JANUARY 1982 - VOLUME 3 - NUMBER 1
Reagan has removed the restraints on conglomerationby Albert A. Foer
Can U.S. Steel save Marathon and the people of Findlay, Ohio, from the clutches of Mobil Oil? Who will win the battle for Conoco? Will Kuwait Petroleum convince the U.S. Government it should be allowed to buy Santa Fe International? (And what about Ewing Oil?)
Behind the headlines, attorneys fly hither and thither, dropping law suits like tactical bomber squadrons, while legions of managers, accountants and brokers bivouac in boardrooms, and investors and speculators around the world cut their deals, hoping to come out winners. '
One could almost expect an announcer to say, "Tune in tomorrow for another thrilling episode of Merger Wars," but in fact the real drama may be missed if one focuses - as our government and media do - on episodic battles.
While the merger wars rage, the face of the world economy changes.
The latest wave of mergers began in the mid 1970's and grows stronger eachy ear. In 1975, there were 14 transactions at $100 million or more. In the first three quarters of 1981, there were 94, the same aggregate recorded for all of 1980. In 1975, there was one transaction valued at $500 million or more; in the first three quarters of 1981, there were eight transactions valued at over $1 billion. (These figures are not adjusted for inflation, but the trend; like an outward bound rocket, has escaped the gravitational field of inflation.)
The usually subdued quarterly report by the Chicago-based merger specialist, W.T. Grimm & Co., used words like "staggering" and "hectic" in its October 21 summary of the first three quarters of 1981. It reported that the e number of mergers and acquisition announcements in the third quarter of 1981 totalled 623, up no less than 25% from the comparable 1980 quarter. The dollar volume for all transactions was $60.8 billion ("staggering"), "which far exceeds the record $44.3 billion for all of 1980. " (Grimm's italics.)
Grimm reports that the five largest transactions in the first three quarters of 1981 were: the $8 billion cash and stock acquisition of Conoco, Inc., by the DuPont Co., the largest corporate takeover in U.S. history; the $4.3 billion purchase of Texas Gulf, Inc. by Societe Nationale Elf Aquitaine of France; the takeover of St. Joe Minerals Corp. by Fluor Corp. for $2.7 billion in cash and stock; the $2 billion cash acquisition of Kennecott Corp. by Standard Oil Co. of Ohio; and the $1.8 billion merger between Nabisco, Inc. and Standard Brands, Inc.
Conglomeration is obviously a salient feature of the current merger wave. Kenneth Davidson, deputy assistant director of the Federal Trade Commission's Bureau of Competition points out another feature.
In the 1960's, mergers occurred primarily between highly-leveraged "glamour" firms offering stock to the shareholders of small firms with underutilized debt capacity. "Now," says Davidson, "the acquiring firms include the largest and most established firms in the nation and their targets are comparably larger, often among the leaders in their industries."
Three additional characteristics round out the picture of the present wave. One-fifth of the total mergers involves foreign companies. One-third represents the sale of divisions' subsidiaries or product lines. And in terms of numbers of transactions, the acquisition of small, privately held firms accounts for slightly over onehalf the total.
The Reagan Administration Boost
"Bigness doesn't necessarily mean badness," Attorney General William French Smith announced early this year, signalling the Reagan policy of reduced antitrust enforcement. This statement "seems to have been a signal to many in the business world" that mergers would no longer be aggressively challenged, said Peter Rodino (D-NJ) at hearings in August of the House Judiciary Committee he chairs.
Through the speeches of the antitrust division's William Baxter and the FTC's chairman James C. Miller III, it is clear that the Reagan administration has no policy concerns about the implications of large conglomerate mergers, no qualms about vertical mergers, and only the narrowest interests in horizontal mergers. (Budget Director David Stockman goes further. He sees no need for antitrust in a world where foreigners provide all the necessary competition.)
The statistics show unambiguously that the merger pace took off once the administration let it be known it would take a soft line on acquisitions. And many corporation lawyers admit privately that their clients are undertaking acquisitions today which would not have been seriously contemplated two years ago. This was disputed by the FTC's Miller, who told a Senate subcommittee on . December 1 that many variables in addition to the stringency of antitrust enforcement explain the rate of merger activity. These other factors - which he did not name - tend to be far more important, he said. Miller also argued that there is "little evidence that approval of a merger in one industrial sector prompts mergers in other sectors, or even that approval of a merger in one industry triggers other successful mergers in the same industry."
