Government Regulations on Market Economy and Mergers

The government can regulate private business and enterprises by way of imposing certain requirements aimed at attaining a set of purposes in the market economy. Government regulation can be categorized into economic and social regulation. The fundamental goals of regulation is seeking to cushion existing organizations against the effects of unfair competition, provision of cheaper and safer goods and services to the consumers as well as safety in the workplace and to the general public. Economic regulation deals with the involvement of government in the national economic matters that encapsulate the setting of prices as well as conditions on entry and practices of firms in an industry. Economic regulations by government include; control of business practices, industry rates, and services and transportation routes of businesses. Such regulations are informed by the occurrence of significant market failure resulting from economies of scale and production scope, imperfections of information in market transactions, incomplete markets and effects of wealth and income distribution. Alternatively, social regulation often deals with the government’s lookout and supervision on the safety and quality of goods and products in the market. Moreover, social regulation allows the government authorities to superintend the conditions under which consumer goods and services are manufactured, produced and distributed.

Rationale for Government Regulation

The effectiveness of government regulation is dependent upon various factors including the nature of regulatory instruments and structures in place, the motives behind regulation, legal and political settings, and economic characteristics of the industry. Owing to the diversity of economic and organizational characteristics, the projected effects of regulation are likely to vary significantly across industries and time. For instance, in oligopoly setting where the market structure that is characterized by competition among small number of large firms having huge market power,  organizations derive their market powers from barriers to entry thus only a small number of firms compete with each other. The market has few interdependent firms that change their prices subject to changes by their competitors (Waddams, 2011). In addition, the market structure in oligopoly is characterized by similar products but differentiated by competing firms and imperfect knowledge on best price and availability. Firms resolve to use product differentiation in a bid to enhance their capacity to set prices (Corchon et al., 2010), which leads to products of a firm becoming more inelastic. However, the government has set laws that inhibit actions taken by firms to increase market power. Such actions include; price fixing, mergers, and predatory pricing. The Clayton Act of 1914 and Sherman Anti-trust Act of 1890 have ben put in place with the intention to outlaw collusion, cartels and monopolization of the markets (Elhauge, 2011).

Regulating an oligopoly market structure ensures that strong incentives are implemented to aid in minimizing cost. The regulatory agencies observe expenses and may persuade a regulated firm to inflate costs as a way to earn the desired rate of return on a larger base. Price regulation is an instrumental tool for regulatory agencies to control competition in an oligopolistic market structure. In industries like electric power, gasoline, healthcare and natural gas, price regulation becomes an efficient way to cushion the consumers against the market failures of oligopoly.

Equally, in a monopoly market situation where a there is only one single seller of a valuable item, there is a likelihood of market failure emanating from the monopolistic intrigues thus there is need for government intervention. A monopoly can be characterized by output of products below efficient levels, loss of consumer surplus, transfer of surplus to producers and loss of efficiency in the economy. The formulation of anti-trust law was informed by the concern to control and regulate industry by a single corporation, loss of economic efficiency and unnatural monopoly. These economic issues had lead to reduction in output and rise in products prices which was detrimental to the consumer and the national economy. The anti-monopoly policies play a vital role in promoting economic efficiency and enhance entry as well as fair competition (Waddams, 2011). The set policies keep changing over time subject to changing economical and political environments. The major issues considered in anti-trust litigations include relevant market, barriers to entry such as capital cost and distribution chains, international competition, fair pricing, and effects of change in technology on the relevant market structure.

Principles of Mergers

Mergers and acquisition occurs whereby one firm or company acquires another company and establishes itself as new owner though the target company may still exist as independent legally but controlled by the acquirer. According to Walter and Barney (1990) some of the objectives of acquisition and mergers are: to improve the companies’ competitiveness by increasing the market share and penetrating new market by utilizing the new acquired marketing capacities, accelerating growth by expanding capacities, reducing risk and costs, diversifying the companies investment to caution the companies cash inflows, and to enjoy the economies of scale.

The basic merit of acquisition is that a merger is legally simple and does not cost as much as other forms of consolidation. Both firms in the merge process agree to combine their entire operations which imply there is no need to transfer title to individual assets of the acquired firm to the acquiring firm. The main demerit of a merger is the fact that a merger must be approved by a majority vote of the stockholders of both companies (Roberts et al., 2012). Getting the required votes can be cumbersome and time-consuming. In addition, the cooperation of the cooperation of the target company’s existing management is almost a necessity for merger. The cooperation is not always easily and cheaply acquired. In addition, anticipated merger gains may not be completely achieved, and shareholders thus experience losses (Roberts et al., 2012). This can happen if managers of bidding ﬁrms tend to overestimate the gains from acquisition. The bidding companies are typically much larger than the target companies. Thus, even though the dollar gains to the bidder may be similar to the dollar gains earned by shareholders of the target company, the percentage gains will be much lower.

