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Merger Mania Continues by Marc Breslow Since our May/June cover story, "The Threat From Mergers: Can Antitrust Make a Difference," went to press, corporate buyouts have proceeded at a furious pace. Four industries have been hit with the largest merger announcements in history: in finance, Citicorp (banking) hopes to combine with Travelers Group (insurance); in manufacturing, German automaker Daimler-Benz gobbled up Chrysler; in telecommunications, SBC bought Ameritech, reducing the number of Baby Bells to four from the seven created by the 1984 breakup of AT&T; and in drugs, American Home Products will acquire Monsanto. Why is all this happening now? One reason is the out-of-control stock market, which allows companies to pay for takeovers with their own inflated stock values, rather than having to lay out cash, says economist William Shepherd of the University of Massachusetts, author of Market Power and Economic Welfare. Another is the current weakness of antitrust policy, leading businesses to try to push through their buyout plans before the Federal government closes the door. A third is simple empire-building by CEO’s, whose salaries and perks tend to depend on corporate size more than performance. Why be concerned about mergers? First, while all deal-making CEOs claim their motivation is increased efficiency, the results are usually the opposite, argues economist James Brock, author of Antitrust Economics On Trial. For example, Union Pacific railroad’s purchase of Southern Pacific led to the recent massive traffic jams in the southwest; and Boeing’s acquisition of McDonnell Douglas caused its first loss in half a century. Second, the money spent to buy other companies (a record $957 billion in 1997, equal to 12% of U.S. Gross Domestic Product) could otherwise have been used productively, such as for product development and building new factories. Third, "Less competition means less choice for consumers, higher prices, and less innovation -- ranging from health care to drugs to banking to telecommunications to electricity," says Shepherd. Workers usually get hurt in buyouts. When Compaq Computer bought Digital Equipment Corp. in January, for instance, it first claimed that no jobs would be lost. But by May an unnamed executive had leaked word that 15,000 Digital employees -- 28% of the workforce -- would face layoffs. Wall Street found justifications for each of the four merger waves in this century, all of which involved stock market booms. "The first three ended in the crashes of 1904, 1929, and 1969; the 1980s boom petered out as the economy slipped into recession in 1990," wrote The Economist in April. We have no reason to expect a more benign result at the close of the 20th century. Issue #218, July-August 1998 |
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Copyright © 2002 Economic Affairs Bureau, Inc. |
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