International Business

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“There are really two important features of the Kahneman and Tversky value function.

One is that people treat gains and losses asymmetrically, giving the latter much heavier weight in their decisions than the former. The second is that people evaluate events first then add the separate values together. There is nothing inconsistent about feeling that a loss causes more pain than the happiness caused by a gain of the same magnitude. What does often appear irrational is treating each event separately, rather than considering their combined effect. ” (Frank 249) MergerA combination of two or more companies in which the assets and liabilities of the selling firms are absorbed by the buying firm.

Although the buying firm may be a considerably different organization after the merger, it retains its original identity. Economies of scale Definition: This basically means the benefits of reduction of average costs resulting from larger scale production. Gains in output and/or costs may be achieved from increasing the size of plant, the size of firm or the size of industry. For example, costs per unit output are likely to decrease if lower prices of inputs are possible through bulk buying.Also technological methods which may be impractical at lower levels of production may become economically beneficial at higher levels. Equally, if by-products are produced in larger quantities and more continuously, they may become saleable commodities for a ready market.

Suppose that you are advising the manager of a young phone company(US telecommunications firm A) who is considering expansion into the French telecommunications market. What factors would you consider?First, why expand to the French telecommunications market? One of the most important reasons for choosing France is that France has long held a natural monopoly in the telecommunications sector. “Throughout the 1980s, no West European government controlled telecommunications more comprehensively than France; French state organizations were the principal operators, developers, customers, export promoters, and, for a time, primary equipment producers. This statist role has a long history. Organized French communications date back to the thirteenth century, when the University of Paris operated a messenger service.” (Noam 133 ) Let us consider for the moment the arguments against expansion into the French market.

Those against such a move will say that French telecommunications companies already have an established presence in Europe. What benefits would we derive from such an expansion? What justifies such a move? To answer this question, the next consideration is not our desires or wishes, but the behavior of firms in the market.1 records the number of mergers occurring in each year for the United States over the last century. In recent years this number dwarfs those from the end of the nineteenth century, just as the size of the US economy dwarfs the US economy of a century ago.

The wave in the late 1990s was unprecedented, however, in terms of the number of mergers, their size, and their international character. If one ignores the upward trend in the number of mergers, two remaining features of merger activity stand out immediately. First, and most obviously, mergers come in waves. (Mueller 156)It is evident then, based on facts, not desires or wishes, that the trend of multinational companies from the 1990s onwards has been increasing in direction of mergers. Refik Culpan, in Global Business Alliances: Theory and Practice corroborates this trend with a similar finding: From a strategic point of view, multinational corporations (MNCs) have changed their traditional views of competition and have adopted a variety of new and flexible approaches for achieving sustainable competitive advantages.

Such a shift in their business strategies has become more vivid today than ever before. In particular, the frequent use of business alliances as an indispensable tool in their strategic repertoire has manifested itself in the global business. MNCs have started to build business alliances even with their competitors. (Culpan 1) From the nature of the capitalist system, we must assume therefore that companies derive a substantial profit from mergers, otherwise this pattern would not persist.

To answer the question, will a merger with a French telecommunications company be in the self-interest of our company, we can say with confidence that it will be in our best interests to do so. The next concern is the profitable effects of mergers. According to Gottinger, “Strategic alliances or joint ventures combine the resources of partners, integrate their operations and share profits. If the partners were competitors, they would stop competing with each other.

From the viewpoint of competition, the effect can be the same as merger.Even more so in network industries, it is logical to view strategic alliances like mergers. (Gottinger 77) Thus far we have established that the general trend in firms is toward mergers, because companies derive substantial profits from this activity; and the next point is that through mergers or strategic alliances, company resources are combined, integrating the operations and profits. “In a fragmented market, firms are unable to make profits by raising their prices or reducing their output because otherwise customers would easily shift to other producers.The principal anti-competitive concerns, such as price increases and output reductions, largely depend on the current production concentration in the relevant market. ” The next point we can derive from this is that mergers are in the natural interest of companies.

Let’ s say for example the U. S. telecommunications market was a fragmented market where A, B, and C companies competed for subscribers. “Firms are unable to make profits by raising their prices or reducing their output because otherwise customers would easily shift to other producers.” So, although U.

S telecomm. A has a certain share of the U. S. market, it is not growing because it cannot raise its profits, or reduce production of mobile phones. Its problem is that it cannot merge with rival telecom. B, which is also in the U.

S. and is a strong competitor. However, if telecom A merges with a telecom firm from Europe (in this case France) US telecom A and its French partner B will have more resources, market share relative to the competition in the U. S.The current rivals (US telecoms B, C, and D) will be ‘dwarfed’ by the size and range of the new merger (telecom A and French partner B).

From this point we can see that mergers not only increase the resources of the companies that merge, but also increase competitive advantage relative to the relevant competition. (US telecom A and French partner B now have more resources, clients, and market share than competitors B, C, and D in the US market. )

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