Merger Mania

[Henry C.k. Liu]

There are many aspects of the current merger mania that are different than that
of a century ago when Rockefeller gained control of oil, Carnegie of steel and
Frick of railroads.  The arena then was the domestic market, and the rationale
was to impose order and efficiency on emerging industries already in the
process of consolidation. It was Rockefeller, an accountant by profession, who
created the business "trust" as a vehicle to control a large number (40) of
different corporations that he had acquired.  The term later came to mean in
common usage a large combine with monopolistic powers.  Throughout the 1880s,
public opinion was increasingly concerned with the growth of monopolies, the
most vocal and bitter opponents of which being small entrepreneurs and
businesses.  There were concerns also with the big trusts and corporate giants
controlled by "holding companies" created overnight through mergers.  The mood
then was populist, anti-bigness in business but not in government. The fear of
unfair monopoly was greater than the fear of regulation.  A number of states
passed laws prohibiting trusts and other forms of corporate combination, but
they were ineffective because some states, notably Delaware and New Jersey,
continued to grant corporate charters with few monopolistic restrictions.
Liberal reformers then turned to Federal legislation as the obvious solution.
As with the Interstate Commerce Act of 1887 which sought unsuccessfully to
prohibit railroad rebates, long and short haul rate differentials and other
forms of pricing discrimination, (the Supreme Court in 1897 nullified the ICC's
authority to set rates), Congress did not feel that anti-trust legislation was
desirable or practicable.  Nevertheless, yielding to public sentiment, Congress
passed the loosely worded Sherman Anti-Trust Act by a near unanimous vote in
1890, in a crude attempt to deal with the problem by declaring illegal,
attempts to monopolize markets, or combine corporations or conspire in
restraint of trade among the several states, or with foreign countries. But
neither the Justice Department nor the courts showed much interest in
compliance.
Historians have categorized 4 sequential phases in the development of
capitalism: agricultural capitalism, mercantile capitalism, industrial
capitalism and finance capitalism.  The 1890s marked the rise of investment
banking in America and the beginning of finance capitalism, symbolized by the
House of Morgan whose higher standard of financial integrity put an end to
buccaneering corporate raiders like Jay Gould who made money by arranging
mergers, watering stocks and then selling the diluted company shares at high
profit to an unknowing public.
Labor solidarity, lacking a strong tradition due to the American heritage of
individualism, was impeded further by racial, ethnic, linguistic and religious
differences and by the prejudices harbored by native-born American workers
against blacks and new immigrants.  In 1865, William H. Sylvis organized the
National Labor Union which claimed a membership of 600,000 by 1868, but
disbanded within 4 years due external pressure and internal dispute over the
correctness of pushing for political reforms without sufficient sense for
realism.
A year later, in 1869, Uriah  Stephens organized the Knights of Labor (KOL),
with agrarian idealism and Jacksonian individualism under the slogan: "Every
man his own master and employer".  Membership was universal, excluding only
lawyers, bankers, stockbrokers, liquor dealers, and professional gamblers. It
sought to achieve its goal by organizing cooperatives and through legislation
rather than conflict with the employing class. Despite being buoyant by a
period of rising labor militancy, with a member up to 700,000 by 1886 under the
leadership of Terence Powderly, the KOL floundered by failing to support
strikes, in preference for producer's cooperatives that eventually failed as a
result of mismanagement or business hostility.
The American Federation of Labor (AFL) was organized in 1881 under the
leadership of Samuel Gompers, with salaried professional officials, strict
discipline, regular dues and strike funds and insurance.  The Sherman Act was
at times used by the court to issue injunctions against strikes based on a
"restraint of trade" argument.  The Fourteenth Amendment was used to declare
labor laws unconstitutional until the 1935 Wagner Act which legalized the right
to collective bargaining.
Eugene Debs, the Railway Union leader, emerged from a 6-month prison term for
contempt of court, became the leader of the Socialist Party, but received
little labor support even for its mild program of peaceful and democratic
methods.
The Industrial Workers of the World (IWW) was formed in 1893 with one million
members, known as "Wobblies", organized by William D. Haywood, a mine workers
