Friday, March 24, 2006

Mergers regulations :Should it means Capital flow restrictions ? (II)

Following last week article, let looks additional issues: Assuming as regulator does, that it prevail the same goal between the agent and the principal, the main objectives mergers are orientated at , would be to take advantage of new opportunities arising in growing markets .Institutional framework will have to take care of markets implications specially the chance of collusive price behaviour. However, there is empirical evidence that in mergers and acquisitions firms, internal factors have a strong influence on the success of any strategy implementation. Half of mergers end up in failure because internal cultural values may not match well to move along the complicated process of working out the new organization and its new strategy. The initial higher stock exchange value, very usual in the first stage of mergers, might decline further into the following stages because of wrong internal strategic decisions.
How to assemble different human resources realities? If there is no internal strategy to follow through to fix it up these differences, the whole process might end up either in a complete failure or important losses of market value. So, regulatory authority should take into consideration the issue of potential failure when it comes to intervene in a merger project, otherwise what it is assumed to be a saving for consumers ,can really be a loss of welfare . This means ,it is better to apply regulation to a merger successfully working when it eventually implies a threat to consumers welfare, than to avoid it and nullifying its potential benefits .
In fact, mergers can also imply gains for welfare consumers. When Citicorp joined with an insurance company to broadening its service spectrum to its clients, there was not too much concern on the impact of such merger on insurance industry, because it was an innovation effort to offer new products to consumers. In Chile mergers in banking industry have allowed a better quality service, lower fixed cost for loans evaluations. and a better access to technology based service for customers. If regulatory authority had intervened stopping this mergers ,because of the ex ante perception of collusive behaviour, none of theses benefits would have come up in the short run.-
What about global scale mergers?. In this case it could also be considered as a capital flow. So, the more it is restricted ,the less efficient is the global allocation of resources, loosing welfare gains for the global society as a whole. How is it ?. Capital resources do seek the best alternatives to maximize profits, both in terms of markets and organizational arrangements, assuming capital holders are not risk averse. .Mergers , (beyond the scope of each firm ´s strategy ),are also a way of allocation of resources to a higher levels of outcomes than what otherwise would be . This has been the case on global banking industry, insurance industry, financial and logistic services industry. If regulations restrict mergers because of ex ante assumptions, capital will not flow to where it has the highest return, but where it get the highest rent. Global welfare will be reduced because this regulations restrictions will be equivalent to protectionism.
Then, Merger Regulations could be applied on the basis of real measured rather than expected behaviour, allowing a period of time to get the benefits for consumers to be in practice, at the same time freeing entry barriers. In other words, merger regulators should allow conditions to protect the benefit of consumers ,rather than punish the benefit of each mergers which on a broader perspective of capital flow ,might also be the benefit of global society.-

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