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Notes from
the Editors
What Happened to
the Women’s Movement?
by Barbara Epstein
The Queer/Gay
Assimilationist Split: The Suits vs. the Sluts
by Benjamin H.
Shepard
Also by this
Author:
U.S. Hegemony:
Continuing Decline, Enduring Danger
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A new surge of corporate concentration is in
process in the United States and abroad, driven in large measure by a
restructuring of global markets through mergers and acquisitions (M&As).
Announced worldwide merger deals reached $3.4 trillion in 1999, an amount
equivalent to 34 percent of the value of all industrial capital (buildings,
plants, machinery and equipment) in the United States in 1999. Of this total,
nearly a third were cross-border transactions that involved companies based in
different countries, up from an average of one-fourth of all mergers during
most of the 1990s.1
The number of “megamergers”—those with purchase prices
exceeding $1 billion—has also been accelerating. In the United States,
mergers of this size averaged twenty per year in the early 1990s, then climbed
steadily to 208 in 2000. During the “merger mania” of the 1980s, the
two largest transactions were the $13 billion takeover of Gulf Oil by Standard
of California (1984) and the $25 billion “leveraged buyout” of RJR
Nabisco (1988), which used borrowed money to buy up the outstanding stock of
the company and take it private so it could be sold piece by piece, thought to
be worth more that way than together as one company. In 1998-2000, the ten
largest M&As averaged $76 billion each (see
table), with value based on the price finally paid to shareholders of the
acquired company in the form of cash, stock or bonds of the new company, or
other financial instruments. The top transactions of 1998-2000 also indicate
that, as with all merger waves, this one may be moving past its prime, as the
U.S. economy runs out of steam from the “New Economy” boom of the
1990s. Only seven of the twenty-five deals were concluded in 2000, and both the
number and total value of M&As dropped off in the last half of the year,
falling well below their 1999 levels.2
The newest merger wave is the fifth in the past hundred-odd years, with
similarities to merger movements past, but significant differences too, both of
which pose threats to progressive and democratic forces the world over.
Past is Prologue: A Century of M&As
Three types of mergers and acquisitions have developed since the 1890s.
Horizontal mergers bring together two or more companies competing in the
same market (two automobile manufacturers or two supermarket chains, for
example). Vertical mergers join companies at different stages of the
same production process, previously in buyer-seller relationships (iron ore and
steel); and conglomerate mergers occur when the merging companies
operate in unrelated industries. All three tend to increase aggregate
concentration in the economy, because they bring a greater volume of sales and
assets under the control of one business firm. But they may have different
effects on the industry or industries involved: the most dangerous type for its
competition-reducing effects is the horizontal variety, because it directly
increases the share of a given market in the hands of one firm.3
The first U.S. merger wave began in the early 1890s and culminated in
1898-1902, probably the most intense period of merger activity in history
relative to the size of the economy. Vertical and horizontal mergers were
widespread, but the more common, certainly the more significant, was the
horizontal integration of leading producers in the same industry, creating a
number of lasting dominant firms (Du Pont, U.S. Rubber, U.S. Steel, General
Electric, Coca Cola, National Biscuit, and others). This historic consolidation
of U.S. industry—representing the rise of modern-day corporate
capital—grew out of, and accompanied, the formation of a nationwide market
between 1870 and 1900, with the railroad and telegraph making it possible for
large companies to produce and distribute their goods across the continent.
Four more merger waves have followed since 1902. The second ran from 1916 to
1929, characterized by horizontal mergers of secondary firms, especially in
banking, retailing, steel, chemicals, and food products. It tightened the
now-familiar structure of oligopoly, in which a handful of firms
dominate a given industry. Speculative motives propelled this wave, as well as
its predecessor, with financial promoters and corporate officers ripping off
quick gains from the rising values of the common stock of companies targeted
for merger and takeover.4
The third merger wave stretched from the mid-1950s to 1969, and peaked
during the “go-go” boom of 1962-1969, when 60 percent of all mergers
were of the conglomerate type. Medium-size companies that often got started in
the rapidly expanding electronics industry or military contracting or both
gobbled up firms in unrelated industries. International Telephone and
Telegraph, Ling-Temco-Vought, Gulf and Western, and Litton Industries all made
unrelated acquisitions totaling $1 billion or more.
