WASHINGTON – As unprecedented waves of mergers wash over the country, the question is whether they will act more like a tsunami, swamping consumers, or more like the tide that lifts all boats.
The current merger mania is setting records for the number of companies joining forces and for the size of the resulting combinations.
In 1991, 1,500 mergers were reported. For the year that ended Oct. 31, the number was up to 4,700. And that doesn’t even count the biggest of the monster mergers – so far – of them all. The proposed Exxon purchase of Mobil Corp., which will cost $86 billion, was announced this past week. It bumped the Citicorp-Travelers Group union, which weighed in at $72.6 billion.
So how big is too big? Or does that even matter?
Economists say no. Only the merger’s effect on competition matters, under U.S. law. Bigger does not always equate with driving competition from the market.
General Motors, for example, is one of the largest employers in the country. But it faces plenty of competition from within the United States and from abroad, leaving it little power single-handedly to raise prices and otherwise control the market.
A two-bit ice cream vendor, though, may not be a conglomerate, but he could charge just about anything he wants if no one else is plying the beach on a hot day.
"Our job isn’t to second-guess what an appropriate size for a company is," said Bill Baer, director of the Bureau of Competition at the Federal Trade Commission, which regulates mergers. "We second-guess size only as it relates to consumer welfare."
But consumer activist Ralph Nader sees plenty to second-guess. He says the mega-mergers could lead to higher prices, concentrated political power, inefficiencies and a quashing of upstart competitors who could bring new products to the market.
"Once they meet economies of scale, the rest is just bureaucracy, " Nader said. "The bigger you are, the less flexible you are, the less you will give your people entrepreneurial elbow room. "
Many economists beg to differ. They say mergers can lead to more efficient companies and, therefore, lower prices. Large companies put society’s resources into the most profitable places, which improves the entire economy.
"One of the reasons for the degree of prosperity we have is the emphasis on making the best use of the resources we have on hand, " said Marvin Kosters, an economist with the conservative think tank American Enterprise Institute.
And they help companies muster the size needed to compete in a marketplace that increasingly crosses national borders.
That need for globalization is one of the driving forces behind the mergers. Daimler-Chrysler – the combination produced by the giant car companies of Germany and the United States – is just one example. And as markets become more global, there is more competition, even for big companies.
"Big is only bad if there are substantial barriers to new competition in the economy," said William Shughart, professor of economics at the University of Mississippi and a former FTC economist.
Another force behind, the mergermania is the deregulation of many markets, such as telecommunications, electricity and transportation, that has unleashed pent-up demand to grow companies by combining them.
As always, those who propose mergers also are motivated by a belief they can save money by eliminating duplicative services and personnel, as well as taking advantage of economies of scale. Two companies with half-empty warehouses, for instance, can merge and sell off one of the facilities, said Scott Perlman, chairman of the Antitrust and Trade Section of the Federal Bar Association.
"Good mergers happen because the two companies can really do together more than the two companies can separated," said Franklin M. Fisher, economics professor at the Massachusetts Institute of Technology. "Bad mergers happen because the two companies, by merging, can manage to avoid some competition. "
Unlike past merger trends, this one involves companies in complementary businesses that think they can find synergies.
The urge to merge has swept the nation periodically, beginning with the last century. That trend toward monopolies left Congress, specifically worried about the power of oil and railroad companies to dominate the economy, to pass the Sherman Antitrust Act in 1890.
The next wave during the Roaring Twenties led to oligopolies and more regulation. Then, beginning in the 1960s, companies began forming very diverse conglomerates by piecing together companies that didn’t always have anything in common.
All sides agree that mergers often affect price, product development, competition and jobs. They agree that jobs often are eliminated. But on a variety of the other effects, they disagree.
The theory is that the more efficient merged company can offer lower prices.
"It’s fair to say it’s worked out that way, " Kosters said. "Over the years, our standard of living has risen."
But, sometimes, the merger is more about executives who want to amass power than about making cheaper or better products, said Bert Foer, president of the American Antitrust Institute, a public interest group that supports strong enforcement of antitrust laws.
