Government Intervention: Managing the Economic Risks of Mergers and Acquisitions

In today’s competitive and unpredictable world, companies often seek growth opportunities in order to remain competitive and adapt to new trends. One of the most critical and popular growth strategies for organizations today is acquiring or merging with another company, either within its borders or internationally. A successful Mergers and Acquisitions (M&A) transaction may help a company achieve a significant boost in market presence, fill gaps in a company’s product or service portfolio, and increase profitability and other performance indicators. It has been demonstrated to be one of the most effective ways to grow a company’s sales, increase profitability, and ensure long-term sustainability.

M&A happens regularly in the business world, and when executed well, it can promote competition amongst businesses, empower entrepreneurship, and protect consumers while allowing for increased freedom. Because of its popularity, the government steps in and assures that the possible repercussions of this activity result in fair and healthy competition among other enterprises and that consumers are safeguarded from would-be monopolies and economic disruptions.

 

Government Intervention with Antitrust law 

Thousands of mergers and acquisitions occur yearly, ranging from large firms to regional businesses. M&As benefit the economy as a whole by improving products and services and fueling positive efficiency. Governments tend to intervene and take a deeper look into proposed mergers and acquisitions when they suspect that the deal would pose a significant risk to consumers, as some of these deals would allow companies to take control of a specific market and spike prices directly, harming consumers.

Given the potential negative impacts of such M&A activity, the Federal Trade Commission (FTC) and the Department of Justice (DOJ) have the authority to halt M&A transactions they believe will likely have a negative impact on consumers and the economy. Such as how it changes market dynamics, potentially leading to higher prices, fewer or lower-quality goods or services, or less innovation.

Antitrust laws are another tool that the government utilizes to police M&A transactions. Antitrust laws, also known as competition laws, are statutes enacted by the United States government to protect consumers against unfair commercial activities. They ensure that there is fair competition in an open-market economy. These rules have grown in tandem with the market, vigilantly protecting against monopolies and disruptions to the beneficial ebb and flow of competition.

The purpose of antitrust laws is to ensure that organizations compete fairly.  Antitrust laws are necessary, so competition among sellers result in cheaper costs, higher-quality products and services, more options, and better customer innovation. The average consumer could be highly taken advantage of and not benefit from a successful M&A transaction without the government upholding antitrust laws. Consumers would be faced with higher costs and only have access to a restricted quantity of goods and services.

An example of an antitrust law scenario is seen with Diligent,  in which you have little or no choice about what you want to buy and how antitrust laws could affect that purchase.

In the example, presuming a consumer, loves to read but prefers audiobooks, either because they have bad eyesight or just a matter of personal preference. The consumer would normally choose the best price of an audiobook between two competing audiobook companies. Assuming those two competing audiobook companies merge buying out all their competition, with smaller audiobook companies.  This may lead to combined company price increase from this M&A transaction which will force the consumer to pay a higher price or quit buying audiobooks. This scenario would be an example of violation of antitrust laws because it removes healthy competition. If no other audiobook competitors come into the market, the combined company could create a monopoly, forcing consumers to buy only from them. In either case, the government could rightly block the merger.” 

A real life example of government intervention recently occurred in the razor industry. According to Diligent,  ” The razor industry has been dominated by two companies for a long time.  Procter & Gamble, makers of Gillette brand razors, and Edgewell Personal Care, makers of Wilkinson Sword and other private-brand razors. Both of these two giants sell primarily through brick-and-mortar sales. The entry of two other razor companies, Harry’s and Dollar Shave Club, has disrupted the market with their marketing strategies, which focus on online sales as opposed to sales at brick-and-mortar stores.  Edgewell sought to purchase Harry’s for $1.37 billion but had to stop the negotiations when the U.S. competition regulator intervened. The Federal Trade Commission (FTC) said that it would block the acquisition based on allegations that would harm competition in the U.S. shaving industry.

 

Bottom line

Antitrust laws are enacted to encourage healthy competition among firms. Preserving consumers’ freedom to choose while keeping prices affordable. One of the factors that organizations considering mergers must evaluate is the risks that may arise along the road in terms of fairness and healthy competition. 

Governmental agencies typically interfere in mergers and acquisitions to protect consumers from corporate greed. These laws presumably have the consumers’ welfare at heart. 

HWA Alliance of CPA Firms understands what risks can do to an organization. We believe in the statement, “Safety is everybody’s business. Risk management is a more realistic term than safety.” As we dive into the topic of mitigating risks, it is essential to include risk management as a priority for your organization. Allow HWA to help you anticipate and avoid risks. We have a complete risk management approach in place that will safeguard your organization’s  finances, decision-making, actions, and operations. We have significant experience in various business industries and the tools and methodologies to improve your risk management functions. We also have expertise in successful M&A transactions resulting in improved profitability and increased performance metrics.

 

You are the key to your safety and success! Allow HWA Alliance to assist you!


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