Mergers often hurt a lot less in the long run

October 29, 2003|By Jay Hancock

HEADLINES say "Mergers." Executives think "Efficiencies." Wall Street thinks "Fees!" And workers think "Layoffs."

The 1990s may be over, the bubble may have popped, and the Dow may take up only four digits, not five. But four large business combinations announced Monday show that the forces that have driven the U.S. economy for years are still spouting steam.

The announced marriage of Bank of America Corp. and FleetBoston Financial Corp. won't be much different, except in terms of scale, from, say, NCNB's Corp.'s acquisition of C&S/Sovran Corp. in 1991. NCNB became NationsBank, which combined with Bank of America.

An antecedent to health insurer Anthem Inc.'s proposed $16.4 billion buyout of WellPoint Health Networks Inc. can be found in 1984, when General Electric Credit Corp. bought Employers Reinsurance Corp. for $1 billion, a huge deal in its day.

UnitedHealth Group's $2.9 billion bid for Mid Atlantic Medical Services Inc., based in Rockville, looks like United's purchase of PrimeCare a dozen years ago.

And R.J. Reynolds Tobacco's proposed $2.6 billion combination with Brown & Williamson Tobacco Corp. calls to mind R. J. Reynolds' Industries' $5 billion purchase of Nabisco Brands Inc. in 1985.

1985 saw two dozen mergers and acquisitions valued at more than $1 billion. Leonard Silk of The New York Times called it "the biggest wave of corporate acquisitions and buyouts in American history," but it was only a ripple compared with what was to come.

Over two decades, American business has congealed into bigger and bigger clumps, running increasing amounts of revenue through decreasing numbers of corporate headquarters.

In the 1980s, the immediate impetuses were a relaxed view toward antitrust policy by the Reagan administration and a gusher of buyout money created by Michael Milken's junk-bond kingdom. In the 1990s, executives used inflated stock as currency to buy rivals, build empires and make themselves feel important.

And now? A rise in corporate mergers and acquisitions has generally been associated with boom times rather than bad, and some analysts suggest that this week's announcements signal management confidence and an upturn for the economy.

But whatever the proximate trigger, the underlying motivation of mergers is usually the same: to sell larger amounts of products using smaller amounts of workers, equipment and other resources. And no matter what dividends result, corporate mergers are never painless.

"The combination of these companies will enable us to achieve tremendous efficiencies," RJR boss Andrew J. Schindler said of the merger with Brown & Williamson.

That's what his workers are afraid of. Deals of this size almost always lead to layoffs, as redundancies in accounting, sales, marketing and other areas are eliminated.

Boston at the moment is going through what Baltimore suffered in the 1990s: the loss of multiple major financial headquarters. Baltimore lost USF&G and Maryland National Bank, among others, and Boston is shedding FleetBoston and John Hancock Financial Services. Baltimore is the poorer for its headquarters evaporations, and so will be Boston.

Nor is success assured for any of the deals announced this week. At least in the short run, many mergers hurt employees, headquarters towns and even shareholders alike. Retired Bank of America chief Hugh McColl Jr. made a career as a "serial acquirer" of other banks in deals that, on the whole, hurt his shareholders more than helped them.

But it is difficult to argue that the United States is worse off for its two decades of merger mania. Flexibility to meld and change gave U.S. companies the strength to fend off international rivals. The United States has far outgrown other countries in that period, and for the past five years this nation has been almost single-handedly driving the world economy.

One hallmark of a thriving economy is productivity growth, and cranking out more products with fewer workers and equipment is the essence of productivity improvement.

Workers who lose jobs through mergers are eventually redeployed into new, more economically productive positions. And productivity improvements generate the capital accumulation to form companies that can employ displaced workers.

Micro-economically, mergers often hurt. But macro-economically, they can be beneficial - as long as they don't cause monopoly problems. And the fact that some U.S. companies are again deemed attractive enough to fetch handsome buyout prices is not a bad sign, either.

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