"A great many mergers end up not producing the effects proponents said would happen," said Foer. "They simply did not create many efficiencies." The Union Pacific merger with Southern Pacific in 1995 is emblematic to critics – miscues in the joined company led to snarled rail traffic.
"Making mergers work is a lot more difficult in reality than in theory, " he argued.
But mergers can lead synergies and new products when companies in similar industries combine forces. The proposed merger of America Online and Netscape Communications is the latest attempt.
"In a fast-moving, technology-driven economy, a merger may enable a firm to acquire quickly the technology or other capabilities to enter a new market or to be a strong competitor," said Robert Pitofsky, chairman of the FTC, when he testified before Congress this year.
The high-technology mergers don’t raise as many threats of negative antitrust fallout because the market is changing so quickly. Having a big market share for some hot, new Internet product is not the same thing as owning the only railroad tracks, Shughart said.
"It’s very easy to enter the industry. All you need is a nerd with a [personal computer] to create new products," he said. That’s why the government should butt out – especially in the high-technology industries, he said.
That is essentially the argument that Microsoft is making as it fights federal antitrust charges. The world’s largest company is now in court battling the Justice Department for allegedly trying to manipulate the Internet-browser market. Microsoft argues that consumers have not suffered because of its practices. In fact, prices of software products that it makes have dropped, as have virtually all other computer-related items.
Antitrust laws focus on individual mergers, not the big picture of concentration of economic and political power, Foer said. If the Fortune 500 dwindled to a Fortune 100, with competition in each market but fewer companies overall, that would be dangerous, Foer said.
"They would be so powerful politically they would control everything that goes on. Democracy in this country was based on fragmentation of power. "
Mergers in the banking and insurance industries, which are on the rise as Congress deregulates, could create a "crushing concentration of political power" argues Nader
Where others see the benefits of one-stop shopping, he sees a nightmare of consumers stuck because it’s too hard to change to another company when one has control of their mortgage, insurance and bank account.
One of the least-discussed fall-outs from mergermania is whether the government will end up bailing out companies that fail. Under the "too-big-to-fail" theory, the U.S. government has stepped in to help companies that are so far-reaching that their failure would hurt many people or damage the economy. One example of this is Chrysler, which would have folded 20 years ago without government help. The government intervened at the time because, otherwise, tens of thousands of jobs would have been lost.
With more huge companies formed by the mergers, the odds of government bailout could go up, say those such as Nader.
"You don’t think they’d bail out a giant insurance company? A giant car company? You don’t think they’d bail out Boeing? " Nader said.
Even pro-merger Shughart agreed that is a concern. But, "that is a problem of the government, not the mergers, per se," he said. "If government is going to allow these mergers to occur, it also ought to keep its hands off if the merger is in trouble. "
But the specter of failing megacompanies is not likely to cast enough of a shadow to slow down the merging. On one day this past month alone, nine major mergers were announced, worth a total of $36 billion.
Even the disastrous results of some past mergers doesn’t quash the craze. Many of the conglomerates pieced together more than 20 years ago have been divided again because executives couldn’t figure out how to run so many different businesses with little in common. One example was ITT, which was put together in the 1960s and broken apart during the merger mania of the 1980s.
The future for merger activity depends partly on the business cycle. The current healthy economy and robust stock market help mergers along because companies feel wealthy enough to take risks and have more money, Perlman said. Often, they can buy competitors with their own pricey stock.
But even a downturn won’t magically erase the merger boom, though it could cool things. Baer said a slowed economy will mean bottom-fishing opportunities for companies that want to snap up another business on the cheap.
The global economy is around the to stay, Perlman said, so that impetus will always be there for mergers.
Sidebar
It Takes Much Paperwork to Make the Mergers Work
Tamara Lytle
WASHINGTON – Regulating mergers sometimes involves planeloads of paperwork.
