Merger Analysis Of Vodafone Airtouch And Mannesmann Ag Economics Essay

The circumstance on merger between two competing firms- English telecommunication company, Vodafone Airtouch and German mobile supplier, Mannesmann AG- will be my highlight of this report. In short, this case illustrates a hostile takeover by Vodafone. Vodafone initiates the merger as it recognizes it as an opportunity for the firm to broaden in a rapidly changing marketing communications technology environment in Europe at that time in time. In the beginning, Mannesmann rejected the proposal. However, in a twist of event, it was eventually remaining without a choice but to merger with Vodafone. Third functions were enraged as they treat this move as anticompetitive. They argued that the merging entity would gain dominating market power, increase obstacles to entry and reap economies to scale that they could only imagine. The situation was helped bring forth to the European Commission rate which only allow for the merger to achieve success after Mannesmann de-merge with Orange and also after Vodafone ensured that it will enable third party non-discriminatory access to the merged entity's included network so as to provide advanced mobile services to their particular customers. The Commission rate viewed these undertakings as sufficient to eliminate the competition concerns from the inability of third celebrations to provide competitive smooth pan-European mobile services.

In this survey, I'll review the financial benefits, how merger impacts upon consumers and/or producers gain, as well as, the full total welfare. I'll also touch about how merger gets the potential to reduce competition and lastly, the reasoning of your competition authority's decision that causes the success of the merger.

ECONOMIC ANALYSIS

The merger between Vodafone is Mannesmann is considered to be always a horizontal one since both companies runs within telecommunication industry. The merger of both entities reduces the number of competing organizations by one and at the same time, increases the commercial concentration. Theoretically, a decrease in number of businesses competing reduces resource whilst increasing prices of the good which is deemed to be bad for consumers. The idea of boosting/diminishing consumer surplus is further talked about later in the statement.

It is not necessarily true that fewer companies and higher prices automatically result in higher profits for the merging organizations. For instance, success of each firm is ˜ in a four-firm industry. So, gains of two specific firms simply soon add up to. Now, three firms remain following the merger of two. We see a decrease in profitability from to 1/3 for the merged organizations. And although higher industrial amount improves sales, this upsurge in sales is insufficient to offset the rise in prices incurred. Success still declines making the merging companies worse off. Thus, charging at price equals to marginal cost provides no motivation to combine unless all businesses on the market merge to form a monopoly.

Having mentioned the aforementioned, merger doesn't only take place only when all firms combine. In reality, conditions such as Vodafone/Mannesmann demonstrated that mergers can result in cost lowering. The efficiency that arises could be strong enough to operate a vehicle this merger. Businesses would want to produce anyway point of the AC curve where they will be producing efficiently. They avoid duplication of set costs when they consolidate management rather than employing two people to perform an identical task. By doing so, the firms are able to lower their cost of labour. Furthermore, both firms are only required to pay a fixed cost such as land and working facilities, only one time following the merger. Effectively, a cost keeping of the set cost will increase profits, providing a motivation to merge specially when they increase their prices. Hence, the organizations may do away with redundant labour, possessions and facilities.

As we know, a merger would lead to a growth in price as lesser firms are left rivalling on the market. Businesses are better off with a higher price enforced on consumers and when they gain from higher producer surplus. The contrary applies for consumers who are worse off when prices increase. If the increase in maker surplus outweighs the decrease in consumer surplus, total welfare is thought to have increase.

However, when the merger reduces marginal cost for Vodafone and Mannesmann, the merged organizations may pass on such less expensive with their consumers in the form of lower prices. Lower prices are usually good for consumers. As consumer surplus go up, there will be a subsequent upsurge in total welfare.

Moreover, there might again be cost efficiencies which explain why merged companies can incur a lower marginal cost than the two pre-merger companies. Synergies can be easily exploited between the merging firms. Each firm recognizes the actual other company is with the capacity of doing and thus, they only produce goods and services that provide them the competitive edge. Overall, a semester in marginal cost means cost keeping that facilitates profitability. This profitability, subsequently, promotes merger.