leader.  It offered a radical program calling for the revolutionary overthrow
of the capitalistic system.  It was crushed during the wave of anti radical
hysteria following WWI.
Theodore Roosevelt, defender of the principle of government supremacy over
business, and charismatic politician of the Progressive Movement, began his
trust-busting campaign in 1902, in preparation for his reelection in 1904.  The
campaign created great popular enthusiasm and matching violent reaction from
corporate magnates, but it gave TR a plurality of 2.5 million votes in the 1904
election.  Yet in his second term, TR's anti-trust accomplishments were less
than impressive.  While the trusts were compelled by court decisions to
dissolve into component entities, these entities could not be transformed to
different ownership, or be compelled to compete with each other.  The new
components in effect divided up the national market into regional sections with
no real competition.  The courts further stipulated that only court interpreted
"undue" and "unreasonable" restraint of trade was prohibited by the Sherman
Act.
TR was supported by big business which understood that he was in truth its
savior by forcing business to conform to a high standard in order to prevent
the growth of revolutionary sentiments.  TR himself declared that "we draw the
line against misconduct, not against wealth".
Progressive politics was dominated by two foci: fight against political
corruption of bosses and machines and opposition to monopolies and their
exploitation of farmers and workers.  It was not a revolutionary movement but a
reaffirmation of traditional American ideals of democracy , individual freedom,
the rule of law and the protection of private property.  Progressives reject
class struggle and rely on ethical, humanitarian and religious values.
American attitude toward the proper role of government shifted several times
throughout its history.  Progressives accept the necessity for government to
assume broader regulatory responsibilities and economic functions, along
Hamiltonian lines.  With the growth of big business, the emergence of a large
working class, and the deterioration of the economic position of farmers, there
was a shift between Jeffersonian laissez faire and Hamiltonian big government
positions, with conservatives assuming the former and liberals the latter.
Among progressives, there were also two attitudes toward monopolies.  One,
represented by T. Roosevelt, argued that bigness was an inevitable economic
trend and that government regulation over their excess was necessary, while the
other, represented by Woodrow Wilson, advocated the prohibition of monopolies,
protection of small businesses, and preserving competition.
Robert Marion LaFollete of Wisconsin, was responsible for introducing social
science as the argument for reform, by bringing academic experts into policy
marking in government.
By 1929, monopolistic trends had shifted towards oligopoly in which a few
corporations controlled the market  by cooperating in maintaining prices
through a price leader, while they competed through improvement in quality and
services and through advertising.
Many causes had been identified for the crash of 1929 and the subsequent
economic collapse.  Aside from the speculative bubble, one fundamental factor
was that wages were rising much slower than productivity.  Thus an overcapcity
in production inevitably resulted.  Another factor was the uneven distribution
of income that prevented a general rise of consumer purchasing power amid a
superficial boom limited to only a small segment of the population.  This
deficiency of purchasing power was masked by the growth of debt, made possible
with the introduction of installment financing which led to a sever credit
crunch.  The imbalance of a high return on capital had a direct bearing in
keeping income low and purchasing power deficient in relation to the growth of
savings available for new investment.
Another factor was the rise in foreign investment in the U.S. which had shifted
from a debtor nation prior to WWI to a creditor nation in 1929.  America was
financing its export by lending foreign buyers the money.  The lack of
effective government supervision allowed Wall Street bankers to collect
profitable commissions by risking the savings American citizens entrusted to
them in unsound investments overseas.
Price fixing by major corporations deprived the economy of the necessary
flexibility and capacity for quick adjustment .  Instead of cutting prices to
stimulate consumption and maintaining production, the corporations maintained
prices and cut employment., thus further depressing consumer demand for their
products.  The emphasis of the economy toward capital goods also made the
recovery agonizingly slow because capital goods tended to be the last sector to
