Question

Was the merger/acquisition of "Bell Atlantic" and "Verizon" about gaining economics of scale? Explain why.

How about the merger/acquisition of "Sprint" and "T-mobile"? Was this also about economies of scale? Explain why.

Answer 1

Economies of scale refer to the comparative benefit gained or the reduction in the total cost of production as a result from the increased quantity or level of production. I.e. it refers to the proportionate cut in the cost of manufacture of the products when a larger and increased quantity of product if being manufactured. The merger that led to the formation of Verizon Communications was based on gaining the economies of scale.

Before the merger, Bell Atlantic Corporation and GET Corporation were two of Unites States’ largest Telecommunication network providers. Bell Atlantic is said to have covered more than 2 billion US customers with its network telecommunications line. It also had its network spread internationally and was the leading service provider in its market. GET Corporation was also a very big corporation with about 35 million customers reach out. However by late 1990’s, both the companies realized that that cost of production was quiet high and the profits that made were although very handsome, but they had the option to gain even more profit, if they became one entity. If they emerged as one unit, their process innovative measures could be combined, and their unified cost of production cold drastically go down. That is, they had their focus on the economies of scale. With this primary aim in view, the merger negotiations continued for nearly 2 year, after which Verizon Communications was formed, and is currently the leader in US telecommunication market.

The Merger between Sprint and T-Mobile is to some extent forced due to the merger between GET and Bell Atlantic and the creation of Verizon Communication. Verizon had grown in to the second largest telecommunication network provider after AT&T and covered a huge customer base. Sprint and T-Mobile also had their large individual customer base, and their cost of production was also not letting them to earn a desired level of profit. Therefore, Both the companies, Sprint and T-Mobile, after long negotiations, finally are at the brink of merger, and it will then become the third largest telecommunication provider in the country after AT& T and Verizon. The base ground of Economies of scale cannot be negated in the merger of Sprint and T – Mobile ,however, their decision to merge is more out of the business call of survival , so that they could compete the other two big rivals in their market.