The Theory of Corporate Finance Assignment Example | Topics and Well Written Essays - 3500 words

The Theory of Corporate Finance - Assignment Example The company's pricing data revealed that the Staples planned to establish their monopoly, and wanted to increase the prices of their product 13% after the merger. The merger was therefore criticized and blocked by the trading regulatory organizations, this saved 'consumers an estimated $1.1 billion over five years' (Yang, 2005), which otherwise would have been spent towards high prices. The acquisition and merger of the supplier with the reseller are regarded as a vertical merger. In the case of the vertical merger, both the parties are involved in the buyer-seller relationship. The acquisition of the Medico Container Services by Merck is regarded as a vertical merger. The regulatory authorities have appreciated exercises of vertical mergers. It is expected that consumers are also able to benefit from the vertical mergers, because such activities i.e. the integration of the supply chain, increase the efficiencies, the prices stabilize and quality of the services also improve. The mer ger of the Time Warner Inc. and Turner Corp., which are entirely different entertainment networks, has improved the services of the entertainment giants greatly. The regulatory authorities expressed their concerns that Time Warner after merger will be reluctant to offer and sell its video programs to other competitors of the cable TV companies, and Turner Corp. will have extra benefit through such bargains of merger, and Turner Corp. will be offered to programme right at discriminatory rates, therefore both the companies will establish their monopolies against other competitors including Direct Broadcast Satellite and new wireless cable technologies. The regulatory authority also feared that the merger will affect competition in the production of video programming; the merger will allow Time-Turner to refuse the services of transmission by competitors. The regulatory authority, therefore, approved the merger as it was likely to improve the services, but ' Direct Broadcast Satellite and new wireless cable technologies' (Yang, 2005). The Corporate Diversification has been discussed in detail by the financial economists, the analysts are of the opinion that corporate diversification has a lesser degree of favorable impact in judging the benefits of diversification for different reasons. The primary reason is that 'any diversification possibilities that corporations might have, will, in a perfect capital market, already have been exhausted through shareholders' individual portfolio choices' (Yang, 2005). The secondary reason is that the diversification discount i.e. the diversified corporations have the privilege to trade at discounted rates as compared to their non-diversified counterparts. It has been therefore concluded that corporate diversification is neutral, but has the potential to damage strategy. Surprisingly, the corporate diversification has been strong practice, 'At face value, diversification can be explained by the fact that when pooling income stre ams that are less than perfectly positively correlated, the resulting income stream is less volatile than were the constituent income streams' (Yang, 2005). The dilution of the risk factor, therefore, has the potential to be beneficial. The critics of the corporate diversification are of the opinion that any reduction that can be achieved through diversification, by any of the firms, 'can be replicated by the individual shareholders through an appropriately chosen portfolio'.