Are Mergers Boogeymen of Business? No, But They’re Not Saviors, Either
Financial mergers are an immensely polarizing subject to discuss.
Some people love them, others hate them. They are simultaneously heralded as impressive accomplishments in business and scorned as threats to the free market. The truth is usually somewhere in the middle.
But regardless of what people think of mergers, one thing is for certain: more are coming in 2020.
Over 10 years removed from America’s devastating financial crisis, the United States’ business sector has come roaring back and is projected to remain strong through the course of the new year. With it, the market for mergers and acquisitions is likewise on the upswing.
Driven by low interest rates and a favorable economic environment, the M&A market is expected to retain its forward momentum throughout the upcoming months. But with many potential mergers on the horizon, the question becomes: how should U.S. regulators proceed?
The answer, as with many things in the finance realm, is complicated. But it’s important to consider that there is no one-size-fits-all solution. Mergers are complex financial arrangements and are neither wholly good nor bad.
As I mentioned in an August 16, 2019, article, “[mergers are] generally good for the economy, the consumer, and the shareholders as all Americans are set to benefit from the economies of scale, the increased innovation, lower prices and stronger stock market returns that generally accompanies this kind of activity.” The keyword, though, is generally.
Often, mergers assist the U.S. economy by spurring innovation. They allow corporate entities to combine their resources, thus decreasing the impact of fixed costs on their bottom line. By eliminating redundancy, mergers provide businesses with the opportunity to dedicate more resources toward finding more efficient solutions through R&D. In short, they either innovate or pass their savings forward in the form of lower prices for consumers.
In 2019, for example, Disney’s massive merger with Fox didn’t materially damage the entertainment industry. Rather than stagnating, the newly merged company pressed ahead with its plans to create a streaming service to rival Netflix. And for its part, Disney succeeded, launching the wildly successful Disney+ in November to much acclaim.
But although the Department of Justice (DoJ) intervention is unnecessary more often than not, there exists a place for it. Not every merger is proposed for the sake of innovation. Sometimes, rather than promote free-market competition and bolster innovation and economic health through increasing research & development, a merger will seek to eliminate it.
Take the airline industry. After officials approved two enormous airline mergers — those between United and Continental in 2010, as well as American and U.S. Airways in 2013 — only four national airlines remained. The merger effectively allowed the airline industry to transition from a free market to an oligopoly, an industry wherein the market is dominated by a small number of large sellers.
The airlines were essentially able to collude, working in tandem to raise prices on consumers, all without the worry of losing customers. People needed to fly, after all, and they had to go through one of the four airlines. In fact, the DOJ is currently investigating whether airlines worked together to limit flights with the intention of keeping planes full and fares high as a consequence. Obama’s DoJ failed to intervene in a series of bad mergers, and that’s a mistake President Trump can’t afford to replicate.
Luckily, when it comes to bad mergers, the writing is almost always on the wall. It’s just up to the current administration’s Department of Justice to read it. Often, the Obama DoJ failed to do so. In the airline example, many of those companies were already known to be working in concert to rig market prices and weaken consumer experience. More questions should’ve been asked, and analyses/stipulations made before it was green-lighted. Unlike the Obama Justice Department, the Trump DoJ should tread carefully when dealing with mergers between companies with a history of uncompetitive behavior likewise raise serious red flags.
In just one pending scenario of relevance, Kone’s proposed acquisition of Thyssenkrupp illustrates the telltale signs of merger that needs some careful examination before it’s allowed to move forward. A pair of elevator companies seeking to combine forces, the two companies exist within an already highly concentrated industry. Only four major elevator companies compete on the national level, and if the merger were to succeed, that number would whittle down to three. That may pose a problem for the competitive economy when, in 2007, all four companies paid record fines for participating in a price-fixing cartel. With an even smaller number of competitors, collusion could become even easier. Rather than increase innovation or benefit the consumer, as many mergers do, the merger between Thyssenkrupp and Kone could accomplish the opposite — festering the problem of anti-competitive activity rather than resolving it.
But the current existence of this proposed Kone/Thyssenkrupp merger may be somewhat of a blessing in disguise. It can provide the Trump Administration with a clear picture of precisely the type of merger to scrutinize. Because, after all, most mergers are not like Kone’s. For the majority of them, there are no serious governmental issues; a merger would actually preserve the free marketplace, rather than harm it. In each of those cases, the Trump Administration should adopt a laissez-faire attitude, allowing those mergers to move forward.
Ultimately, 2020 will be a big year for mergers and acquisitions within the United States, and it is essential that American policymakers handle them with finesse — weeding out the bad apples but leaving the rest to flourish.
Michael Busler, Ph.D., is a public policy analyst and a professor of finance at Stockton University, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years. @mbusler www.facebook.com/fundingdemocracy