In the case of Coca Cola Co., it has the option of building its own capital through self-expansion projects. However, this option would be more expensive and would take sometime before it breaks the barriers of entry.

Additional Complexities Ensuing from Self-Expansion after Merger

In a free market environment, merger regulation has two facets. On one hand, the proponents of free markets endeavor to have as much competition as possible and they seek to have government regulation in ensuring that there is no single player that dominates the market. Contrariwise, the neo-liberals are apprehensive of government intervention in the market and see no need for government intervention in the event that the market demands that a merger is necessary.  Although the advantages of free market are subject to competition, government regulation on mergers would be justified in the event that it would correct externalities, protect rights of all parties involved, ensure fairness, and support caring. Mergers can generate anti-trust legal concerns and hence they are subject to government regulation. There are three main antitrust laws in United States of America such as Sherman Antitrust Act (1890), Clayton Act (1914), and Federal Trade Commission Act (1914) that can be brought into play to regulate mergers and protect organizations for externalities.

During mergers there is the risk of transferring weaknesses of one company to the second. Additionally, companies can become market leaders after mergers and the prices of products can go prohibitively higher for consumers and there is the occurrence of monopoly in the market due to only few organizations operating in the market.  In the event of Coca Cola Co. opting for self expansion as opposed to a merger, it is evident that the merger may not have brought any additional benefit and profitability to the company. If Coca Cola Co. takes several projects after merger, and owing to inadequate resources, staff and technology, they suffer losses, it is advisable that they should opt to self expand. However, when companies start to self expands it may lose a considerable number of valuable clients since most customers may seek to deal only with that single company. This follows from the fact that many clients and customers are addicted of same products and company brands and thus would not prefer for the same product with other company’s name.

Forces Facilitating Convergence and Profitability of Mergers

The acquisition of one firm by another through merger is an investment that takes place in an environment of uncertainty and this compels the need for evaluating the basic principles of valuation. A company should acquire another only in the event that in so doing generates a positive net present value for the stakeholders and shareholders of the acquiring company (Roberts et al., 2012). However, the Net Present Value of an acquisition candidate is subject to various factors which make the valuation of mergers and acquisitions considerably challenging. The achievements from mergers are dependent upon factors such as strategic fits.  In principle, strategic fits are difficult to establish precisely and it also challenging to estimate the value of strategic fits by use of discounted cash flow techniques (Chaplinsky, 2000). Mergers are considered as a vital control device for shareholders. For instance, some mergers ensue from underlying conflict of interests between the shareholders and the management thus making acquisitions an effective way of get rid of the current management. This fact thus illustrates that Coca Cola Co. would net necessarily need to merge with any of its competitors since they do not currently exhibit any management crises.

In determining the gains and benefits of mergers, it is crucial to estimate the apposite incremental cash flows. The valuation often involved issues like synergy and control, which go beyond just the mere valuing a candidate firm. The key to the existence of synergy is that the target firm controls a specialized resource that becomes more valuable if combined with the bidding company’s resources. In this regard, Coca Cola Co. getting involved in a merger would only be beneficial if the combined firm will have a Net Present Worth that is greater than the sum of the values of the separate companies (Chaplinsky 2000). The specialized resource will vary depending upon the merger. It is crucial to determine what form is the synergy the merge or acquisition is expected to take. It should be it will reduce costs as a percentage of sales and increase profit margins or will it increase future growth.   In horizontal mergers there is an economy of scale, which reduces costs, or there is a resultant increase in market power leading to increases in profit margins and sales (Chaplinsky 2000). In vertical integration the primary source of synergy comes from controlling the chain of production much more completely. In functional integration involves a firm with strengths in one functional area acquiring another firm with strengths in a different functional area and the potential synergy gains arise from exploiting the strengths in these areas.

If the net present value (NVP) is a positive value the company can go ahead and invest in the project as it is economically viable. The market for takeovers may be sufﬁciently competitive that the NPV of acquiring is zero because the prices paid in acquisitions fully reﬂect the value of the acquired ﬁrms (Roberts et al., 2012). In other words, the sellers capture all of the gain. Finally, the announcement of a takeover may not convey much new information to the market about the bidding ﬁrm. This can occur because ﬁrms frequently announce intentions to engage in merger activities long before they announce speciﬁc acquisitions. In this case, the stock price for the bidding ﬁrm may already reﬂect anticipated gains from mergers.

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