Big and bigger

February 02, 2005

IN CORPORATE America, big is back -- in a very big way. But will investors and consumers benefit?

AT&T -- having sunk low after its Ma Bell monopoly was broken up two decades ago -- is being swallowed for $16 billion by an offspring, SBC Communications, itself the merger of two regional Bells. The new phone company will be the nation's largest and it hopes to grow by peddling bundled local and long-distance phone, Internet, wireless and video service.

Consumer-products giant Procter & Gamble is buying Gillette, the razor company, in a $57 billion deal aimed at gaining more market leverage for advertising savings, product price increases and critical retail shelf space. P&G plus Gillette will be the world's largest company of its kind -- while selling almost 20 percent of its products to just one customer, Wal-Mart.

The two recently announced mega-deals are by no means the whole story. Mergers and acquisitions are off to such a fast start this year that it could be the biggest since the end-of-the-1990s tech boom. With stock prices up, interest rates still low, corporations flush with cash, and the very favorable tax and antitrust environments of the Bush White House, consolidation is in the air across many industries, from communications to insurance.

But, despite the touted potential of such deals, operational synergies and savings tend not to be realized so easily. In many cases, share-price growth of the acquiring or merged firms falls behind that of their peers. (Witness the AOL-Time Warner disaster.) Layoffs are a virtual given. And if fewer market choices or higher prices result -- a possible consequence of the product bundles inherent to both the AT&T and Gillette acquisitions -- consumers may not benefit, either.

There will be federal antitrust reviews -- and P&G may have to sell off one or two overlapping Gillette product lines -- but these deals aren't likely to be blocked by Washington. And anyway, the failure of the AT&T break-up to bring about local phone competition in 20 years ought to be sufficient reminder that government intervention hardly is a universal solution for marketplace problems.

Making room for new technologies may be more useful. In telecommunications, as more phone services move to the Internet, true competition is being joined by cable providers.

Even the long dominant software behemoth, Microsoft -- judged by both U.S. courts and, just recently, the European Union to be a monopolist -- is finally beginning to now face strong pressures; but they're from the spread of free or cheap, sometimes better, open-source software, not so much from regulators.

Mind you, Microsoft, even with its antitrust restrictions and guerrilla-style competitors, remains plenty strong -- enough that its one-time $3-a-share dividend (totaling $32 billion) gave the nation's savings rate in December its first positive jolt in years. Likewise, SBC-AT&T will claim more than 30 percent of the U.S. local and long-distance markets. And P&G-Gillette will boast 21 global brands that each have $1 billion in annual sales. But in a world of rapid-fire technological change, while the advantages of such scale are significant, they are insufficient in the long run without innovation.

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