Chairman Miller notwithstanding, firms continually respond to changes in their environment, including perceived shifts in government policy. The large scale reorganization of the financial services industry, involving one merger after another by such firms as American Express, Sears Roebuck, Prudential, and Merrill Lynch, and the sudden eruption of efforts by major oil companies to acquire second-tier oil companies is more than mere coincidence.
The Impact of Mergers
Are we in a massive merger wave that has the realistic potential for restructuring our economy for generations to come? Chairman Miller says no. "Since 1974," he told the Senate, "the proportion of all manufacturing assets held by the top 200 manufacturing corporations has only risen from 56.7% to 59.9%."
The question is, what is significant? A 3.2%. increase in aggregate concentration over six years would seem to carry tremendously important implications when taken in the full context: the base is already high (over half of our manufacturing assets are held by 200 companies, 4701o are held by 100); the current is , undeniably running swifter; and the policemen have given notice that they are not interested in conglomerate mergers, the prime mode of aggregate growth.
Factors other than antitrust enforcement policies surely do affect merger decisions, and it could be that a shift in one or more of those factors will, like the unexpected rainstorm that douses a runaway fire, stop the current merger wave, which is probably the most far-reaching since the first one in the late nineteenth century swept in the likes of Standard Oil.
If we are not so fortunate, however, what are some of the implications? Traditional populist concerns have focused on two issues: political power and discretionary power.
In essence, the political concern is that dramatic increases in firm size may significantly disrupt the political process primarily by reducing the number of centers of political influence and by increasing the political power of the merging firms. "The larger the firm, the greater and more diverse the political resources which it can marshall," said Michael Pertschuk, then chairman and currently a commissioner of the Federal Trade Commission, in a 1979 article.
A second focus of concern is that large mergers increase the discretionary power of a small number of top managers, power to decide employment levels, plant and office locations, the kinds of technologies to pursue, charitable contributions, and so on. The people of Findlay, Ohio, want to keep Marathon out of the hands of Mobil because they do not expect distant Mobil to make the same kinds of discretionary decisions regarding Findlay that have been made with the company independent and Findlay-headquartered.
A third concern, organizational responsiveness, is receiving increased attention, not merely from populists but from many business professors and consultants, as well. The charge is that large business firms are too big to be responsive to the needs and desires of customers and employees. As the nation's productivity rates have fallen, attention has turned to conglomeration as a possible contributor to economic stagnation.
"Empire-building indigestion is the common feature of this corporate gluttony," said Senator Howard M. Metzenbaum (D-OH) and Herman Schwartz, his top antitrust aide, in a statement this summer. "Flexibility and experimentation decline, communication and management problems develop and the quality of decision-making often deteriorates."
Management of too many different endeavors under one corporate umbrella has also proven more difficult than optimistic conglomerators had hoped, Mobil's financial trouble with Montgomery Ward being only one example.
Finally, so many intellectual and financial resources are going into the merger wars, which might have gone into more productive activities, that the process itself has become a national drain.
As an example of how the merger wars may be skewing our economic decision-making, consider how much careful thought could have gone into Mobil's move to become the owner of U.S. Steel, a troubled company in an entirely different industry. The decision was apparently hatched in the frenzy of Mobil's effort to buy Marathon, once U.S. Steel emerged as a competitive bidder for the company.
Whether Mobil could actually make a profit in the steel business or whether Dupont and U.S. Steel could turn the trick in oil is something the companies will learn only over time. Shareholders shoulder some of the economic risks, but what larger costs will society have to pay?
Our laws do not deal with such issues. The large merger has to pass one legal test, generally, and that is whether it is likely to reduce competition in any particular market. By phrasing the test that way, we have encouraged the conglomerate form of enterprise, because that is the structure into which the desire to grow rapidly - nurtured by tax laws that penalize redistribution of profits to shareholders - is most easily channeled.
Only after decision-makers have come to think in terms that are not restricted to competition and single markets will they have the intellectual flexibility to identify long-range problems and develop appropriate solutions. (]
Albert A. Foer, a former Deputy Director (Acting) of the Federal Trade Commission's Bureau of Competition, , is with the Washington, D.C. law firm of Jackson, Campbell & Parkinson, P. C.