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TITLE (supplied by the customer): "The Merger of GTE and Bell Atlantic"

DESCRIPTION (supplied by the customer): I need a 2 page paper on why they merged, what were the benefits of the merger, what were the costs of the merger, and what does the marketplace think of the merger.

PROJECT DEVELOPED:

The new patterns of economic growth render the economy's performance highly dependent upon the developmental level as well as the quality of the telecom infrastructure. However, the telecommunications industry has over the past decade exhibited a manifest propensity and need for intensified restructuring activity, which has oftentimes come in the form of mass mergers, acquisitions, and consolidations. The profile of the Federal Communications Commission has been shifting toward the facilitating end more than the regulatory status it used to be associated with in the recent past. The social cost of mistakes and long delays in reviewing and approving major restructuring developments (instances of consolidation included) has grown extremely high, more so at a recessionary stage characterized by less than confident demand side. Accordingly, in early 2000the FCC was facing a growing pressure from Congress to wrap it up on the major cases of mergers in review. 

Bell Atlantic and GTE declared their intent to merge as early as 1998, and yet the regulatory constraints have remained as strenuous as they have somewhat controversial. Combined, these two LECs would control about a third of the local phone lines in the US, let alone the enviable market power in data and mobile communications services. The major stumbling block was GTE's Internetworking division, which is one of the key long-distance data and voice networking operators in the nation. The problem was that, while Bell Atlantic got approval to offer long-distance service in the New York area, it was still cut off from the the rest of the toll call market. Therefore, the consolidation could not be effectively deployed from the regulatory standpoint, for much of the business would be disapproved for the resultant company. After long and hot debates, the two parties (incumbents and FCC) did reach some compromise, which might even be of higher importance as an underlying for other big mergers than for this particular consolidation. We have addressed some of the benefits as expected by the incumbents, but what were the social costs and benefits, to spill over to other stakeholders, that left the FCC in so active a stance to push the case through the sheer scrutiny?

The industry profile can be outlined as requiring high initial outlay to enter the market. The high and growing proportion of fixed costs in the cost structure translates into a rather high minimum efficiency scale, or a scale of operations that could secure decent scale economies and critical cost efficiency lying at the core of staying in business. The presence of economies of scale implies that, the larger the scale of operations (the market share), the more effectively the business can spread its fixed costs (provided the incremental variable costs are low) over this scale, thus arriving at low average per-unit costs of staying in the market. In a sense, the high fixed costs and required minimum efficiency scale serve as a natural entry barrier, or indeed a case for natural monopoly power, as the market is unable to sustain as many new entrants as would desire to expand into this particular market. Moreover, the industry at large has been market with material economies of scope, which is to imply that the business could spread its costs even more effectively by expanding into new markets. The recently observed parade of mergers can largely be ascribed to the telecom services providers to economize on costs and gain some stable core market share, by capturing the synergies of joint use of assets (basically sharing the fixed costs) as well as penetrating each other's markets.

The Telecommunications Act of 1996 was intended to foster the free penetration of markets so as to stimulate competition, which has the obvious benefits for consumers as well as the rest of the corporate sector. At the same time, though, it launched a new ear of unprecedented merger activity aimed at making use of these opening markets. However, the existing regulatory framework would not allow unconditional expansion to new markets for just any participant. On the one hand, in particular where the existence of natural monopoly was sufficiently documented, companies like ATT were authorized to enjoy a high yet controllable market power, provided they behave as contestable market player. By that, we mean that it agreed to supply its core service (long distance voice and data communications) at reasonable rate, and not to attempt gaining a comparable exclusive market power in other sectors. Moreover, the reciprocity rule had it that the local exchange carrier seeking expansion onto another market had to demonstrate that it granted a similar opportunity to enter its market to other contestants, or that it thus contributed to competition rather than sought to restrict it.

Far from all mergers could show to qualify along these lines, though. Three were several reasons why the market as well as the public could perceive the GTE-BA merger as socially inefficient. In particular, the FCC applies some formal tests to measuring the social cost of such decisions based on the industry initial conditions such as the ongoing concentration. The latter is conventionally measured by the Hirschmann-Herfindale Index (HHI), which sums the squared equivalents of all participants market powers in percentage terms. Consequently, its minimum value of 0 corresponds to perfect competition, while its upper bound of 10,000 (100 percent squared) refers to the degenerate case of monopoly. One tentative cutoff point applied was 1,500 on this scale, beyond which the market was considered to be more than weakly concentrated, that is oligopolistic yet not very effective in controlling price. The Merger Committee and the Consumers Union thus argued that mergers could not all be treated symmetrically, as they contributed to the social cost and benefit in very different ways. For instance, it was calculated that allowing one more merger at that point would amount to boosting HHI 300 to 500 points, which could result in dangerous levels of concentration. Therefore, the GTE-BA case was unfortunate largely because it was less than permissible on the margin, i.e. based on the initial conditions in the industry. In other words, while the consolidated company could certainly benefit from the increased market power on more markets, as well as from more effective and synergistic use of assets, they might likely engage in anticompetitive practices which could not only act to set suboptimal rates, but also restrict entry for more efficient providers. Moreover, the issue of regulatory approval of Bell Atlantic entering the long-distance market (which was a big stake in GTE's subdivision) was still swaying in limbo ...
  
  

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