The fourth wave brought the then-giant M&A deals of the 1980s. Changes
in government policy toward business spurred the new generation of merger
makers. The Carter administration deregulated airlines, trucking, natural gas,
and banking; the Reagan administration extended deregulation to the telephone
industry and openly relaxed antitrust policies in the face of hostile takeovers
and leveraged buyouts. Sensing the lower likelihood of government challenge
under the antitrust laws, companies carried out horizontal mergers that would
have been inconceivable under prior administrations, reducing competition
markedly in retailing, food and beverages, chemicals, and oil.
The New Merger Wave: Capital Goes Global
The fourth merger movement subsided during the recession of 1990-1991, but
around 1994 another boom began, so large that it must be considered a fifth
wave. Its pattern is eerily similar to the century-ago wave of the 1890s. Both
were strongly affected by new technologies and a favorable public policy
environment, with corporate capital today benefiting from liberalization
of world trade and investment, deregulation of financial institutions
and telecommunications, and privatization of state-run enterprises on
all continents. And if the first wave followed the emergence of a nationwide
market for goods in the United States, the fifth is riding on the globalization
of the world economy, with plunging costs of collecting and processing
information helping to make cross-border acquisition and control feasible,
therefore imperative in corporate strategy. These global mergers are bringing
about concentration and centralization of firms on a global scale and the
closer integration of the world capitalist system.
Unlike those of the 1980s, the current mergers are financed primarily with
corporate stock, not borrowed money, and companies are not being broken into
pieces for sale but are merging to enlarge their size. Today’s M&As
are based on long-term strategic and economic motives. This involves acquiring
the scale and resources to compete at home and abroad, protecting and enlarging
market share, reducing competition and attaining greater pricing power, in what
large corporations see increasingly, often primarily, as a global market.
But short-term gains are important too, as in the past. Excess productive
capacity is a recurrent feature of oligopoly, and it is growing on a worldwide
basis, notably (but not exclusively) in banking, retailing and clothing, fast
foods, automobiles, airlines, hotels, movie theater chains, computers,
telecommunications, and electrical appliances. Even when it does not create an
oversupply of goods relative to consumer demand, it can prevent companies from
raising prices, and during economic contractions may exert downward pressure on
prices at the worst possible moment. Either way, excess capacity squeezes
profitability, and mergers and takeovers are effective ways to reduce it, if
temporarily, by shedding labor and closing down less profitable facilities.
Another short-term incentive is the payoff for top executives, for whom
M&As have become an almost no-lose proposition, and a lucrative one. The
1999 deal linking his company with Qwest brought US West CEO Sol Trujillo $15
million in severance, and $46 million in stock options along with $11 million
to cover taxes on them, a guarantee he had set up for himself while negotiating
with various corporate suitors. He also received 300,000 shares of restricted
stock in Qwest (worth $24 million at the time of the deal). Qwest CEO Joseph
Nacchio, for his part, got stock options worth $160 million and a $26 million
“growth share” payment. Similar tales accompany nearly every big
merger. The AOL-Time Warner deal generated stock option bonanzas for AOL boss
Steve Case, his deputy Robert Pittman, and TW’s top five executives,
totaling an estimated $3 billion.5
For the entire decade of the 1990s, the leading industries in M&A
activity, in terms of transaction value, were banking, telecommunications, oil
and gas, and radio and TV stations, with increasing ties developing between the
second and fourth.6 The pattern continued
through 1998-2000, when eleven of the twenty-five largest M&As were in
telecommunications, the core industry of the “New Economy” (see
table), and six more were in the financial sector, including banking and
insurance. Virtually all of the top twenty-five were horizontal in nature,
although the distinctions among the three merger categories are becoming less
clear-cut.
Telecommunications giants are investing in what appear to be different lines
of business but are increasingly linked segments of the same evolving
industry—telephone, radio broadcasting, television, internet, cable
systems, cable channels. Deutsche Telekom’s purchase of relatively tiny
VoiceStream Wireless (only 2.2 million subscribers and $1 billion in
revenue—small change compared with AT&T Wireless or Sprint) for a
hefty $42 billion illustrates what is going on.7 The German company is not just buying a business in
the United States but also the potential to become a dominant player globally.
The acquisition is part of a fight to achieve economies of scale and market
share as telecommunications giants jockey for position in the coming world of
wireless web services. The booming stock markets of 1994-1999 have also
contributed to the telecommunication merger spree. The surging price of
AOL’s stock, for example, allowed it to swallow the much larger Time
Warner in January 2000 in a merger valued at $166 billion at the time, although
the subsequent decline in AOL stock reduced the deal’s value to $106
billion when concluded a year later.
