Money and Business/Financial Desk; Section 3
ECONOMIC VIEW
As Mergers Get Bigger, So Does The Danger
By LOUIS UCHITELLE
02/13/2000
The New York Times
Page 4, Column 6
c. 2000 New York Times Company
MERGERS today are something to behold. The big ones are four or five times pricier than the biggest in the 1980's, and the number keeps
climbing like an airliner gaining altitude. Giant companies on different continents come together as easily as neighborhood stores, and hardly a
week goes by without another huge deal. The time has come to stop gawking at this spectacle and to figure out what is happening to so many of
the corporations that shape our lives.
We read with amazement that America Online is buying Time Warner to get material to transmit over the Internet. Daimler and Chrysler have
merged to gain greater access to each other's markets, creating a giant that is neither European nor American. And just last week, Pfizer said it
would buy another pharmaceutical powerhouse, Warner Lambert, in part to get hold of Lipitor, a hot-selling anti-cholesterol drug.
Seldom since the late 19th century, when corporate trusts dominated oil, steel, copper and railroads in the United States, has there been such a
march toward concentration, this time on a global scale. And the process is gathering speed. Companies around the world agreed last year to pay
$3.4 trillion to acquire other companies, Thomson Securities Data reports. The total has skyrocketed from less than $1 trillion in 1995, when
the current merger wave took off.
The action was very different in the 1980's, when leveraged buyouts prevailed. Companies were bought, typically with borrowed money, and
broken into pieces thought to be worth more apart than together. Today, companies are merging to multiply their size.
The danger is that two or three huge corporations will come to dominate each industry and gain the power to shove up prices. As effective
competition disappears, so will the innovation and striving for quality that it fosters. The American auto industry fell into that state after World
War II, until Japan broke the Big Three's dominance in the 1970's. If the merger wave now unfolding across the globe goes too far, who will be
the spoilers?
''There is pressure to make very diverse industries less diverse,'' said David Wyss, chief economist at Standard & Poor's DRI. ''That is because
in nearly every country today, it is hard for more than two or three companies in any industry to make money.''
Concentration is the natural drift in a market system, but it lay dormant or was held in check through most of the last century. Now it is
unchained again, for a laundry list of reasons. One is the booming stock market: AOL's surging stock price allowed it to swallow the much bigger
Time Warner. Deregulation also plays a big role: Not long ago, the joining of Citibank, Travelers and Salomon Smith Barney, for example, would
have been illegal. So would many of the mergers in telecommunications, before Congress changed the rules in 1996. And there are fewer
obstacles to cross-border combinations today.
Technology is both a means and a motive. New information networks allow managers to oversee bigger operations than before. Breakthroughs in
delivering phone calls, TV signals and Internet data over a single line have companies scrambling for position through mergers. And e-commerce
is not likely to be very profitable until a few companies emerge in dominant positions.
Excess capacity pushes mergers in established industries, to eliminate duplication and achieve economies of scale. Even the Asian financial crisis
has played a role. United Technologies, for example, which makes Otis elevators among other products, acquired control last month of a big
South Korean elevator maker, extending United's reach into that lively market.
''We could not have done that just a few years ago,'' said Ruth Harkin, United's senior vice president for international affairs and government
relations. ''The foreign investment rules would not have been favorable to us. And prior to the Asian crisis, there would not have been a
willingness in Korea to let us merge.''
The concentration of corporate power is still in a very early stage. Nothing like the trusts that dominated American industry a century ago have
emerged in the global marketplace. Teddy Roosevelt's spirit is not forgotten. The antitrust structure survives and lately has been pointedly
invoked, as when the Justice Department challenged BP Amoco's proposed acquisition of Atlantic Richfield. There is also talk of coordinating
antitrust rules globally.
The goal, as economists put it, is an optimal balance in which some concentration is allowed, but government steps in before price-fixing
develops and innovation is killed off. That's not an easy balance to strike when the pressure is on to make government smaller while mergers
make industry ever more concentrated.
Graph shows the value of mergers and acquisitions announced world-wide in trillions. (Source: Thomson Securities Data)