Mega-merger mania grips western economies with dubious financial benefits

Khalil Umar

Ramadan 13, 1419 1999-01-01

Special Reports

by Khalil Umar (Special Reports, Crescent International Vol. 27, No. 21, Ramadan, 1419)

The latest outbreak of merger mania has heralded a new era of corporate consolidation in various industrial and financial sectors of the global economy. Tempted by the ‘size’ mystique - the mythical corporate belief that ‘bigger is better’ - and the seductions of crass capitalism, multinational corporations (MNCs) have lately been merging with abandon.

A cursory look at the international economic arena indicates that the global economy is on the cusp of one of the most extensive waves of consolidation in history. Mergers are in train the world over setting the stage for what former US secretary of labour Robert B. Reich has dubbed an era of ‘corporate giantism.’

Nestled in the capitalist warmth of a single market at hand and a single currency to come, Europe’s corporate giants have been marching to the nirvana of mega-mergers. For instance, Générale de Banque, a mid-sized Belgian bank, was taken over last May by ABN Amro, a Dutch financial institution, in a bid that would transform the latter into Europe’s second-largest commercial bank.

Similarly, as evidenced by Citicorp’s merger with Travelers Group into a US$700 billion financial colossus known as Citigroup or BankAmerica’s giant merger with NationsBank, America’s financial services firms are tying the knot at breakneck speed. And mergers have also been on the rise in the Canadian financial industry, which had long been decentralized into the four distinct sectoral entities of banking, insurance, trust and mortgage, and securities. Regulatory changes introduced in the early 1990s allowed the Canadian industry to coalesce into a few behemoth-sized financial supermarkets that provide customers with financial services across the sectoral divides.

Mergers and acquisitions are also proceeding at quickening pace in emerging markets as well as between transatlantic industries. Dailmer-Benz and Chrysler have been negotiating the biggest industrial merger in history. British Petroleum announced last summer that it was taking over Amoco in a US$48 billion deal, the biggest purchase ever of an American firm by a foreign company. Moreover, in the first half of 1998, mergers in emerging markets reached a total record level of US$34.3 billion, up from $200 million in the first half of 1997.

As this maelstrom of mega-merger mania sweeps into new reaches of the global economy, it is becoming increasingly clear that the corporate consolidation now underway provides a mere hint of things to come. Mergers are destined to beget more mergers in a relationship that is sequential like falling dominoes, if only for defensive reasons.

Merger negotiations between various MNCs have been proceeding along different patterns. Some mergers bear all the earmarks of hostile takeovers, including a negotiating process shrouded in secrecy and conducted in a cloak-and-dagger fashion in law offices. Other mergers are mere chummy arrangements arrived at by corporate titans in smoke-filled rooms.

But regardless of the variegated processes shaping these arrangements, they often lead to one outcome: the increasing concentration of economic power. As corporate empires are meshed together into bigger business leviathans, competitors, whether through the contrived collusion of the new merged firms or as a natural consequence of excessive concentration of power, are squeezed out of the market. This gives way to grave concerns over the enhanced ability of business behemoths to raise prices and gouge consumers at will.

Supporters of the ‘big-is-better’ notion dismiss worries about competition as unproven. They argue that mergers do not eliminate competition as other big companies remain in the same market, producing therefore ample incentives to keep product prices low. They also prattle on about how the quickening pace of globalization supposedly prevents corporate giants from raising prices as this could allow competitors from other nations to move in with cheaper products.

Proponents of ‘corporate giantism,’ moreover, assume that mergers would introduce new efficiencies, which can further reduce prices, into the market. Colossal banking operations will be less susceptible to economic slowdowns or slumps than smaller banks and they can spread the costs of new technologies over many more transactions. Bigness will give business behemoths the economic muscles to better compete in an increasingly globalized market.

Intriguing as the size argument might be, many of its assertions and assumptions do not stand up well to scrutiny. Mergers may well be in the interest of corporate shareholders, if for nothing but the savings on operational expenses they bring about due to cutting duplication. But despite the blissful corporate gloss put on mergers, it is highly doubtful that they always act in the public interest. For one thing, it is inconceivable that joining call centres, head-office functions and branch structures will not result in a significant number of job losses.

Equally doubtful are claims that mergers intensify, or have no or little effect on, competition. Nowhere is this assertion more precarious than in the financial services industry. It is hard to see how a bank merger, which inevitably moves the financial services market in the direction of oligopoly, would leave room for competition to thrive. Although some small banks with an established niche in the financial market may be able to weather the merger maelstrom, middle-sized banks will find it extremely difficult to remain afloat unless they find partners to leap into the merger bed with.

Worries over the corrosive effects of mergers on competition are heightened given the Darwinian nature of the global market where the strongest survive and the weakest go under. Mergers would restrict price competition firmly within the confines of the ‘giants’ club,’ hence, effectively undermining the competitiveness of weaker rivals and shutting new entrants out. No wonder then that these worries have found their way to the trade policy agendas of some western capitals. For instance, a transatlantic trade war hovered on the horizon in 1997 when Washington’s approval of the merger of two American aeroplane manufacturers, Boeing and McDonnell Douglas, was met by European Union threats to block the deal.

Add to this stew of concern the fact that there is little evidence that giant business conglomerates created by mergers are better equipped to offer the comprehensive and diverse range of services and products demanded by today’s consumers. Even a pro-corporate weekly like The Economist of London (April 11, 1998) has expressed misgivings about the ability of mergers to facilitate cross-selling to consumers, saying: ‘Cross-selling motor insurance or emerging-market mutual funds to credit-card holders is easy in theory, but turns out to be extremely hard to do.’

The economic dangers of mergers are compounded by the political dangers posed by the phenomenon of ‘corporate giantism’ in a political process already rigged in favour of big business. The new merged giants will possess greater power to influence the political process through their enhanced ability to raise political money. At a time when political campaigns for elected office in many democracies are fast degenerating into pure orgies of fund raising and campaign spending, the possibility that corporate giants will come to dominate the political process is not a farfetched one.

Likewise, the lobbying juggernauts of corporate giants will be able to exert greater influence over the decision-making and legislative processes in their bid to secure favourable outcomes over environmental, health and safety regulations. Above all, merger-generated business behemoths will be better equipped to augment their ‘corporate welfare’ benefits in the form of tax breaks, subsidies and other already disproportionate governmental flows to big companies.

Muslimedia: January 1-15, 1999