Expansion and Merger - Why the Government Is Needed - Essay Example

? Expansion & Merger Explain why the government is needed, citing the main reasons for government involvement in a major economy? The government control of the private businesses falls into two principal classes. Economic regulation entails controlling or regulating costs directly or indirectly (Flynn, 2011). Conventionally, the government looks to check monopolies from increasing prices above the level that would guarantee them rational profits. Antitrust law seeks to reinforce market forces so that express regulation is needless. The government and, occasionally, private parties have employed antitrust law to proscribe mergers or practices that would unjustifiably limit competition. While social regulation is used to attain social goals, for instance, shielding the public's safety and health or upholding a healthy and clean environment. Governments in market economies should institute and defend the right to private property and to the financial gains resulting from the utilization of that property. Gaughan (2010) claims that in defining and implementing property rights and upholding an effectual legal system, governments may create a social environment that permits private markets for the majority of goods and services to task successfully and with extensive, popular support. These elite rights give the proprietors, whether corporations or individuals, exclusive rights to trade or otherwise advertise their products and creations for a given duration. The number of monopolies is essentially small and relates to a small percentage of the economic action in key market economies. It is common for a problem to occur due to industry domination by a few successful firms (Halibozek and Kovacich, 2005). There is an actual threat that these corporations may conspire to set high prices and prevent entry by novel, competing firms. To proscribe such monopolies and conspiracy behaviour, and to uphold a more efficient level of antagonism in the economic system, supposed antitrust laws have been enacted in key market economies, including the United States. Governments in market economies have significant responsibility in offering the economic environment, which the bazaar of private corporations can task most effectively. A Hilbert (2007) states, one such function is to supply a widely conventional, unwavering currency and to uphold the worth of that currency through guidelines that restrict inflation. As a result of elevated unemployment and low inflation, governments increase the availability of money, which decreases interest rates. Lower interest rates motivate investment expenditure by businesses seeking to develop and employ more workers. During low unemployment and high inflation, policymakers increase interest rates, thereby decreasing the availability of credit and the supply of money (Hilbert, 2007). Justify the reason for the involvement of government, in the market process, in the U.S. Government intervention in the market process is crucial, since there are key differences in the government’s duty, in the market sectors of the United States economy. The state and local governments are the direct providers of majority (92%) services, and government employees are service providers. In addition, quasi-political government bureaucracies make decisions about the methods of production. Nevertheless, government programs and policies substantially reduce the costs of education and medical care for the end users. Market redistributive considerations and imperfections can explain the government involvement in a market economy. Let us assume that the merger faces some threats and the industry resolves on self-expansion the probable strategy, describe the complexities that would emerge under the new idea of expansion via capital projects. Identifying the costs of monetary distress, creditors of rising firms call for detailed agreements to guard themselves against possible managerial incompetence and opportunism. These agreements are probably to be particularly limiting for highly-leveraged expansion companies, because these corporations are involved in high possibility activities. Nonetheless, restrictive loan agreements shun many of the possible conflicts related with debt financing by restricting management activities that are potentially detrimental to bondholders. They may turn out to be expensive to shareholders since constrain management’s options of investment, financial and operating policies, and decrease its ability to react to variations in the business environment (Halibozek and Kovacich, 2005). If suppliers, customers and distributors sense that the corporation is so financially fragile that its permanence is in question, they will not formulate the investment needed to develop an association with the corporation. Without such obligation from non-investor stakeholders, the corporation is probable to be unsuccessful before it can totally develop its growth choices. Therefore, the firm should show that it has financial potency and flexibility. Thus, this breakdown points to one inevitable conclusion: the company requires a strong arrangement of equity upfront; debt is to be employed with moderation and care. Analyze how different forces will come together to create a convergence of interest of stockholders’ and managers. Stockholders mainly provide the firm with capital, and they expect the firm to make use of the risk adjusted in their investment. The managers and employees provide the firm with time skills and human capital commitments; they in turn, expect to get a fair income and healthy working conditions. Gaughan considers the idea of convergence by contract. He states that this idea is achievable when the stockholders have managers to commit to better governance. This can be through cross listing of the firm’s shares on a stock exchange with tougher corporate governance or, by the creation of new exchanges with stronger listing requirements. Mergers have also been proven an alternative mechanism for corporate governance reform. We will consider both domestic mergers and international mergers. Merging does reduce completion, therefore, this induces the merging firms to produce less; as a result, the managers tend to expropriate less (2010). In the case of cross border merge, a better system of investor protection is imposed on managers especially if the acquirer comes from a legal system that is protective. Bris and Brisely argue that cross border mergers make a powerful force for corporate governance improvement. In a cross border merger, the target firm adopts the nationality of the acquirer with its legal systems and governance standards. Adoption of strong governance benefits the shareholders in a merged firm. Although the firm produces less, the unmerged domestic firms increase their output benefiting their stockholders and managers. A corporate governance functions to restrain opportunistic managerial behaviours. This is of benefit to the stakeholders who cannot always monitor the management. The takeover regulation does focus on the conflict of interests between management and shareholders, which focuses mainly on the protection of investors (2006). Speculate about the implication for the goals of the firm as to whether to minimize the industry’s profits or to create more value for shareholders. Halibozek and Kovacich argue that the most significant motive of a merger is to increase profitability and shareholders wealth. This is achievable by increasing the prices of the stock. They relate the increase in share price to an increase in the shareholders wealth. A merger also aims at diversifying the industry. Combining of two companies’ results to economies of scale, this means that the company produces more at an increased efficiency level. They observe that firms merge to lessen competition in order to achieve monopoly profits (2005). The increasing of shareholder wealth targets on making the shareholder happy, therefore, it guarantees the maintenance of the shareholder in the company. An increase in the shareholder wealth translates that the officers and directors of the corporation who make the shareholders of the firm increase their maximum value. Firms focus on increasing their share price in order to attract investors. A high share price means that a firm is making more money, and this tends to attract investors. Halibozek and Kovazich in their observation conclude that a merger does not improve the shareholder value of the acquiring firm rather it decreases it. Their advice for a declining firm that wishes to sustain itself should avoid undertaking a merger with a growing company that is utilizing its current managers and management styles, since that would not help in increasing the shareholders wealth (2005). References Flynn, S. (2011). Economics for Dummies. New Jersey: John Wiley and Sons. Gaughan, P. (2010). Mergers, Acquisitions and Corporate Restructuring. New Jersey: John Wiley and Sons. Halibozek, E. and Kovacich, A. (2005). Mergers and Acquisitions Security: Corporate Restructuring and Security Management. London: Butterworth-Heinemann. Hilbert, L. (2007). Currency Intervention, Fluctuations and Economic Issues. New York: Nova Publishers. Read More