Assume you an economic analyst at a technology company. The company provides technology services to cable providers such as Comcast and Verizon. The services offered by the company are directly related to maintaining the communication between the cable providers and the set top boxes. Over the past 10 years consumers have cut the cord, looking for alternatives to the high price of cable TV. It is your opinion, the trend of consumers moving away from traditional cable TV and into internet streaming services will not only continue, but accelerate moving forward. Some members of the board of directors believe it is a good idea for the company to merge with a competitor in the same industry.

As an economic analyst employed by the technology company, it is your job to advise management. Is the potential merger between your company and a current competitor a good idea? Use the economic principles and concepts covered in class this week to construct a detailed letter to the Board of Directors. Explain in detail the potential economic consequences of the proposed merger.

As an additional resource, students are encouraged to read the article "How mergers go wrong - It is important to learn the lessons from the failures and successes of past mergers" July 20th 2000 The Economist. The article discusses the potential pitfalls of corporate mergers.

Article

THEY are, like second marriages, a triumph of hope over experience. A stream of studies has shown that corporate mergers have even higher failure rates than the liaisons of Hollywood stars. One report by KPMG, a consultancy, concluded that over half of them had destroyed shareholder value, and a further third had made no difference. Yet over the past two years, companies around the globe have jumped into bed with each other on an unprecedented scale. In 1999, the worldwide value of mergers and acquisitions rose by over a third to more than $3.4 trillion. In Europe, the hottest merger zone of all, the figure more than doubled, to $1.2 trillion. Can today's would-be corporate partners avoid repeating yesterday's bad experiences? To help answer that question, The Economist will over the next six weeks publish a series of case studies of mergers, most of which happened at least two years ago so that lessons can safely be drawn. None is in the Titanic league of merger disasters on the scale, say, of AT&T's 1991 purchase of NCR, the second-largest acquisition in the computer industry, which was reversed after years of immense losses. But none has gone entirely smoothly either; and all offer useful insights. Most of the mergers we have looked at were defensive, meaning that they were initiated in part because the companies involved were under threat. Sometimes, the threat was a change in the size or nature of a particular market: McDonnell Douglas merged with Boeing, for example, because its biggest customer, the Pentagon, was cutting spending by half. Occasionally the threat lay in that buzzword of today, globalisation, and its concomitant demand for greater scale: Chrysler merged with Daimler-Benz because, even as number three in the world's largest car market, it was too small to prosper alone. Or the threat may have come from another predator: Bayerische Vereinsbank sought a merger with a Bavarian rival, Hypobank, because its management was scared of being gobbled up by Deutsche Bank. When a company merges to escape a threat, it often imports its problems into the marriage. Its new mate, in the starry moments of courtship, may find it easier to see the opportunities than the challenges. Hypobank is an egregious example: it took more than two years for Vereinsbank to discover the full horror of its partner's balance sheet. As important as the need for clear vision and due diligence before a merger is a clear strategy after it. As every employee knows full well, mergers tend to mean job losses. No sooner is the announcement out than the most marketable and valuable members of staff send out their resums. Unless they learn quickly that the deal will give them opportunities rather than pay-offs, they will be gone, often taking a big chunk of shareholder value with them. The mergers that worked relatively well were those where managers both had a sensible strategy and set about implementing it straight away. The acquisition of Turner Broadcasting by Time Warner comes in this category: Gerald Levin, Time Warner's boss, had developed in the late 1980s a vision of the modern media conglomerate, offering one piece of content to many different audiences. At DaimlerChrysler, too, merger integration was pursued with Teutonic thoroughnessalthough not skilfully enough to avoid the loss of several key people. And after Citibank merged with Travelers to form Citigroup, the world's biggest financial-services firm, it quickly reaped big profits from cost-cuttingthough rather less from its original aim of cross-selling different financial services to customers. When the gods are against it. As in every walk of business, luck and the economic background play a big part. Merging in an upswing is easier to do, as rising share prices allow bidders to finance deals with their own paper, and it is also easier to reap rewards when economies are growing. But companies, like people, can make their own luck: Boeing's Phantom Works, an in-house think-tank that has speeded the integration process, developed new products and refocused the company on its diverse customers, was a serendipitous creation in the turmoil that followed its deal with McDonnell Douglas. Above all, personal chemistry matters every bit as much in mergers as it does in marriage. It matters most at the top. No company can have two bosses for long. So one boss must accept a less important role with good grace. After many months of damaging dithering, Citibank's John Reed eventually made way for Sandy Weill of Travelers. It helps if a boss has a financial interest in making the merger work, as the success of the union of Time Warner and Turner shows: few people would have bet at the outset that the mercurial Ted Turner would have been able to work with the stolid Mr Levin. Without leadership from its top manager, a company that is being bought can all too often feel like a defeated army in an occupied land, and will wage guerrilla warfare against a deal. The fact that mergers so often fail is not, of itself, a reason for companies to avoid them altogether. But it does mean that merging is never going to be a simple solution to a company's problems. And it also suggests that it would be a good idea, before they book their weddings, if managers boned up on the experiences of those who have gone before. They might begin with our series of briefs.