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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 takeover.

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 acquisitions.

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