Typically, there are a number of reasons to undertake a merger. Many times, companies look to increase growth, increase efficiency, and extract very real profit during a period of irrational exuberance. In any case, the government indicates that it will approve a merger, but only on the condition that certain changes are made, such as sales of specific business units to a third party to avoid the danger of monopoly (McGuigan et al., 2011). Nevertheless, this system has lead to criticism from two different sides. While the first side believes that the government should be more deferential to prospective merger partners, the second side believes that the government should not be involved at all. This paper discusses the role of government during a merger.
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Explain why government regulation is or is not needed, citing the major reasons for government involvement in a market economy. Provide support for your explanation
A free-market economy is a market economy where consumers and suppliers trade freely with each other without government intervention. According to Michael Pompian (2012), in a free-market economy, the efficient allocation of resources is determined by the level of competition in the market. In such a market, the government only ensures that law and order are maintained but does not take part in activities that involve trade or business transactions between buyers and sellers. Furthermore, in earlier periods, the government played no role in promoting mergers (Huck, 2004). Nevertheless, many scholars agree that for an economy to function efficiently, the government should enforce some regulation in the market (Pompian, 2012).
Michael Pompian (2012) argues that government regulation is extremely beneficial in a market economy. He asserts that government regulation can help control or protect sellers’ and buyers’ interests. Additionally, Michael Pompian (2012) argues that government regulation can promote economic growth and development. In regards to these two observations, the government may be involved in the market economy during a merger for three main reasons. Firstly, it is the role of the government to enforce business contracts. Secondly, it is the role of the government to protect business properties through the issuance of patent rights and trademarks to investors. Lastly, the government set and collects taxes. The government uses taxes to control negative externalities in the economy.
Justify the rationale for the intervention of the government in the market process in the U.S.
An examination of the factors that contribute to government intervention in the market shows that the government has a variety of reasons for undertaking these strong measures. According to Michael Pompian (2012), the main rationale for government intervention is to control market failure and unfair competition in the market. For instance, during a merger, the government of the United States anticipates the effect of a merger on competition. In the United States, the Federal Trust Commission (FTC) and the Antitrust Division have issued a joint Horizontal Merger Guidelines. The goal of these guidelines is to remove unfair competition between the merging firms. These guidelines, therefore, promote healthy competition in the market because they regulate any unfair competition in the market. With respect to this, it is justifiable to conclude that government intervention is necessary during the business process because it brings healthy business competition in the market.
Assume that the company is considering a merger. The possible merger currently faces some threats, and that the industry decides on self-expansion as an alternative strategy, describe the additional complexities that would arise under this new scenario of expansion via capital projects.
An organization, whether small or large, faces the dilemma of handling its expansion. Michael Pompian (2012) argues that growth or expansion via capital projects is a fundamental stage of business life. However, business expansion often comes with various complexities. The most notable complexities may arise because of changes in managerial structures, and changes in the number of employees. Organizational management structure may become less and less centralized during business expansion. In regards to this, a company would be forced to change its management structure. According to Michael Pompian (2012), changing the structure of management is not only expensive but is also time-consuming. During expansion, it might also be necessary for an organization to increase the number of employees. Nevertheless, it might be difficult to acquire new employees with relevant expertise. Training new employees are also expensive and time-consuming.
Analyze how the different forces will come together to create a convergence between the interests of stockholders and managers indicating the most likely impact on profitability. Provide support for your response.
The company might engage in a sustainable form of conducting business through the convergence of interests of shareholders and senior management. Forces such as pressure from the stock market and the need for social responsibility may create a convergence between shareholders’ and managers’ interests. For instance, the shareholders and managers of the company may decide to carry out various social responsibilities including support of cultural activities and control of product safety (Avkiran, 2009). Social responsibility would have a positive impact on the Company’s profitability.
Social responsibility programs give a company an opportunity to improve relations with the local communities. Additionally, social responsibility programs may benefit the company’s image. In regards to this, the profitability of the company would increase significantly because these social responsibility programs will help the company acquire loyal customers. Lastly, increased pressure from the stock market would be beneficial to the company because it would lead to increased profit. In regards to pressure from the stock market, several empirical studies of the impact of shareholder activism by organizational investors demonstrate that organizational investors’ monitoring of management is associated with significant value gain, including increased financial performance and profitability.
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Avkiran, K. (2009). The evidence on efficiency gains: The role of mergers and the benefits to the public. Journal of Banking and Finance, 23 (7), 991-1013.
Huck, S. (2004). Merger Profitability and Trade Policy. The Scandinavian Journal of Economics, 106 (1), 107-122.
McGuigan, J., Moyer, R., & Harris, D. (2011). Managerial Economics: Applications, Strategy, and Tactics (12th ed.). Mason, OH: South-Western Cengage Learning.
Pompian, M. (2012). Behavioral finance and investor types: Managing behavior to make better investment decisions. Hoboken, N.J: Wiley.