Merger Maverick

An interview with Arthur Burck

In the last 30 years Arthur Burck has regularly written articles, testified before Congress and given speeches condemning mergers between the country's largest corporations and its most promising small companies. In those same 30 years, Burck has been the architect of several hundred mergers. Burck explains this seeming dichotomy by distinguishing mergers of small and medium size firms from mergers in which large U.S. corporations acquire small and medium size companies. The first can give companies the edge in both domestic and international competition but the latter often hurt competition and encumber the acquired company with the bureaucracy of the larger company. Burck, who now heads a merger consulting firm in Palm Beach, Florida, doesn't see the acquisitions made by the nation's largest companies as simply inefficient. Such mergers, he argues, stifle innovation, damage if not destroy the best of the country's small companies and ensure that the United States will continue to lose the battle against foreign competition. In early February, Burck talked with the Multinational Monitor about the consequences to the U.S. economy of the merger mania that has swept the country.

Multinational Monitor: What are some of the negative economic ramifications of mergers?
Arthur Burck: I think what's most important in condemning many of these big mergers is the fact that huge corporations in today's post-war world, are too sluggish, too slow, too overburdened by bureaucracies to be fully competitive. Huge companies are very efficient when there isn't change. You can build the biggest factory that will turn out a billion of an item, whether it's cars or anything else, you cheapen efficiency. But you're over the barrel once those items change. The larger you're factory the more you've got to change, but you're not going to change. You don't want to obsolete a billion-square-foot plant until you have to. So you're very slow to change. In other words, the huge corporation, which has always been our stalwart in history, is now our enemy.
Monitor: What impact have these over-sized firms had on productivity and efficiency?
Burck: In the first couple of decades after World War II we had a dominant position in making everything. We had the only plants, the only products, and that didn't give us much reason to change. I started to see this in the late 1950's, working on European deals, Pd look at their plants and say, "My god, this is better than anything we have in the U.S.," and then Pd look at their management and see that they had about a quarter as many officers as we had-they were tight. And then I looked at the salaries of the leaders of these foreign companies, they got only a small portion of the remuneration in our firms. In other words, we were fat, awfully fat. They were lean, and hardworking and efficient and starting from scratch. They weren't burdened by old plants, or by old ideas. We were tied down to old, outmoded ideas.
Burck: The way I'd like to think it should happen is mergers should occur when you think two companies could be made better by joining together, not for antitrust reasons but for reasons of interlocking skills. Usually this happens when you get a couple of smaller companies that need to have additional size and strength to compete with the giants.
Monitor: How do most mergers end? Burck In 1978 before the senate antitrust subcommittee I urged them to use some of their staff appropriations to try to get a record of what had happened to mergers. But it wasn't glamorous enough. I, without hesitation, state that the majority of large acquisitions made by large companies turn out to be in time, damaging to companies.
Monitor: Damaging for both companies or the acquired company?
Burck: Sometimes for both, but acquired companies are damaged, hurt, weakened, in some instances destroyed. Since 1970, we have statistics showing there have been about 18,000 divestitures made by larger companies. Now a divestiture is invariably a sign of a damaged or ruined acquisition.
We have 18,000 divestitures, but there have been a lot of companies that were so badly ruined that they were not divested at all but merely phased out. Many couldn't be divested-they were unsalable.
Maybe seven out of ten acquisitions of the giants, have been failures. Now this has not only hurt the giant-and their stockholders, but in many instances this has damaged some of our best companies. In the last 20-30 years, the big companies have been beating the bushes to find the best smaller companies to acquire. The majority of those companies that were acquired failed. Now remember, these were companies that were some of our greatest smaller companies, that might have had a future. Left alone they might be the great companies of the day.
Monitor: What is the impact of ruined acquisitions on employment?
Burck: Initially, there is a shrinkage of the work force, but that's sometimes one of the economies, one of the reasons for the mergers. What the economic impact to this nation may be is an imponderable that we can only guess. But obviously, there has been a very retrogressive economic impact that may even blight our future. One can only speculate, but one has to wonder how many of the millions of unemployed today-in various industrial towns--don't face that unhappy plight because of ruined acquisitions.
