FedEx in the Case of FedEx, Some

FedEx

In the case of FedEx, some elements of its business would be subject to regulatory oversight from the Department of Justice, which enforces the nation's antitrust statutes. These laws exist to protect consumers from unfair business practices. If the DoJ were to be involved in a FedEx merger this might imply that the company was attempting to merge with UPS. The result of that merger would be to take the industry from oligopoly to a virtual monopoly. The only remaining players would be DHL and TNT, and a handful of local firms. This would provide insufficient competition, as per Section 7 of the Clayton Act (FTC, 2013). Antitrust laws serve to protect consumers from monopoly abuse. It is entirely likely that such abuses would occur if there are no major competitors. Many customers of this industry would be forced to deal with the combined entity, and this lack of competition means that there is no disincentive for the company to abuse the monopoly position.

Other elements of the company's business are less likely to be subject to federal antitrust action. In ground packages, for example, the U.S. Postal Service remains a viable third option, so there is less potential for monopoly abuse. In things like customs clearance, office services and LTL freight, these industries are in a condition of monopolistic competition, so there is unlikely to be federal oversight. The government becomes involved in the market economy to ensure that there remains enough competition in the marketplace for the consumer to enjoy the benefits of the market economy. One can easily see how an overnight courier combination between FedEx and UPS would not have competitive conditions, as the combined entity would have around 90% market share.

2.

As noted above, the rationale or justification for government intervention in this scenario would be to maintain competition in the market (CFR, 2013). Antitrust legislation limits the size of companies within an industry, especially where those companies have formed through mergers and acquisitions, Companies that have a monopoly in their industry lack incentive to compete on any basis, and therefore can abuse their market position in terms of pricing and in terms of service offerings. The government therefore intercedes in the market in these situations to maintain natural competition.

3.

Given that neither of the two major firms in the overnight courier business can merge with one another, expansion in this industry can only reasonably occur with capital investment and organic growth. There are considerable threats at this point, because such an expansion would entail creating new markets. Thus it involves making investments in things like unproven markets and unknown technologies. This risk is perhaps the greater threat. There are also threats associated with other courses of expansion. For example, moving more aggressively into foreign markets poses significant risk. This is because at this point the firms in the industry are well past the point of diminishing returns on new market development. Such expansion at this point would take the company into small, unstable or insecure markets, which exposes it to political risk and foreign exchange rate risk, among other forms.

The firms in the industry would also have to consider how such organic expansion would be financed. FedEx could choose to tap the capital markets, but at that point would risk diluting the value of its stock, to the detriment of its current shareholders. Alternately, the company could take on more debt, something that increases the risk associated with having obligations on the company's cash flows. Though corporations seldom use floating rate debt, there are risks associated with interest rate changes when the company takes on additional leverage.

There are also risks directly associated with the capital projects. Such projects are often analyzed on the basis of assumptions, and this ends up being a case of garbage in, garbage out. If the assumptions are poor, then the analysis will lead to an incorrect assessment of the viability of the project. All capital projects have risk related to their viability, and this is important especially when a company in a mature industry is trying to expand organically.

4.

Up front, agency theory needs to be explained. The interests of management and the interests of the shareholders should be more or less the same. The managers are hired by the CEO and the Board of Directors and all of these act as agents for the shareholders (Investopedia, 2013). Thus, management should always be seeking to improve or defend shareholder wealth. Instances where there is poor alignment between the interests of management and the interests of the shareholders should be few and far between.

Shareholders are interested to see the total value of their holdings increase. Total value is derived from a combination of dividends and capital gains. . Both of these are directly related to increased profitability. When a firm earns more profits, it can afford to pay higher dividends, and with more earnings the value of the firm's stock is likely to increase. The duty of management of an American firm is to increase shareholder wealth, as Friedman (1970) argued.

What this tells us is that the convergence of management and shareholder interests has always been at the point of maximizing profits. Management does not have any interest in doing anything that the shareholders do not authorize. So for example if the managers want to donate money to charity, they can only do so with the permission of the shareholders, or in situations where such donations will increase the profits for the shareholders.