The fictitious company chosen for this exercise is a medium-sized investment bank called Armor Bank, which has a footprint in states in Southern United States. The bank has plans for penetrating markets in the rest of the country and is mulling options for a merger.
Explain why government regulation is needed, citing the major reasons for government involvement in a market economy.
Government regulation is a concept that is seen out-dated in capitalist economies. The faith in unfettered free trade is thought to be a panacea for all economic problems. But empirical evidence points to the fallacy of this theory. As it is, government intervention is only sought when there is a major economic crisis, like during the 2008 Wall Street crash. It is a bit unfair for the general population that tax-payer money is doled out to greedy corporations when they are in trouble. At the same time, during the boom their behavior is not regulated in the name of Laissez-faire. The activities of the financial services industry being the cause for the current economic slowdown, it would be prudent to call for greater government regulation in this area. The prospects and possibilities of Armor Bank for further expansion will have to be weighed in the broader context of the stability and long-term sustainability of the economy.
Justify the rationale for the intervention of government in the market process in the U.S.
The American economy had always seen cycles of boom and bust. It is fair to say that the domestic and economic policies framework of various American Presidents of past have been generally business friendly and thereby been lax on regulation. The most recent economic crisis witnessed across the world was precipitated by financial institutions in the United States. The collapse of the Lehman Brothers in 2008 brought to light the reckless and greedy decision making of top executives in this industry, leading to the inevitable collapse. In this context, the idea of regulation as a legislative means to “encourage the things society as a whole likes (such as economic development) and discourage the things it doesn’t (thus, the sin tax)” (Rosenzweig, 2007) is the way to go. As globalization and technology advance,
“financial institutions become the focus of additional regulation; new regulations might be seen as a way of thwarting money laundering, achieving community development goals, or channelling credit to needy borrowers, for example. Such uses are legitimate reasons that lead regulation toward its true mission – to help establish the boundaries within which an industry can operate.” (Jordan, 2001)
In the prevailing regulatory environment in the United States, there are only limited hurdles for corporate consolidation. This means that there is a constant flux of merger & acquisition activities in corporate America. But such a free reign had not helped strengthen the general economy, beyond the private sector. Hence, there is credence to the view that greater control should be exerted over M&A activities. This is especially true with respect to the financial services sector that bears major culpability for the current decline of the economy.
Assuming that the merger faces some threats and that the industry decides on self-expansion as an alternative strategy, describe the additional complexities that would arise under this new scenario of expansion via capital projects.
Expansion via capital projects is a relatively more challenging exercise than finding opportunities for mergers. Yet, this could be achieved via starting operations in new and unexplored verticals within the financial services sector. In the context of Armor Bank, if the company could consolidate itself into a financial holding company, new opportunities for growth beckon, including “banking and insurance, investment and commercial banking, mortgage banking, trusts, and annuities…even the lines between banking and commerce blur.” (Jordan, 2001) But managing a broad portfolio will bring its own share of legal, financial and managerial complexities which requires adroit handling.
Analyze how the different forces will come together to create a convergence between the interests of stockholders and managers.
Often, the interests of shareholders and managers are the same. Both parties want a stable financial situation, a bright forecast for performance and opportunities for expansion. The conflict might occur in the area of executive remuneration, where the United States ranks quite poorly. Among all industrialized societies the disparity between top executive compensation and employees from lower ranks is most pronounced in Corporate America. But this potential conflict area could be converted into an opportunity for growth and consolidation if the top management adopts strong ethical practices and team ethics. Just to illustrate the opportunities within the banking sector, recent years has seen “growing size, concentration, and complexity. Banks now spread across vast regions of the country (or around the world), engaging in wholesale, retail, and subprime lending, Internet banking, and trust services, funded by a broad array of deposit and non-deposit liabilities. And this is just “traditional” banking.” (Walter, 2004) Hence, there is plenty to go round for everyone. Therein lay opportunities for convergence between the interests of stockholders and managers. By simply adhering to standards of team ethic, all related parties can benefit.
Speculate about the implications for the goals of the firm as to whether to maximize the industry’s profits or to create more value for the shareholders.
One of the challenges to the management is in balancing the imperatives of incorporation, namely increasing value for stockholders, against the requirements and conditions of the broader economy. Sometimes, these twin-goals could converge, making decision making straightforward. But there are also moments when the two goals are in conflict and a balance will have to be found. Moreover, a sound balance sheet with reasonable profits is one of the criteria for enhancing share value. In other words, the goal of the Armor Bank to maximize its profits will generally help create value for shareholders.
Jordan, J. L. (2001). Effective Supervision and the Evolving Financial Services Industry.Economic Commentary (Cleveland), 1+.
Rosenzweig, B. E. (2007). Private versus Public Regulation: A Comparative Analysis of British and American Takeover Controls. Duke Journal of Comparative & International Law, 18(1), 213+.
Walter, I. (2004). Mergers and Acquisitions in Banking and Finance: What Works, What Fails, and Why. New York: Oxford University Press.