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Operations and profits

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. ) We have established that the behavior of firms in the market have shown an increasing trend toward mergers, and that these mergers increase advantage relative to the relevant competition (which is what we want). Our next consideration is now the cost of expansion. Let’s say our accountants, or some advisers within our firm, have shown that it would be costly in the short run to make business trips to Europe for the purpose of strategic alliances with French telecom How can we respond to this critique?

The principle of economies of scale justifies such an expansion. By definition, economies of scale refers to the process of reducing average costs in the long run by increasing the size of the plant, the size of the firm, or the size of the industry. Refer to the definition given below: 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.

 

Soruce: http://businessays.net