Mega-Merger Madness

Last week's announcement of a proposed, $30-plus billion merger of AT&T and cable TV giant Tele-Communications Inc. signals that corporate mergers will likely continue their record pace.

But experts note mounting evidence that such mergers bring little, if any benefit to consumers, the economy, or even the companies involved.

Mergers and acquisitions in the United States this year could reach a record $2 trillion, about equal to the all merger activity from 1990 through early 1996. The number matches, in size, the economies of Britain or Italy.

Impressed?

The Clinton administration is. It launched a review of business concentration earlier this month.

"This merger wave is not slowing down," Joel Klein, the Justice Department's top antitrust official told Congress June 16. "In fact, it appears to be increasing."

So what does this mean for consumers and investors?

"Many mergers may increase efficiency, improve research and development, and lower prices to consumers," Mr. Klein said.

They also benefit Wall Street investment-banking firms that assist in these transactions. In addition to boosting their own bottom lines, the mergers will, they say, stimulate innovation and boost global competitiveness.

Some academics are skeptical.

"If we listen to the public-relations machines," says James Brock, an expert at Miami University of Ohio, Middleton, "we are about to enter utopia. The remarkable thing is that anybody would believe that kind of claim."

The record of the five merger waves since the turn of the century indicates that most corporate combinations work out poorly, says Professor Brock. "A large number of cases are almost a disaster."

Robert Litan, a scholar at the Brookings Institution, Washington, D.C., is more generous. Half fail; half succeed, he says.

The earlier merger waves are often described as different in character. The first, the construction of major trusts about the turn of the century, resulted in antitrust laws. The second occurred during the "roaring 20s." The third was the in the 1960s, when many varied businesses connected to become conglomerates.

In the 1980s, junk bonds provided ready financing for a merger mania, and often involved breaking up conglomerates.

In today's merger boom, a common rationale is that the combination is "strategic." Companies are responding to changing technology, globalization, industry upheaval, or deregulation.

But Mr. Brock doubts today's mergers will succeed any better than those of the past. "It takes a while for memories to fade and we play the game all over again," he says.

Mergers impose a "significant cost" on the economy, he adds, because many become anticompetitive, raising prices. And profits at merged firms "are usually lower, costs higher."

They also mean lost opportunities, he says. Executives are so busy merging, they take less time to supervise research and development, operations, expansion, and personnel matters.

So why do companies buy out others?

One reason, says Walter Adams, former president of Michigan State University, East Lansing, is that investment bankers push mergers or breakups, getting commissions in either case.

Another is that executives often benefit. Bigger companies offer higher pay, perks, power, and prestige, says Mr. Adams. Even outgoing bosses often come out rich. The top 10 executives at Chrysler harvested more than $1 billion in benefits when it was bought by Mercedes-Benz of Germany.

Executives are mobile, he says. They are usually long gone by the time a company "reaps the whirlwind" of a failed merger.

Both Klein and the other top antitrust official, Robert Pitofsky, chairman of the Federal Trade Commission, see greater danger that today's strategic mergers can make collusion and other anticompetitive activities more likely.

Both agencies have stepped up antitrust activities, yet they challenged just 52 of 3,702 combinations. "The key for our review is whether the merger will harm consumers," Klein says.