Saturday, October 24, 2015

Corporate and scale

The season for mergers, and acquisitions is in full swing.  Economics of current time and markets are forcing it.  The Economist states in "Land of the corporate giants":

"Some things only get bigger. From boats and planes to skyscrapers and shopping malls, size records are routinely broken. Companies are operating at record scale, too. But if the trend towards growing ever larger is clear, the economics of bigness are far murkier. In some cases, like boats, greater size still promises greater efficiency, as fixed costs are spread over higher output. In others, like buildings, the gains from scale may be running out. Where do firms lie on this spectrum?"

The article states two key realities:

"If size does not keep driving down costs, why do big firms keep expanding? One possibility is that they are seeking to boost profits not by driving down costs but by raising prices. Buying up rivals softens competition and enables firms to charge more. American antitrust regulators recently looked back at past health-care mergers, and found that prices rose significantly after some deals. Another view is that mergers are driven by something other than profit. The “empire-building” theory holds that managers are out to increase the scale of their business whatever the cost in terms of creeping inefficiencies."

"A 2011 paper by Federal Reserve staff supports this conclusion, suggesting banks pay a premium to merge if the tie-up gives them “too-big-to-fail” status."

Read the complete article here.

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