Research Paper on Corporate Mergers
Corporate
Merger
Mergers and consolidations are common phenomena in the corporate world, yet these activities are often associated with legal and/or ethical complications. Many corporations extend their operations ‘by combining with another corporation through a merger, a consolidation, a purchase of assets, or a purchase of a controlling interest in the other corporation’ (Miller & Jentz, 2005, p. 628).
Mergers, consolidations, and purchases of assets or controlling interest have become more frequent than usually as the crisis deepened. Distressed corporations sometimes find that merger or sale of assets is the only option available to them. While mergers and acquisitions might be regarded as a desirable activity when more effective corporations are taking over least effective ones improving overall economic efficiency, there is a treat of a monopoly or oligopoly. In a monopolistic or oligopolistic market, competition is imperfect and distorted, therefore special legal provisions are in place to prevent markets from becoming a monopoly or oligopoly.
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The article “Face Value/The Enforcer” from The Economist’s January 10th issue talks about the political and economic interdependence in Europe. Mario Monti was Europe’s competition commissioner before 2004, who has prevented many companies from mergers and ignored their lobbying efforts. Neelie Kroes, his follow on the position, turned out to be even stricter in enforcing anti-monopolistic laws. Lately, in the conditions of general economic slow down, there has been some criticism towards Kroes’ strict politics. Some people see mergers as a way to help struggling companies to survive.
According to the article, some competition experts fear that in the conditions of economic crises politicians will less reinforce anti-trust laws and allow more mergers, which might result in lower growth and higher prices. As it turns out, mergers are not always good for the economy.
During the times of the Great Depression, the competition law was temporarily abolished in the US, which some experts say has actually prolonged the depression. The article mentions the merger the British banks Lloyds and HBOS supported by the British government mainly to let HBOS, the weaker bank, to survive. The American antitrust committee has also not prevented the mergers of banks that have occurred in the country lately.
In American history, there were cases when a massive wave of mergers and consolidations saved a dying industry. The end of the Cold War and the decrease in the number of defense contracts prompted a wave of mergers in aerospace industry: Boeing became de facto the monopolist in the civil aircraft field after buying its chief domestic competitor McDonnell Douglas. In the steel industry, a wave of bankruptcies in late 1980s virtually ruled out a possibility of a turnaround, yet when Wilbur Ross acquired bankrupt LTV Steel, a merger frenzy decreased the number of major steel manufacturers from seventeen to three.
A merger can result in cost-cutting by eliminating inefficiencies. Also, it can have increased the competitive potential. Boeing, for example, was only able to compete with Airbus after taking over its major rival, McDonnell Douglas. However, a careful cost-benefit analysis is necessary before arriving on the final judgment whether a merger is desirable. Saving a company and at least some of its employees is a good goal, yet creating a powerful monopoly might be a dangerous prospect.
When a merger occurs, all the rights, privileges and power of two corporations are joined (Miller & Jentz, 2005). It gives an opportunity to combine the strength of the best performing assets each corporation has under management. The mergers might be not very good for the healthy competition, however in the current economic conditions, they might be the only way to survive for many companies, since, as we know, the strongest wins.
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