Price, P

P2

P1 = C1

C2 Demand, D

0 Q2 Q1 Quantity, Q

Figure 1: Diagram illustrating welfare ramifications of a cost lessening merger (Modified from lecture slides)

From Body 1, there is absolutely no company surplus when price equals to cost (P1 = C1). Businesses are only earning income while producing at Q1. At this time, consumer surplus resides in the region under the demand curve and above the C1 horizontal cost curve. Following the merger between Vodafone and Mannesmann, lesser firms are still left competing and therefore, price increases from P1 to P2. Consumers are little by little worse off with the climb in cost. Now, their surplus is reduced to the area under the demand curve and above P2. The region enclosed within P2, P1 and Q2 is the surplus that is moved from consumer to designer. Alternatively, the triangular areas under the demand curve, but bounded within Q1, Q2 and P1 signifies the deadweight loss. This deadweight reduction identifies the surplus that is no more gained by consumers and providers.

Concurrently, there could be synergies between the merging firms that allow cost saving. This cost efficiency lowers cost from C1 to C2. Organizations are better off. As shown in Figure 1, the region enclosed within P2, C2 and Q2 presents total maker surplus after the merger. The area within C1, C2 and Q2 is the surplus gained by companies from synergy that render better opportunities to increase margins.

Looking at the above mentioned, we see that it is beneficial for companies to combine as they incur company surplus. Total surplus improves because of this of a growth in developer surplus.

Moving on, we will consider competition with regards to the merger between Vodafone and Mannesmann. Assuming that there is no cost saving, a rise in price due to merger will ultimately erode consumer surplus greatly, to a spot where loss to consumer outweigh profits to producers. In the producer's point of view, this may provide an incentive to allow them to seek excuses to merge. They may falsify information to convince competition specialists to approve merger.

Taking the impact of merger into account, competition specialists have to critically decide on whether to approve a merger especially those which involve large organizations like Vodafone and Mannesmann. Such decision process will demand them to obtain accurate information which is not always easy to obtain.

One main worried of competition government bodies is the size of the merged organization. Market segments dominated by large organizations have a tendency to further inflate prices and drive down consumer's welfare. With reference to the case accessible, competition specialists were initially unwilling to offer merger to both firms. They were worried that merger between the two large organizations will come out disastrous because they are already producing beyond Q* due to their sheer size. Approving their merger would only mean that these firms operate beyond the MES. Companies that merge at this stage face diseconomies of range when cost is driven up as they continue to increase output along the AC curve.

Cost, C Average Cost, AC

MES

0 Q* Quantity, Q

Figure 2: Diagram illustrating Minimum amount Efficient Size (MES) on the AC curve.

Rival firms highly disapprove Vodafone's proposal to merge with Mannesmann as they view the move to be anti-competitive. They argued that the merged entity will be able to provide exclusive services on a smooth basis because the merged entity gets the integrated network that such services require. In the proposal, however, Vodafone stated that if an interconnected network does develop it could not bring about competition concerns, both because there will be opportunity for such networks to build up, and because there will be other routes for providers to ensure good competition within the telecommunication industry. The point is, Vodafone considers that other providers will be in a posture to provide "seamless" services on the same scope soon.

COMPETITION AUTHORITIES' DECISIONS

The Commission's research has shown that with the complexities involved in agreeing on the modification on the prevailing network construction, centralised management solutions and cost and revenue allocation can make it exceedingly problematic for third parties to replicate. As well as the uncertainty regarding the replication of the merged entity's network through the right combo of mergers, this process would be extremely costly, time consuming and fraught with regulatory delays given the need for regulatory approval. This is reinforced by the significant number of failures over the past years in building similar solutions in related marketplaces within the platform of joint ventures or strategic alliances.

The merged entity will be the only mobile operator able to capture future progress through new customers who would be attracted by the seamless services offered by Vodafone/Mannesmann on its own network. Rival companies which could not give you a similar service to catch the attention of enough market stocks will see themselves sacrificing out in the competition. Furthermore, given their inability to replicate the new entity's network, competition will have, at best, i. e. if they're allowed usage of Vodafone's network in any way, significant costs and performance/quality down sides given its dependency on Vodafone/Mannesmann. The merged entity's power to refuse third people' usage of the its network or to allow gain access to on conditions and conditions entrench the merged entity into a dominant position and diminishes third party offerings.

What's more, customers would generally prefer Vodafone/Mannesmann to other mobile operators given its unrivalled possibility to provide advanced smooth services across Europe. This reinforces the merged entity's position on the market as a prominent player.

And through its unrivalled large customer foundation and position, Vodafone/Mannesmann will be in a unique bargaining electricity against handset manufacturers to discuss design functionalities unavailable to rivalling providers. Customizing handsets make it more difficult for roamers from rivalling mobile operators to adopt advantage of the advanced pan-European services available over Vodafone's network. Again, competitors lose out if the merger were to be approved.

