Merger Activity in the Eu

There is probably not one single factor to explain the increase of mergers/acquisitions within European Union countries. In fact, there may be many causes. In this essay I will briefly discuss five of the principal factors that may have led to the increased merger activity in the European Union: a stable currency, an increasing market size, competition from large foreign enterprises, and the maturing of traditional European industries and technological change. An increase in cartels in Europe would seem to indicate a laxity of enforcement of anti-trust laws. I am not aware of a weakening of anti-trust laws thus I have very limited comments concerning cartels.

A stable currency is important for mergers and acquisitions because it encourages low interest rates. Low interest rates in and of themselves do not help mergers, but the inexpensive money that low interest rates engender allows for the large loans that are sometimes necessary to complete a merger or acquisition. Mergers and acquisitions often mean that one side is being at least partially bought out, so a large amount of money goes to some people. These people want the cash to remain valuable, and thus they too have an interest in a stable currency. If they thought that the currency might devalue, they might not agree to a merger/acquisition, preferring to keep an operating asset. The Euro has been very stable since its recent introduction, which has helped to fuel the flurry of merger/acquisition activity in Europe.

Another important point when considering mergers/acquisitions is the size of the market. A small market may offer no benefit to larger companies, as their resources and services may be under-utilized and a smaller company would be better able to fit a niche. On the other hand, as the market grows, a large company may have an advantage because it would be able to achieve economies of scale. In other words, a large company could produce a product more efficiently in a large market than could a small company; conversely, a small company could produce a product more efficiently in a small market than could a large company. The consolidation of Europe has created a very large market that continues to expand with the European Union. This larger market supports economies of scale, thus larger companies are more efficient. While previously perhaps each country in Europe had their own company that produced widgets, now, with a common market, there is no need for 15 or 20 companies producing widgets that differ only slightly. So the widget companies merge, creating a bigger and more efficient corporation.

It is not only the European Union that has increased the market, but also the trend towards more world trade. As international business becomes more ubiquitous, there may be more pressure for companies to merge. For the same reasons discussed above, a large company can compete more effectively in a larger market. So a European company in competition with a large American or Chinese company would do well to merge with another European company. This merger would allow the European company to compete with the economies of scale that a large foreign company may have. The larger company would also have the resources necessary for large-scale production or services.

Europe has been industrialized for a long time, so industries there are relatively mature. As an industry matures, there tends to be less and less innovation, due to the law of diminishing returns, a tendency (not really a law) that Turgot and Malthus anticipated. That law indicates that the longer an industry has been active, the less there is to improve upon it, since most improvements will have already been made. When this happens, one of the most obvious ways to increase profits is to cut costs by merging companies. Thus, it may be that the maturity of European industry has been a factor in the increased merger activity in the E.U.

Finally, there is the technology variable. The advent of computers in the workplace allows bigger companies to be more efficient because information gets to the top level more quickly. Before computers, a bank’s size was limited because they had to have a card with one’s signature on it