Types of Corporate Restructuring

Mergers and Consolidations

Consolidation is a type of corporate restructuring and occurs when two or more organizations come together to form a completely new corporation. This new corporation typically include all assets and liabilities of the combined separate companies. Consolidations usually occur between organizations of similar size.

Merger is also a type of corporate restructuring and occurs when two or more organizations merge into one. Organizations that merged into one usually maintain the identity of most important organization.

Merger often involves one or more smaller organizations merging into a larger organization and becoming part of that larger organization. Merging involves absorption of assets and liabilities of all firms merged. Mergers also can be called acquisitions, buyouts or takeovers.

Within a merger, the acquiring company (generally larger and more important company) usually will approach a target company (smaller and less important company) to arrange a merger.

Sometimes, however, the target company may approach acquiring company. The key outcome that the acquiring company seeks from a merger is synergy, leverage, key staff, technology or even preventing a competitor from acquiring a particular company.

Government and mergers

Governments regulate mergers. The main concern of the government is to ensure that competition is not eliminated. This concern is especially relevant if one direct competitor attempts to acquire another direct competitor. Such a merger could result in higher prices for consumers and lower output of combined organizations (fewer product or service options or inferior customer service). If such a situation occurs then population may end up worse off than it was before the merger.

Mergers, of course, also may provide social benefits. Such benefits include economies of scale and scope, better utilization of resources, higher output and improved quality.

Therefore, government usually prohibits only those mergers in which anticompetitive disadvantages outweigh social benefits.

Hostile and Friendly mergers (takeovers)

Hostile merger (hostile takeover) usually occurs when the acquiring company approaches target company but management of the target company or the board of directors of the target company do not support the proposal for acquisition. In such a situation, the target company may take actions to make it harder or impossible for the hostile merger to take place by executing hostile merger defence strategies.

Acquiring company then attempts to obtain the required amount of shares in the market place via tender offers. Tender offers refer to formal offers made to the shareholders in the market place to obtain a certain amount of shares at a given price which is above the current market price.

The acquiring company may also undertake a creeping tender offer by silently purchasing enough shares in the market place before making their intentions known.

Hostile mergers (hostile takeover) also occurs if the acquiring company approached shareholders directly without firstly approaching the management and board of directors of the target company.

Another way a hostile merger can occur is if the acquiring company engages in a proxy fight by trying to obtain support of enough shareholders to replace management with new management which will endorse the takeover.

Certainly hostile mergers are more difficult to undertake. The acquiring company may struggle to obtain a loan if it needs to borrow to finance a hostile takeover as banks usually are not supportive of hostile takeovers.

The acquiring company is also at greater risk under a hostile takeover because it cannot undertake an in depth due diligence of the target company and will have to rely completely on the publicly available information to make a decision to acquire a target company. Nevertheless, hostile takeovers also take place.

Friendly merger (friendly takeover) involves a situation where the acquiring company approaches the management of the target company with the proposal for acquisition. If management supports such an acquisition and if the board of directors sees a merger to be in best interests of shareholders, then the board makes such a recommendation to the shareholders. If shareholders approval is obtained then a friendly merger occurs and it is completed by the acquiring company obtaining shares in the target company.

Motives for mergers

Any action undertaken by business must be based on achieving the main objective of the enterprise which is the wealth maximization of the owners of the enterprise.

The main objective of a merger should be the same as the main objective of the firm. Namely, the maximization of the owners’ wealth by improving the share value.

There are two driving forces for mergers, which should be consistent with the main objective. They include strategic and financial reasons.

Under a strategic merger the performance of firms after the merger is higher than performance of firms before merger. The strategic merger involves economies of scale due to combining two or more firms to achieve greater productivity and profitability.

Financial mergers are conducted due to a perception by the acquiring company that the target company can be managed and structured better after acquisition. In this way the acquiring company anticipates to unlock unrealized value from the target company. Such mergers rely significantly on debt to finance acquisition. A leveraged buyout (LBOs) is an example of financial mergers. Strategic mergers are more prevalent than financial mergers.

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The economic policy and special interest groups

Yet another sub-group that influences the economic policy decision-making process is special interest groups. Individuals with similar interests form a special interest group which makes them more powerful in influencing the decision-making on economic policy and other issues. The beneficial factors of special interest groups within context of economic policy decision making is supported by pluralism, which is a model of economic policy making.

Special interest groups that exert an influence on economic policy decision-making include three main sub-groups:

  • organized business groups
  • non-governmental organizations
  • organized labor groups

Examples of organized business groups include organized business and agriculture. Examples of non-governmental groups include educational and welfare organizations. Examples of organized labor groups include trade unions.

