Urge to merge

The recent business headlines have been dominated by big firm mergers. First was Sprint and Nextel (following on the Cingular – AT&T Wireless merger). Then Procter & Gamble buying Gillette. Now, the talk is about SBC absorbing AT&T. What is going on? Wasn’t this new economy supposed to be all about networks and free agents and agile virtual companies? So, why the continued combination to create even larger companies?
In today’s Christian Science Monitor, Ron Scherer offers a set of explanations for “Why businesses are once again keen to merge”: 1) excess corporate cash, including the repatriated overseas earnings allowed under the latest tax bill, and 2) continued global pressure.

Corporations are embarking on what is being called a “new wave” of mergers. Although this may result in tens of thousands of layoffs, it may also mean that the improved efficiencies are passed on to consumers. It’s too early to say how large the wave will be compared with the late 1980s, when hostile mergers dominated the news. But they are likely to become more common, since US companies have more than $1 trillion in cash.

“What we are seeing is that as you get late in the economic cycle, companies look for alternative ways of growing their business,” says Fred Dickson, chief market strategist at D.A. Davidson. “Companies loaded with cash have to put it to work or face screaming shareholders.”

. . .

The mergers are also increasing because of competition from abroad, says Anthony Chan, managing director at JPMorgan Fleming Asset Management in Columbus, Ohio. “The race for efficiency is on,” he says. “It’s driven by globalization pressures: China has such low labor costs that US companies have to be able to compete by improving efficiency.”

I agree that companies sitting around with lots of cash are likely to try to buy other companies. Expansion by acquisition is supposedly a tried and true method. But, as the story points out in its closing paragraph “some of the mergers in the past haven’t worked too well because of different corporate cultures.”
Thus, I hope that we are not in a new conglomerate building phase. Acquisition for the sake of acquisition is bad corporate strategy – and bad public policy. Far better for those funds to be channeled into innovation and the development of new products and services. But our anti-trust (competition) policies don’t cover dumb corporate investments – only those that restrain competition. Other policies are needed to promote business combinations that foster innovation.
Such a combination may very well be what is happening in the case for the P&G/Gillette merger. This is an example of an innovative company expanding its product line by acquiring another innovative company. I doubt very much that the merger would produce the orders of magnitude in efficiency needed to compete with the low wages in China that Mr. Chan of JPMorgan talks about. Synergies of innovation are more at work here than just economies of scale.
I fear, however, that the mindset of increased efficiencies and economies of scale are still predominate in the boardrooms, Wall Street and Washington. That is well and good within limited parameters. But the real question in the intangible economy is not efficiency but innovation. How we help create synergies of innovation should be at the top of our economic policy agenda.

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