- Mergers and Acquisitions: Should the government encourage ...
Mergers and Acquisitions: Should the government encourage or discourage mergers and acquisitions? Illustrate your essay with specific examples.
Mergers and acquisitions form the subject of much
debate in the commercial, academic and regulatory worlds, with
various proponents and detractors arguing their points of view. The
agency cost of mergers and acquisitions are to be measured by the
companies involved, however the government has a considerable
degree of influence over whether the costs to those companies
encourage or discourage.
The net effect of government interference is that
mergers and acquisitions are discouraged, because the competition
between the private and public sphere is such that the legislative
tendency of government binds the private sector with bureaucratic
laws and increases agency cost. On the other hand, the private
sector wishes to merge or acquire according to market principles.
Therefore, mergers and acquisitions with the least agency cost are
those where the government is not involved. This is to the benefit
of companies wishing to merge or acquire. Clearly the reduction of
agency cost alone is sufficient to require governments to encourage
mergers and acquisitions.
Governments and agents may be encouraged to merge
or acquire where there is an overvaluation, or an undervaluation of
agency costs. Telefonica was sold by the Spanish government because
it undervalued the agency costs of privatising the utility to the
corporate executives (who wanted a quiet life), and to the
acquirers of shares in Telefonica (who paid too much). Telefonica
acquired 02 because it was encouraged by an overvaluation of 02,
because soon after the announcement of takeover the share price of
02 gained. A counterargument to this would be that 02's share price
would not have risen had Telefonica and 02 announced a merger.
Rises in share prices and increases in agency costs are a feature
of all mergers and acquisitions, largely because management of the
acquiring company overestimates itself (van Fredrikslust, van der
Wal & Westdijk 2005). Where it is the government that is
privatising, the management further raises the costs of
There are, in conclusion, two possible outcomes of
mergers and acquisitions: first, agents' costs are lowered
(Bertrand & Mullainathan 2003), or agents' costs are raised,
for example in the case of a company making an acquisition (Firth,
1980). In neither case should the government encourage the merger
and acquisition. The government should, as is exemplified by
Telefonica above, neither merge nor acquire agents, nor be acquired
by agents. Government should discourage mergers and