As the pace of mergers has picked up in recent years, the number of regulators has not kept pace. That has some antitrust experts worried that the two agencies charged with keeping consumers safe from monopoly practices don’t have enough staff to do the job.
By a quirk of history, two federal agencies regulate mergers and acquisitions: the Federal Trade Commission and the Department of Justice Antitrust Division.
Although Republicans in Congress have sought out for elimination any redundant federal roles, the current arrangement has survived because the two regulators have split the job efficiently, mostly along industry lines, according to antitrust experts.
The FTC, for instance, handles most pharmaceutical and computer-hardware cases, while the Department of Justice takes care of telecommunications and railroads.
The FTC was first formed to counter a generation of ruthless empire builders at the turn of the century, when behemoth companies such as Standard Oil and U.S. Steel prompted Congress to pass the Sherman Antitrust Act in 1890 and the Clayton Act in 1914.
During the years, enthusiasm for antitrust regulation has swung like a pendulum.
Before Ronald Reagan, who was elected president in 1980, bigness was considered bad. Antitrust laws we zealously enforced. Reagan’s administration had the opposite view, one of laissez faire.
The Clinton administration has been much more active in pursuing antitrust cases. But its philosophy is based on keeping companies from controlling too much power in one market – not on worrying about the size of merged companies.
"Our focus in reviewing each merger is on whether the merger will hurt consumers by raising prices, reducing quality or limiting innovation," said Joel Klein, head of the Department of Justice’s Antitrust Division, when he testified before a Senate panel that is considering making telecommunications mergers more difficult.
Keeping tabs on merger activity has gotten more complex since 1976, when the Hart-Scott-Rodino Act set up new paperwork requirements for companies considering a merger or major acquisition.
When Kohlberg, Kravis, Roberts & Co. wanted to snap up Nabisco, the paperwork weighed in at 680 cartons. The cheapest way to get the documents to Washington was to rent a DC-9, according to William Shughart, professor of economics at the University of Mississippi and a former FTC regulator.
But the 680 cartons are not completely unusual. Shughart said he remembers a semi-tractor trailer pulling up with 300 cartons on an oil merger while he was at the FTC.
"We’re way below what’s adequate," said Bert Foer, president of the American Antitrust Institute, which favors aggressive enforcement. For this year, financing for antitrust regulation went up about 5 percent, he said. But the number of antitrust filings is up way beyond that.
Filing fees paid by companies, he said, cover almost all the cost of doing the regulation.
In addition to more paperwork, more mergers are happening. According to Klein, for every $1 of merger activity that happened in 1992, now there is $10.
The number of filings under Hart-Scott-Rodino jumped from 1,500 to 4,800 in just the past seven years, according to William Baer, head of the FTC’s Bureau of Competition.
"We are desperately stretched, and I know the Antitrust Division is in the same position," Baer said. "We’re getting the job done, but just barely. "
Once the filings are in, either the FTC or the Department of Justice investigates. Regulators can ask for more information.
The regulators can allow the merger to happen or file a preliminary injunction in federal court. Along the way, lawyers negotiate behind the scenes to try to quell federal concerns.
The Clinton administration has fought some high-profile cases in recent years. It put the kibosh on a merger between Staples and Office Depot and another between defense giants Lockheed Martin and Northrup Grumman.
"Where we see a problem, we are not at all reluctant to go after it aggressively, " Baer said. They look at the company’s market share, the ease of getting into the market for newcomers, and long-term trends in the industry.
One of the hottest cases now is not a merger but another flavor of antitrust case: the suit filed against Microsoft for bundled products.
Shughart sees it as emblematic of what he calls the Clinton administration’s mistaken policies.
But Baer disagrees with Shughart’s contention that regulators cater to competitors who want to use antitrust rules to trip up more powerful rivals.
"Because they respond to the demands of competitors, labor unions and other well-organized groups having a stake in stopping mergers that promise to increase economic efficiency, the antitrust authorities all too often succeed, not in keeping prices from rising, but in keeping them from falling, " Shughart said.
