Mergers have for a long time been commonly used by most businesses as ways of expansion. The decision to come together in form of mergers is fundamentally made mutually by the two firms. The history of mergers can be traced back to the Great Merger Movement in the U.S in the period between 1895 and 1905.
We will write a custom Case Study on The Mergers of Companies specifically for you
301 certified writers online
In this period, small companies came together with other small firms to give rise to large, powerful organizations that subjugated the markets. Approximately, 1800 small firms went into these consolidations as a number of them obtained significant shares of the markets they were operating in. The tool used in these mergers was called trusts (Gal-Or, 640)
A number of factors pushed the firms into The Greater Merger Movement, for instance short-run factors like the need to keep the prices high and the Panic of 1983 which saw immense turn down in the demand of homogeneous goods. One of the major short run factors that sparked The Great Merger Movement was the desire to keep prices high. With many firms in a market, supply of the product remains high and therefore the need to outspread the high fixed costs by the producers and at the same time maintain profitability (Gal-Or, 642).
Similarly, there were long run factors that encouraged the mergers especially the need to maintain low costs. There was need to increase efficiency through the technology that was evident in the small companies, as well as reducing operation costs like transportation. The rules against price fixing by the U.S government through the Sherman Act in 1980 saw many companies use merger as a strategy of eliminating competitors while avoiding price fixing.
Today, the reasons behind mergers have diversified with others slightly moving away from the conventional factors of the Great Merger Movement. For instance, today companies merge to enhance customer service especially for firms in the same or close to their lines of production. There are also other mergers meant to conquer the cyclical bumps in the market in order to enhance investment portfolio.
This is done through acquiring or merging companies in different industries. They are also motivated by the need to acquire thoughts, methodologies, personnel and contacts and not necessarily the hard assets of the other company (Gal-Or, 680). This is evidenced in the case of Google, Yahoo and Microsoft where they prefer acquiring small firms instead of recruiting.
Other mergers are arising from the need to buy companies with their patents, licenses, methods and technology, market share, brand name, research team, consumer base, as well as culture. Such soft capital is very delicate, fragile, and watery. Integrating it by and large calls for more poise and know-how than incorporating machines, real estate, catalogue as well as other tangibles.
However, mergers and acquisitions are not without challenges including the failure of famous mergers involving big deals with huge financial outlays as well as laws barring merging attempts by some companies. Particularly, the focus is on these antitrust laws meant to regulate the activities of the mergers as in the case of cell phone companies, T-Mobile and Verizon as well as AT&T merge with T-Mobile.
These have not been the only cases of antitrust suits, for instance antitrust in Google and ITA, sports in the European Union, Hewlett-Packard and Compaq Computer merger in 2002, as well as the merger between Staples Inc and Office Depot, the two giants in office supplies among others (Goldman 1).
The department of justice filed an antitrust suit against T-mobile and Verizon in their bid to form a merger that would see the birth of the leading wireless company in the U.S, with a customer base of 130 million subscribers from the second and fourth largest wireless companies.
This will see the merger serve over two-thirds, which is over 78% of the wireless serving millions of consumers. According to the department of justice the merger would create unfavourable terms for the millions of subscribers. This is because of increased prices, fewer choices for the consumers, and low quality services (Goldman 1). The Federal Communications Commission is still in the process of going through the proposal.
This merger should be allowed because it will enhance the competitiveness of the two firms. The merger would first of all enable the provision of wirelesses services at lower costs in the market. This is due to the low prices charged by T-Mobile as it will confer its advantages to the market. There will also be a resultant decreased cost of production that will enable the provider to charge lower than the competitors. There will also be better chances as the market share will increase to beat competitors.
In the market, everyone is entitled to market freedom and thus they can exercise their property rights as they please. In this regard, the market is also a free market. Additionally, the price coordination arrangements as in a merger are a great way of enhancing efficiency in the economy.
Eventually price fixing will collapse in the long run and thus a merger will be more appropriate for both the companies and the economy or specifically, the consumers. Therefore to enhance this efficiency resulting from mergers due to economic liberalisation, all barriers to such moves should be removed.
Get your first paper with 15% OFF
The proposed merger between AT&T mobile and Verizon will ensure improved services and wide range of consumer choices. For example the 4G network wireless services will be much easier to attain through the merger. The technological innovation as a result of combination of the know-how is going to yield high quality services in terms of wireless services.
Additionally, T-Mobile is known for setting predominantly cheaper prices as the price leader in the market compared to the other three providers. This can only get better for the consumers after the merger. The innovation cost may be weighing heavily on T-Mobile but after the merger we are likely to see more high-end services in the market.
The merger between Verizon and T-Mobile is not going to create a monopoly or an oligopoly in the wireless service market. There are still other firms involved in the wireless network. However, this merger will undoubtedly birth a company with huge economies of scale due to the market, cost, sales and managerial advantages.
These benefits of increased profitability will spill over to the consumers in form of enhanced services, high quality and greater customer service. Therefore this merger will not only benefit the two companies, it will also benefit the customers through better prices since the cost of production will be much lower as a result.
The merger between T-Mobile and Verizon is likely to present major informational advantage especially in the stochastic market (Gal-Or, 675). If the argument of the antitrust law against the merger is protecting other firms in the industry then it is not enough. This merger will predominantly enable access to the rural areas for both the merger and the competitors, since they will only be required to pay for the roaming.
This roaming will enable access for many customers. Alternatively, on the price argument; the merger gives an opportunity to the competitors to increase their prices as well if the merger takes that direction. Moreover, since the Clayton Act, the antitrust laws have not been revealed to increase their efficiency in viewing mergers.
Mobile phone industry is very important in every economy as they have greater impact on economic performance especially in the current world of technology. Therefore decisions regarding them should be reviewed by considering both the short and long term implications of the merger involving such companies. This merger between T-Mobile and Verizon will see a great success and increased research and development.
Due to increase in profits and lesser operating costs there will be more investment in research and innovation for instance in the realization of speedy wireless network. This could also lead to diversification of more products in the mobile industry and therefore enhanced consumer choice and satisfaction. As much as competition will be reduced to some extend, this will not interfere with consumer choice and efficiency in service delivery.
In conclusion, the department of justice was not well justified to use antitrust laws governing competition and regulation of mergers to block the merger between T-Mobile and Verizon. There are other more important factors to consider beyond competition and prices.
There are greater benefits in terms of increased research and development, diversification and spread of services to the rural areas or wider consumer base. It is also bound to produce even better and fast wireless services at a lower cost as much as increasing competition to the other firms for greater services and consumer choice.
Gal-Or, Esther. “The Informational Advantages or Disadvantages of Horizontal Mergers.” International Economic Review 29.4 (1988): 639-661. Print.
Goldman, David. DOJ files antitrust suit to block AT&T merger with T-Mobile. 16 March 2012. Web. <https://edition.cnn.com/>