Friday, March 17, 2006

Mergers regulations: Should it means capital flow restriction? (I)

Mergers and firm acquisition increased by 12% in the year 2005 in Chile. Telecommunications sector had the higher share with USS 1400 millions, 37% of the total amount involved ( U$$ 4000 millions). In the second place, is commerce with 27%, and in third place forestry sector with 12.5%.(
This amount represent roughly 4% of Chile` s 2006 GDP. This number by itself, does not tell us too much about the underlying issues concerning mergers, because there are a lot of variables involved on them. To mention just a few: capital mobility, firm efficiency levels , rate of return for capital, consumer needs ,market efficiency and level of competition. But high internal capital mobility measured throughout mergers done in a year, is a good signal of the dynamic of economic growth.
Considering the usually defined three type of mergers, (Horizontal, vertical mergers and potential competition mergers),there are some key issues to take into account. The first issue is whether mergers are good or bad for the economy. The answer , will depend of the institutional framework quality(IFQ).Credible organism for markets behaviour supervision, proper legal instrument either to protect the rights of consumers, or to punish privilege use of inside information are key aspect of a proper institutional framework. -
The second issue refers to the regulation of mergers, which apply when it happens that the new firm, increase industry concentration and eventually gets monopoly power and its consequences :Higher prices, lower quality of products, reduced availability of goods or services, and less innovation. By the way, regulatory authority assume that all mergers will function well. But we will see this is not always so.
On the other hand , it is important to keep in mind that concentration ratios by itself , does not necessarily means monopoly power. It also requires entry barriers to markets. So, after a merger in banking industry for instance, the concentration ratio may be higher, but if there is no entry barriers for new banks, there will no be monopoly power, but higher banking industry concentration. That was the case in Chile with the merger of the Spain based “Bank of Santander” and “Bank of Santiago”, which after the merger with the brand of “Bansander” got a 30% of local share markets ,;but because of free entry and the higher profits expectations , three new banks come into the consumer sector increasing competition. Otherwise, with heavy entry barriers, authority intervention throughout regulations and supervision, must protect markets efficiency and above all consumers, stopping mergers suspicious of monopoly intention.
The third issue concerns to the aims underlying the bid for another firm. The movie “Barbarians at the gate” with James Garner, shows that on this regard there is plenty of goal to give attention to. Another matter is whether you like it or not the whole movie. The organizational economy study this phenomenon , within the dilemma of the Agent(Firms executives or CEO) and the Principal (the owners or stakeholders).They either may have the same goal ,let say to maximize the firms profit , or they may have different goals. An example of differing goals? Enron, and Parmalat. When they (agent and the principal) have the same goal, mergers are aimed to firms `s objectives, such as to take advantage of new opportunities in fast grow sectors based on a cost leadership or a differentiation strategy. (A different story is the implementation of such strategy inside the firm). In this case, merger improve firms scale and efficiency, innovation potential because of lower cost , and consumers attention , which will allow the firm to take a greater share of market participation in terms of sales, profit or production. So, these are firms goals all its people agree on.-

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