Ch.6: Governmental Regulation and Oversight of Firms Diversification

Governmental oversight and regulatory influence is nothing new for businesses and firms. The scope of these regulations influences all sectors of the economy (Regulation and the Economy, 2017). Diversification is a means for growth in an organization or firm. They are used to expand operations in firms by adding products, lines, markets, services, and stages of production to an already existing business (Diversification Strategy). This blog will discuss if the government should have a role in regulating the pursuit of diversification strategies and if so how much?

Ronald Reagan, Library of Congress

The regulatory environment began to change in the 1980's under Ronald Reagan's presidency, which decreased legal barriers for company takeovers and mergers (Gulati, Mayo, & Nohria, 2016). It was at this time that the diversification trend began and firms began to divest to better focus on their core businesses and divest poor performing units and companies. 

There was a scene in the movie Pretty Woman in 1990 in which divesting a large company was mentioned. In this scene, at a dinner meeting, the owner of a large ship building company was meeting with Richard Gere's character, who was interested in buying it. The owner bluntly asks the interested buyer why he wanted to purchase his company and he stated, "break it up and sell off the pieces".  This example was briefly detailed to be an example of a company that was struggling in some sense and the consideration to divest was necessary to salvage their losses. In this case, the owner described it as 40 years of hard work. Gere's character is known as a corporate raider. It was clear that the owner was not happy about the raider's intention and truly didn't want to sell, but due to financial circumstances needed to divest or diversify to save the situation. In the end, Gere's character had a change of heart and ended up joining with the owner and partnering with him to diversify the company in other ways besides selling it off in pieces. The owner was quite pleased with this change of plans. 

Photo Found at Unsplash @joshuas

It was during the early 1980's that the stock market was recovering from the oil crisis that began a recession. This also coincided with the changes of the antitrust policy, the deregulation of the financial services sector, and the creation of the junk bond market, all of which helped create the market for corporate control that led to these takeovers and divestitures (Martynova & Renneboog). It was in 1982 that the Reagan administration used the Sherman Antitrust Act to break up AT&T into the "Baby Bells", arguing that competition would benefit the economy as a whole (United States Antitrust Law). While it was clear this was needed, this didn't really seem to fit in line with the other allowances that the government granted for large corporate takeovers at that time and in the coming years. 

Considering the amount of large companies in our current state of affairs, it is the opinion of this author that more government regulations with external diversification, such as mergers and acquisitions, might be better utilized to prevent future monopolies. Amazon is a good example of the potential for a large company to attain this. It's growth in the last decade has been fierce. At this time it seems Walmart is its biggest competitor. It would not be a benefit to the consumer should either one have a monopoly or acquire the other. And should this occur, it would be wise for governmental regulations to be utilized as an advantageous strategy to protect the consumer much like the Reagan administration did with AT&T. I understand they had reasons for why they didn't do this with other takeovers, but it might have been useful back then to more frequently utilize regulations to prevent corporate raiders from taking over firms that would have benefited from other internal diversification strategies. But, as with most consumer and business decisions, too much governmental oversight is not required nor desired. 

As you can see there are a lot of complexities when it comes to governmental regulations and firms pursuing diversification strategies. Much of this could definitely be expanded on, but due to length restrictions, it's best to limit it at this time. In short, governmental oversight may often be needed to protect consumers and to prevent large mergers and monopolies. However, there is definitely a point at which excessive oversight and regulations are also very harmful. In any case, regulations should be restrained until the consumers are potentially in harms way. 

References

• DIVERSIFICATION STRATEGY. (n.d.). Retrieved July 11, 2020, from https://www.referenceforbusiness.com/management/De-Ele/Diversification-Strategy.html
• Gulati, R., Mayo, A. J., & Nohria, N. (2016). Management: An integrated approach. Australia: Cengage Learning.
• Martynova, M., & Renneboog, L. (n.d.). A Century of Corporate Takeovers: What Have We Learned and ... Retrieved July 11, 2020, from https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1032403_code334326.pdf?abstractid=820984&mirid=1&type=2
• Pretty Woman. (1990, March 23). Retrieved July 11, 2020, from https://www.imdb.com/title/tt0100405/
• Regulation and the Economy. (2017, September 27). Retrieved July 11, 2020, from https://www.ced.org/reports/regulation-and-the-economy
• Ronald Reagan: A Resource Guide. (n.d.). Retrieved July 11, 2020, from https://www.loc.gov/rr/program/bib/presidents/reagan/index.html
• Sukoff, J. (2019, December 02). Photo by Joshua Sukoff on Unsplash. Retrieved July 11, 2020, from https://unsplash.com/photos/5DDYHjk_KMU
• United States antitrust law. (2020, July 05). Retrieved July 11, 2020, from https://en.wikipedia.org/wiki/United_States_antitrust_law