September 29, 2009
“The Vine that Ate the South” (source: WolfeReports)
In yesterday’s New York Times, Andrew Ross Sorkin reports on two recent corporate mergers– Abbott’s purchase of a Solvay unit and Xerox’s absorption of ACS, each valued at over $6 Billion. Good times are back, he suggests.
… taken in the context of what has been a merger drought — in the wake of the financial crisis, deal-making is still off by more than 50 percent from last year — the transactions suggest that the most senior ranks of corporate America may now have a more optimistic outlook on the economy than some people thought.
“Will you see us move with a lot of acquisitions over this next year? You betcha,” John Chambers, the chief executive of Cisco Systems, said in a recent meeting. “Especially if it plays out economically the way that I think.”
In fact, as noted here before, M&A activity has already run hot and heavy in the financial services arena, not despite, but because of the economic crisis and the bailout. TARP and related funds, ostensibly meant to loosen credit for consumers and commerce, has instead been largely used to fund investments on the receiving banks’ own accounts– to help the favored “too large to fail” banks buy up competition and expand their market shares. (See the illustration here for a graphic– pun intended– depiction of your tax dollars at work.)
Now, Sorkin suggests, the imperial expansion moves to other arenas.
The greatest concentration of deal-making appears to be in the health care and technology sectors. Warner Chilcott made a $3.1 billion deal for Procter & Gamble’s drug business last month, for example, and Dell bought Perot Systems, a technology services company, for $3.9 billion. But deals are also being made in other sectors, like food; Kraft’s $16.7 billion unsolicited bid for Cadbury, which was rejected but remains a possibility, is the largest outstanding offer to date.
“If you’re healthy, it’s a great time to acquire inexpensively,” adds Ted Rouse, a head of Bain & Company’s global mergers and acquisitions practice. “But it’s an awful time for two weak companies to merge.”
The experience of the last several decades has trained us to see increased M&A activity as a sign of economic strength. And indeed, when the economy is fertile– when every company that disappears via acquisition is replaced by two or three new start-ups with world-beating plans, it probably is a sign of economic health.
But when the companies that are swallowed up are not replaced– because funding/credit isn’t available or because IP laws are too restrictive or because oligopolists’ channel power freezes new players out or… well, you get the picture– the prognosis is not so rosy. At best, we get a return to the “gray flannel suit” 50s; at worst, a decline into the turbidity of the 30s.
As suggested in “Beware the Land of the Giants…“:
When oligopolies emerge, they do all they can to retard competition and innovation; it’s their self-interest. But in a growing economy, their impact is measured in “decreases in the rate of growth,” “slowing rates of innovation.” On balance, things are still trending up. And to the extent that new entrants succeed, that innovation trumps defensiveness, the oligopolies fade.
But when oligopolies form by default in troubled times, their self-protection can salt the earth around them, can make it hard-to-impossible for ferment– for start-ups or disruptive innovation– to take root… and it’s from those seeds that strong growth in a recovering economy can emerge.
We have a huge stake in making sure that the more concentrated economy with which we’ll emerge from this downturn is as “un-oligopolistic”– as free and open– as we can make it.
The problem is that it can be very hard to tell one kind of M&A activity from the other while in the midst of the deal stream. A slide into oligopoly can feel, as it’s unfolding, just like the good old days of the 90s– one exciting deal after another– until it’s too late to do anything about it. And when so many of the parties to the transactions are paid– and richly paid– on the transactions, as opposed to the longer term outcomes of the deals (much less their utility to the economy as a whole), there is, to put it politely, no incentive for the actors to pause to consider.
But pause we should. Vulnerable as we are in what may or may not yet be the trough of economic decline, We can ill afford an implosion of competition that resolves into a tar-baby of oligopolies.