Other interest groups that exert an influence on economic policy decision-making include international financial organizations such as the World Bank and the International Monetary Fund (IMF) as well as media and foreign governments.

Some individuals hold the opinion that special interest groups are excessive in their quantity and pressure on the government to influence decisions concerning economic policy. They feel that such pressure and “disproportionate” influence only complicates and slows down the decision-making process with regards to the economic policy.

Nevertheless, each special interest group is an important constituent influencing government with regards to economic policy decision-making process. According to pluralism, one of the models of economic policy making, the role of each interest group is crucial along with roles of a technocrat, a political leader and a bureaucrat.

On the flip side of the coin, special interest groups are also seen to have a beneficial influence within context of economic policy decision making. They serve as a watchdog of the government’s actions (e.g. actions of politicians, technocrats and bureaucrats) and of building important networks within communities or regions.

 

A bureaucrat and bureaucrat’s role in setting the economic policy

A bureaucrat is a constituent of a bureaucracy. Bureaucracy is usually means governments but can also refer to specific organizations. As an example, a large private organization is also a bureaucracy and an individual working for such an entity is a bureaucrat.

Bureaucrat, as a word, originated from the French word bureau, which means “desk”. This name was selected because bureaucrats are seen as individuals who work behind the desk.

However, here we are concerned with a bureaucrat who is an employee of the government and an economic policy decision-making participant.

A bureaucrat is an agent of a political leader (principal) and he or she implements policy choices of politicians. One of the big differences between a politician and a bureaucrat is that the latter is appointed and the former is elected. Some bureaucrats are technocrats. Technocrats are professionals, such as economists and engineers, who advise politicians on the areas of their expertise. For example, economists may advise on economic policy choices.

Bureaucrats are often driven by motives other than being a faithful servant (agent) of politicians (principals). A bureaucrat is a human being with his or her own agendas, desires and ambitions. Along with meritorious motives, he or she may be driven to maximize income, status and power or to advance his or her career.

In the economic theory, it is assumed that a bureaucrat is driven to maximize his or her budget. This occurs because the bigger the budget that a bureaucrat controls, the bigger the perceived power and the status and, thus, satisfaction of a bureaucrat.

Therefore, bureaucrats have an incentive to arrange for a budget which is above the optimal (most effective) budget level and this leads to excessive spending by government. In the pursuit of enlarging the budget, a bureaucrat may exaggerate benefits and downplay costs and threats.

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The economic policy decisions: who is behind them?

We mentioned in the introduction to the economic policy that economic policy is a purposeful action (or purposeful non-action) by the government with the intent to affect economic behavior with the goal of achieving certain outcomes which will improve the material well-being of society. However, of what does government consists? Who really makes the decisions on economic policy?

It is generally accepted in the conventional economic theory that economists (technocrats) advice politicians with regard to the economic policy choices. Politicians than make economic policy choices which are implemented by public workers (bureaucrats).

Each of these sub-groups of the government have their own motivation behind making certain policy decisions and their motives must be recognized. A political leader (policy maker), for example, is generally motivated to increase his or her votes and to stay in the power. A bureaucrat is usually motivated to increase his or her budget which will increase his or her power.

Government sub-groups consist of real people with their own agendas, motives and goals, which are sometimes not aligned with the assumption the government always acts in the national interest with the goal of achieving economic stability and prosperity. This will distort the effectiveness and appropriateness of the economic policy choices.

Now let’s take a look at some sub-groups of the government which are involved in economic policy decision making.

In the articles that follow we will take a closer look at different groups which influence economic policy decisions. We will particularly discuss a political leader’s role and political business cycle theories. We will also take a closer look at the role of a bureaucrat, including the role of a technocrat, and their role in the economic policy decision making. Lastly we will address the role of the special interest groups within the context of their influence on the economic policy decision making.

Later, when we will discuss four models of economic policy making, we will look at the role of each constituent within each model in more aggregated format. However, we will start from looking at their roles in isolation:

The role of a political leader in setting economic policy is very prominent. According to standard economic theory, technocrats (economists) provide recommendations on economic policy choices to a political leader or group of politicians who, in turn, make economic policy choices which are implemented by bureaucrats.

The role of a bureaucrat in setting economic policy is instrumental. A bureaucrat is an individual who essentially implements economic policy set by politicians.

Special interest groups that exert an influence on economic policy decision-making include three main sub-groups: organized business groups, non-governmental organizations and organized labor groups.

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You may read this related article entitled “Who is behind Bush economic policy” for deeper understanding of how economic policy decisions are made in the real world.

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