Cross-border M&As involving U.S. companies set records in 1998-2000. In
five of the twenty-five largest mergers, the buyers were foreign firms (three
British, two German). While purchases of foreign companies by U.S. firms
declined during 2000, foreign buyers of U.S. companies stepped up their
activity, with acquisitions worth $302 billion (11 percent greater than in
1999).8 The Vodafone and Deutsche Telekom
takeovers (see table) represent a further step in consolidation of the world
telecommunications industry, as the other three (two by BP, the other by
Daimler Benz) do in the automobile-oil complex. In Europe, the value of
M&As has run very close to U.S. levels.9
To date, the 2000 takeover of the German telecommunications giant Mannesmann by
the U.K.’s Vodafone Airtouch, valued at $183 billion, is the biggest on
record. Vodafone itself was the result of the U.K. takeover noted above; and
Mannesmann’s position in telecommunications had just been reinforced by
its acquisitions of Orange PLC (UK) and part of Olivetti in 1999 for a total of
$41 billion. In cross-border deals too, horizontal mergers like these have been
increasing relative to both vertical and conglomerate; in value terms they now
constitute more than 70 percent of M&As worldwide, compared to 53 percent
in 1987.10
Strengthening the concentration effects of the new mergers are strategic
alliances among large corporations. These take many forms—joint
research and product development, joint manufacturing, marketing and
distribution agreements, licensing and franchising contracts, and technical
assistance. For firms based in North America, Europe, and Japan, annual numbers
of new collaborations doubled in the 1980s and increased even faster during the
1990s.11 In telecommunications, AT&T and
British Telecom pooled most of their international operations in 1998 in a
jointly owned company with revenues of $10 billion to capture more of the
corporate business market, a sign that not even the biggest communications
giants feel big enough to go it alone in the global marketplace.12
Among other industries involved in international partnerships are oil (Shell
and Texaco), automobiles (Toyota and General Motors), aluminum (Alcoa and Kobe
Steel of Japan), semiconductors (IBM, Siemens, and Toshiba), and financial
services (American Express and Tata of India).
Particularly ominous are the cartel-like arrangements in the airline
industry. Following the deregulation of 1978, U.S. companies formed
partnerships with several foreign airlines—American with Swiss Air, Delta
with Aer Lingus and Air France, US Airways with British Airways, and others. By
the late 1990s four international alliances accounted for 80 percent of all
revenue passenger kilometers (RPKs). The “Oneworld Alliance” alone
included American Airways, British Airways, Canadian Airways, Cathay Pacific,
Iberia, JAI, Quantas, and US Airways and took in 28 percent of all
RPKs.13 In an example from another industry,
all the world’s major microchip manufacturers and equipment suppliers
attended several meetings during the 1990s to chart an “international
technology road map for semiconductors.”14 If cross-border mergers are hard to regulate and
control, strategic alliances like these are no easier, particularly since they
can often lay claim to common pooling of risks and greater efficiencies, which
should bring benefits for consumers—but seem more likely to produce bigger
profits, and more effective control over industrial conditions, for the
companies involved and their shareholders.
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NOTES
- United Nations, World Investment Report 2000(New York: United
Nations, 2000), 10-14, 28; World Investment Report 1999 (New York:
United Nations, 1999), 94-96.
- Mergerstat release, December 20, 2000.
- In this article “concentration” refers to the share of an
industry’s output, employment, or assets held by a relatively small number
of firms, usually four or eight (which is how the U.S. Census Bureau and
Federal Trade Commission measure concentration). Marx called this
“centralization,” as “the larger capitals beat the smaller. . .
. [I]n a certain line of industry [centralization] would have reached its
extreme limit, if all the individual capitals invested in it would have been
amalgamated into one single capital.” He used “concentration” to
refer to the growth in the size of individual firms as “accumulation
increases the concentration of that wealth [the means of production] in the
hands of individual capitalists” (Capital, vol. I, Kerr ed.,
685-688). The distinction, and the trends foreseen, represent a landmark in the
history of economic analysis.
- See R. B. Du Boff and E. S. Herman, “The Promotional-Financial
Dynamic of Merger Movements: A Historical Perspective,” Journal of
Economic Issues 23 (March 1989).
- “Merger Prompts US West CEO to Call it Quits,” USA Today,
March 1, 2000, 2B; “US West Execs Set Bonus for Trujillo, others to get
$18.5 million,” Denver Post, March 14, 2000, C1; “Mergers: How
Sweet They Can Be!,” Too Much, Winter 2000, 9.