rebound.
The New Deal was a continuation of the Progressive Movement.  Its main purpose
was to save capitalism by bringing about recovery.  It sought through
government public works programs and deficit financing to stop the process of
deflation  and unemploymant.
In 1935, a group of militant union leaders, including John L. Lewis of  the
United Mine Workers, Sidlney Hillman of the amalgamated Clothing workers and
Dvid Dubinsky of the International Ladies Garment Workers, noting the failure
of the AFL to respond to the demand for industrial unionism, broke away and set
up a Committee for industrial ORganization (CIO).  Under the leadership of
Lewis, CIO expanded reapidly and won notable successes in steel and
automobiles.  By 1940, total union membership reached 9 million, although still
only 25% of the work force, but unionis was strongly entrenched in all basic
industries.
The New Deal failed in its primary objective of full employment through revival
of production. There was no attempt to make structural changes in the
pownership and control of basic  economic enterprises.  In fact, American
corporations were bigger and more concentrated in 1940 than in 1929.  It did
provide an extensive social safety net program and inmcrease government
responsibility in the regulation of commerce.
After WWII, the global economy was distorted by the geopolitics of the Cold
War.  The militarization of the peace throughout the Cold War hid the classic
relationship between low wages and over capacity, because military expenditures
soaked up the excess capital.  Reagan economics and foreign policy essentially
spent the Soviet Union into bankruptcy and piled up historic levels of debt for
the U.S., deregualted the U.S. economy at the same time decimated unionism in
American industry.  Now, less than a decade after the fall of the Berlin Wall,
the classic factors that causes depressions: low wages and high returns on
capital, are once again threatening the world's economies.  The only thing
different this time is that America now is the world's biggest debtor nation,
but acts as if she is still the world's biggest creditor nation, with the
financial resources to bail out a world mired in deep financial crisis.
It is interesting to note that Allan Greenspan, in his recent testimony on
monopolies before Congress, argued: that government is inept at determining in
advance those mergers that would create competitive problems and the it would
be wiser to wait and see. To this old laissez faire line, two new arguments are
added: that mergers are necessary for survival in a global economy and the
technological imperative mandates them.
But the current mergers in manufacturing (Daimler/Chrysler), finance
Citibank/Traveller, Deutch Bank/Bankers Trust), energy (Mobil/Exxon), etc. are
all focus on price stability through cost cutting, mainly through massive
worker reduction, thus exacerbating the over capacity and under consumption
-problem that will again bring the global economy crashing down.
My suggestion for a solution to the current financial/economic crisis is
simple: a massive across the board increase in wages worldwide, 25% annually
for LDCs and 10% for MDCs, until consumption soaks up the world's overcapacity
in production.
As for mergers, they should be allowed only if they do not lead to layoff of
workers and if they are accompanied by increased wages.

Henry C.K. Liu

Rakesh Bhandari wrote:


> Having never read a textbook like Copeland and Weston's Finacial Theory and
> Corporate Policy, I would ask Henry and others about the significance of
> these mergers being mostly stock, not cash, deals;

It is an expedient strategy to skirt the current credit crunch.


> also are mergers
> concentrated today in certain kinds of industries, not others?

It is dictated by which indusry has the higest degree of excess capacity and
under the most severe deflationary pressure.


> Which
> industries are most concentrated in the US; does such a pattern hold in
> other countries?  Will the main effect of mergers be to give monopoly power
> to national capital at home and thereby the ability to secure additional
> surplus value in circulation while positioning these monopolies to better
> compete on the global market in which each can undersell the other as each
> can sells at marginal costs for the sole purpose of destroying
> international rivals having made superprofits in production and circulation
> at home?

Merger are not designed to increase competition, rather they aim to stabilized
prices with increased efficientcy through labor cost reduction.


> What percentage of profits do these monopolies make at home? And ,
> following Brenner, what are the implications of these mergers for the
> nature of competition on the world market?

I have never read the authors you named, nor do I have any desire to.

Henry