Billy Brown wrote:
>IMHO, one of the big problems with any kind of mega-merger is that the
>organizational effectiveness of a company tends to be inversely proportional
>to its size. As a result, when a company tries to do many different things
>it tends to do a poor job of all of them. This is a particularly
>significant issue in the Microsoft/Intel case, because software engineering
>and CPU design are both exceptionally difficult disciplines where relatively
>modest mistakes can quickly have a large effect on product quality.
>
>So, I am wondering whether modern economic theory offers any concrete means
>of analyzing this kind of concern. Can you offer any basis for predicting
>that this sort of problem would or would not become significant?
Sure, dozens of concrete means. How relevant they are is another matter :-). But there are tons of books and articles on "orgazinzation design". Milgrom and Roberts have a nice text (ISBN 0-13-224650-3).
Theoretically the puzzling thing is that a merged company should in theory still have the option of letting its two parts be managed independently. By that argument, a merged firm couldn't do any worse; merging just creates new options.
So if merged companies do worse, it must be due to reduced oversight from the now merged board of directors, reduced information to analysts and speculators about the merged firm, meddling by a CEO who has to prove his or her worth by getting involved in what should be independent operations, a difficulty in creating financial instruments which are the equivalent of "stock options" on the returns from each subsidiary, or some similar explanation.
Robin Hanson rhanson@gmu.edu http://hanson.gmu.edu
Asst. Prof. Economics, George Mason University
MSN 1D3, Carow Hall, Fairfax VA 22030
703-993-2326 FAX: 703-993-2323