December? Below are the closing share prices of three of the biggest supermarket chains in the US. (There is no price information for chains that are not publicly traded like Publix, H-E-B, and Meijer.)

	Price at Close on			Return
	9-Dec	10-Dec	11-Dec	1-day	2-day
Costco	987.86	993.4	994.69	0.6%	0.7%
Target	135.29	135.05	135.98	-0.2%	0.5%
Walmart	93.62	94.34	94.75	0.8%	1.2%
S&P 500	6,052.85	6,034.91	6,084.19	-0.3%	0.5%

For all three firms, the returns over both the one-day and two-day windows when this merger became dead beat or met the S&P500 return. So, no lamenting and some rejoicing in moderation. It might be better to describe these values as shareholders of competitors being relieved that the merger was called off. Still, the market capitalization of Costco, Target, and Walmart tops $1 trillion. Even a 0.1% excess return is worth $1 billion to shareholders. This amount will focus the mind of most Wall Street analysts.

The inference is that the merger was more likely to have lowered prices than raised them. Antitrust is hard.