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Industries have resorted to expand their capacities through mergers and acquisition. This is sometimes viewed as a defensive mechanism for an organization to wind out competition through merging with its competitor. The industry of telecommunication has experienced an increase in mergers, as this industry is depicted to be the most profitable and rapidly developing. The aim is the attainment of competitive benefits in the industry. Majority of mergers that take place in the telecommunication industries are horizontal as the merging entities do work in the same industry.
The keen interest of this service industry is the option to cut expenses and the achievement of greater market share, which can accomplish the control of markets. The prosperous trend that is displayed by the industry has been advocated to continue by the market analysts. This has propelled the industry to strategize on ways to be recognized globally, with mergers being the first priority. There are several ways of merger that include the purchase of all or some of the acquired company’s assets and buying the majority share of its stock. The two entities merging, experience more worth than when apart. Generally, the potential advantages of mergers are the tax advantages, the combination of the complimentary resources and the elimination of inefficiencies.
The reason for the government’s intervention to the process of merger is to ensure that the regulation that guides the process is followed. Most mergers end up in restructuring which have adverse effects on the stakeholders of the entity acquired. During the process of merger, there are stocks that are exchanged and are considered to be tax-free (NetAction). This allows the owners of the company to exchange their stock of the acquiring company without payment of tax. The government plays an important role in the process in ensuring the combination of these entities, does not understate their stock or the acquired company not to be understated by the acquiring company.
The rational intervention by the government is the protection of the stakeholders from the exploitation by the acquiring company. The equities of the acquired company can be undervalued by the acquiring company, making it unworthy for merging, and the interest of the workforce of the acquired company is taken into consideration. This is because the aim of merging is cost cutting and elimination of competition in the market. Without the intervention of the government, the majority of the workforce of the acquired company ends up losing jobs, thus, increasing the burden of government insurance, due to unemployment, and rendering the loss of revenue by the government.
The intentions of the merger must be well understood, whether economical or whether based on selfish motives: creation of monopoly with uncompetitive fixed prices of their products (NetAction). There are acquisitions based on self-interests which are not economically tarnishing the image of the government to protect companies from malicious competition. The company being acquired may be having financial problems, and it is possible not to transfer the creditor’s accounts to the acquiring company, thus, making the creditors lose their proceeds.
The survival of the company in the current global market environment depends on its competitiveness; the best option is through merging. The telecommunication industry is being precipitated by the reaction to the changes in the configurations of the industry due to the fundamental shock. The supply and technological shock have adverse effects, as they have resulted to excess capacity of production, and mergers are the sure way of eliminating the excess capacity. The industry wide mergers cause their association with the expansion not to be clear-cut and the immediate effects are the reallocation of the existing assets. This occurs when an entity tries to increase their size in the industry expansion.
The role of merger in the telecommunication is the removal of duplicated function and the rationalization of operations which have the effect of reducing the firm’s assets base. The activity of merger in the industry is the decomposition into the fundamental roles of expansion and concentration. Mergers in the telecommunication industry play a major role in the enhancement of quality products and services offered by the firm. The number of customer increases steadily, compared to the period when the companies were not merged. The assumption that consumer choice is based on the quality of a product and the price, the merger of these companies will enable the offering of quality services to customers at a price worth to both the firm and the consumer (McDonald, Coulthard, & Lange, 2005).
A firm can decide to expand its operation through the utilization of capital assets, when the concept of merger does not materialize economically, as this is the only option by which the firm is left with. There are many complexities that face the firm when it decides to go alone. The utilization of the industry will be limited, as it is not possible for the firm to make use of all its excess capacity. This is due to the fact that competition for the market share of the telecommunication industries will increase, as the firms try to access all demographic and geographical areas. This, in return, will read price war in the mobile industry, as the firms use all the resources at its disposal to gain the maximum customer base. This price war is a disadvantage, as the firms would not be expanding, and the resources used in promotion could be used in research and development (Andrade & Stafford, 2004).
The expansion of the companies will become stagnate due to the excess capacity the firms are operating. The farms will be duplicating resources, as technology which could be used by merged firms is being used by one firm, as each firm is determined to add value to the services they are offering to consumers (Andrade & Stafford, 2004). The value which the customers get from the firm that operating alone `is less in quality, as the development of quality will be hampered by the existence of fierce competition. Resources for technological advancement are utilized through promotion of the company’s services. The lowering of prices due to competition with the aim of capturing a significant market share leads to decreased return (McDonald, Coulthard, & Lange, 2005)s.
The merger of firms in telecommunication sector has benefits to the firm and the stakeholders. The building of infrastructure is enhanced in a way that is more convenient, thus, increasing the value of services offered. Resources from both entities are pooled together, and advanced infrastructure built is used by both companies. The infrastructure that is build is of high quality, enabling the firms to offer quality services to their customers. The offering of quality is the primary principle that attracts customers to use products of the company. Due to the high quality of the company’s products, the customers are able and willing to pay for the price that is offered, thus, resulting to an increased customer base (McDonald, Coulthard, & Lange, 2005).
The licensing of mergers is relatively easier than that of individual company, and thus companies opt for a merger, in order to get rid of licensing handles. The brand value of the merged company is increased, as more customers are attracted to its quality services offers leading to royalty of the products, thus, propelling the growth of the company which enhances the recognition of the brand image. The network coverage of the firms is extensive, as there is no duplication of equipment and technological advances (Andrade & Stafford, 2004). The resources generated from the companies operation are used for research and development, which creates an avenue for new products and services to the market. The reason behind the expansion of firms is primarily due to the returns and capturing of a significant market share. The firm is aimed at increasing the profit to the firm and increasing the value of the stakeholders. The purpose of cutting costs is to build the image of the firm, thus, value addition.