- Martin Sikora, “A Decade of Dealmaking,” Mergers and
Acquisitions Journal 35 (January/February 2000), 36-38.
- “Deutsche Telekom’s Wireless Wager,” Business Week,
August 7, 2000.
- Mergerstat release, December 28, 2000.
- “The Big Grab,” Business Week, January 24, 2000;
“Entreprises: après les Etats-Unis, la folie des fusions
s’empare de l’Europe,” Le Monde, April 19, 1999, 18.
- World Investment Report 2000, 101-102.
- United Nations, World Investment Report 1997 (New York: United
Nations, 1997), 12-15.
- “AT&T and British Telecom Merge Overseas Operations,” New
York Times, July 28,1998, A1.
- “Airline Alliances: Mergers in Mind,” Economist, September
26, 1998, 68.
- See “Partners,” Business Week, October 25, 1999.
- W. G. Shepherd, “Causes of Increased Competition in the U.S. Economy,
1939-1980,” Review of Economics and Statistics 64 (November 1982).
- U.S. Census Bureau, Census of Manufactures, and Census of Retail
Trade, various editions.
- U.S. Census Bureau, Economic Census 1997 at
<www.census.gov/epcd/www/concentration.html>.
- Kevin Stiroh and Jennifer Poole, “Explaining the Rising Concentration
of Banking Assets in the 1990s,” Federal Reserve Bank of New York,
Current Issues 6 (August 2000), Table 1.
- Data from Survey of Current Business, various issues.
- “Why U.S. Giants Are Crying Uncle,” New York Times,
October 11, 2000, W1.
- “Unexpected Result of Airline Decontrol is Return to Monopolies,”
Wall Street Journal, July 20, 1987, A1; Amy Taub, “Oligopoly!”
Multinational Monitor, November 1998, 9.
- “Why Service Stinks,” Business Week, October 23, 2000.
- “Bigger Isn’t Better for Fleet’s Customers,”
Business Week, July 10, 2000.
- Stiroh and Poole, “Explaining Rising Concentration,” 4-5; Gerald
Hanweck and Bernard Shull, “The Bank Merger Movement: efficiency,
stability and competitive policy concerns,” Antitrust Bulletin 44
(Summer 1999), 263.
- “Paper Prices Are Driving Flurry of Industry Mergers,” Wall
Street Journal, May 10, 2000, B4.
- “Pfizer Gets Its Deal to Buy Warner-Lambert for $90.2 Billion,”
New York Times, February 8, 2000, C1.
- “Farm Subsidies,” Environmental Working Group, at
<www.ewg.org>.
- William Greider, “The Last Farm Crisis,” The Nation,
November 20, 2000, 14; Michael Stumo, “In Firm Control,”
Multinational Monitor, July/August 2000.
- See Du Boff and Herman, “Promotional-Financial Dynamic of Merger
Movements.”
- David Ravenscraft and F. M. Scherer, Mergers, Sell-Offs, and Economic
Efficiency (Washington: Brookings Institution, 1987), 38-45, 207-217.
- Mark Sirower, The Synergy Trap (New York: Free Press, 1997), 11-17,
123-136; “The Case Against Mergers,” Business Week, October
30, 1995.
- New York Times, November 26, 2000, BU1; also, “Unmaking Mistake
. Daimler’s New Boss For Chrysler Orders Tough, Major Repairs,”
Wall Street Journal, January 22, 2001, A1.
- “Let’s Talk Turkeys,” Business Week, December 11,
2000; “Cautionary Tales: When Big Deals Turn Bad,” Wall Street
Journal, December 8, 1999, C1.
- For reports on these splits, see New York Times, November 10, 2000,
C1 (British Telecom); November 2, 2000, C1 (WorldCom); October 26, 2000, A1 and
September 21, 1995, A1 (AT&T).
- “Big Mergers, Bad Service,” Business Week, August 10,
1998. “Cramming” is billing customers for fraudulent services or
products; “slamming” is switching them to a new long-distance company
without their knowledge.
- “Megamergers Are a Clear and Present Danger,” Business
Week, January 25, 1999.
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RICHARD B. DU BOFF and EDWARD S.
HERMAN are both longtime contributors to Monthly Review. Du Boff is
Professor Emeritus of Economics, Bryn Mawr College. Herman is Professor
Emeritus of Finance, Wharton School, University of Pennsylvania.
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