Upon inspection the Authorities revealed that the merged entity would face stiff competition from other operators and will not like a dominant purchasing electric power over time. They arranged that the merged entity will be a strong buyer searching for mobile handsets and network equipment, but there continue to be many other equivalent incumbents competing on the market. So, the merged entity would not achieve the necessary buying power to become dominant on the marketplace.

In the light of the above the government bodies concluded, " the notified business deal does not lead to the creation or conditioning of a dominating position in the global markets for mobile handset and mobile network equipment as a result of which effective competition would be significant impeded in those marketplaces. " Meaning to say, the regulators do not view the merger as a significant menace since it's forces would have been neutralized by other relevant opponents within the industry.

Further safety measures were used ensuring good competition within the industry as seen in the demerger of Orange with Mannesmann. This move is aimed at diluting the powers of Vodafone and Mannesmann following the approval of the merger. It is a well-received decision as it takes out the competitive overlaps in the United Kingdom and Belgian markets of telecommunication services.

Besides Vodafone has, on its own consideration, pledged to enable third party non-discriminatory usage of the merger entity's involved network which includes undertakings which cover exclusive roaming agreements, third people' access to roaming plans, third parties' access to wholesale arrangements, requirements and SIM-cards and a set of implementing measures aimed at ensuring their effectiveness. On top of that, it has proposed to set up a fast record dispute resolution method in order to resolve disagreements in the described aspects and also to reduce its anticompetitive stance. The undertakings as well as demerger is thought to be justifiable since it removes the competition concerns from the failure of third functions to provide similar competitive seamless pan-European mobile services.

CONCLUSION

In finish, Vodafone's proposal to merge with Mannesmann is seen as an anticompetitive threat to other telecommunication company. Rival companies were concerned that the merger would bestow considerable market capacity to the merged entity. Thus, they were strongly from the merger proposal. However, after much concern by the competition authorities, they concluded that the merger wouldn't normally inflict much hazard because of the presence of a number of strong, large and powerful customers in the market which prevent Vodafone/Mannesmann from reaching dominating position on the provision of the related services. Additionally, the demerger of Orange with Mannesmann will erode market electricity of the merged entity. Furthermore, Vodafone send undertakings that allow third get-togethers usage of its networks. Following the implementation of the undertakings, third people will be in a position to offer contending advanced pan-European mobile services which also avoid the emergence of your dominating position on the provision of these services. The probability to provide similar services in competition with Vodafone will, in turn, also develop incentives for third functions to develop competing sites. Therefore, the authorities approved of the merger between Vodafone and Mannesmann.

To some degree, I disagree that the merger should be approved. The government bodies' argument that the occurrence of equivalent incumbents will be sufficient in minimizing market ability of the merged entity comes across as weak if you ask me. Only few of such incumbents operate within the telecommunication industry. Thus, it's impact on the merged entity's market ability is almost negligible. Vodafone/Mannesmann could still operate just like a monopoly by establishing high prices and reducing outcome while erecting hurdle to admittance to deter competition. Consumer welfare would be greatly harmed therefore of the merger.

On the other hand, I support the merger as it promotes innovations. In today's competitive society, only the strongest emerge as champions. Therefore, rival companies may invest in Research and Development (R&D) in creating an ground breaking communicative technology or network system that gives it a competitive advantage over Vodafone/Mannesmann existing resources. This promotes a forward-looking competitive that benefits modern culture as a whole. Producers gain as it might develop ideas to increase efficiency while consumers may gain from perhaps cheaper costing that is passed on to them from lower development cost incurred by companies.

APPENDICES

European Competition Payment, http://ec. europa. eu/competition/mergers/cases/decisions/m1795_en. pdf, evaluated on 11 November 2010

Kendall (2010), Market segments, Competition and Regulation Lecture Notes Period 8: Mergers; and Session 9: Competition Policy

Merger Control and Remedies Policy in the E. U and U. S: the situation of Telecommunications Mergers, http://www. cerna. ensmp. fr/Documents/GLB-TelecomMergerRemedies. pdf, assessed on 12 November 2010

United Kingdom Competition Commission payment, http://www. competition-commission. org. uk/rep_pub/reports/2003/475mobilephones. htm#full, reached on 15 November 2010

Europa NEWS RELEASE Rapid "Payment clears merger between Vodafone Airtouch and Mannesmann AG with conditions", http://europa. eu/rapid/pressReleasesAction. do?reference=IP/00/373

http://information. bbc. co. uk/2/hi/business/630166. stm, evaluated on 16 November 2010

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