Monitor: What about the socio-political ramifications of these big mergers?
Burck: There are no constitutional checks to corporate power-and I can foresee if this movement continues we could have such concentration at the top that it's reasonable to forsee that we're going to have a situation where the huge money-center banks can take over and completely dominate our banking industry. When that happens, what does it mean? It means that if at the same time we're concentrating through deals like General Electric and RCA and many others, if we're concentrating and making larger the huge corporations, a handful of banks will own what might be the controlling blocks of a handful of huge companies that dominate our economy. Look ahead twenty years. You'll really have concentration of power that is far beyond anything ever imagined by our constitutional drafters-something never envisioned in our constitution-a private power that is something to worry about.
Monitor: What about the argument that antitrust laws shackle U.S. firms in competition with foreign firms?
Burck: I think it's total nonsense to think that we need big companies to fight foreign competition. When foreign companies become too big they are eventually going to have some of the same diseases and maladies of our own companies. Maybe that should be our hope, that they become awfully big. That's what happened to the German companies, some of them have already reached the point of stagnancy.
If you go through the top groups size-wise, whether it's Renault or American Motors or some of the huge British or Italian companies, you find that they have a stagnancy. Give the huge Japanese companies another five or ten years of prosperity and they're going to become just as fat and lazy as ours did. That's what happens.
Take the auto industry. We didn't meet the challenge of small cars, ten years ago when it became apparent that gas and other problems, even traffic problems and parking, required us to have a small car industry. Now, had we had, as in Japan eight or nine automotive companies and hot competition we would have met the challenge.
In Japan they didn't have the Big Three-if they had had a Big Three then, maybe today we'd be a lot more happy in this country. But they had a lot of small, scrappy ones like Honda. They were in there with better products, putting pressure on the big ones like Toyota. But in this country there was big General Motors, which set the trend, and the others followed, and did very little changing, and nobody had any incentive to meet the small car threat, so they left themselves vulnerable.
Although they say that we should fear big foreign companies, Fin inclined overall to fear more the smaller companies that have grown big because they're smart. Its not size that does it. It's because they work harder and they're smarter and more innovative. So I think it's nonsense this argument that we need to let our companies become bigger to better face foreign competition. I think it's the other way around, they better make them shrink a bit, and become more nimble, more agile, and then maybe they can compete.
Monitor: Do you think that a change in the tax structure could slow the number of mergers?
Burck: Well this is one thing that I have been urging ever since 1977 when I appeared before the Senate antitrust subcommittee, then chaired by Senator Kennedy. The way to handle this issue with minimal impact on bureaucracy is to take away certain tax benefits that not everybody enjoys anyway. The tax-deductibility on these multi-billion dollar loans finance these deals. It allows them to issue stock tax free. Now I had urged that these two tax breaks not be made available, except under unusual circumstances, to companies beyond a certain size. This would tend to deflect the good acquisition opportunities into the laps of the companies that needed them-the medium sized and smaller companies. And this automatically would change the face of our economy.
Monitor: Do you think that is the most effective way of dealing with merger mania?
Burck: Yes, a major reason for most big companies getting in the acquisition business, is that they have a lot of cash to play around with. Where do they get that cash? By retaining earnings so that they don't have to pay taxes on the dividends. There's a very big tax advantage for retaining earnings instead of distributing most earnings as dividends. These days, very few of these big companies need the money. They shouldn't be retaining it because they are going nowhere and they should be shrinking, but they continue retaining it because of the tax advantage. They sit there with those millions, and sometimes, hundreds of millions, and it's just like candy in the closet-a temptation for the kids. What to do with that money becomes a temptation and somebody traipses in from Wall Street with some idea and there they are, they're out on an acquisition that they shouldn't have made. That has been one of the pernicious things, companies have more assets squirreled away in infertile investments, some are acquisitions, some just are fancy offices and needless plants, etc. But that money that they have kept to avoid paying taxes very often finds its way into infertile, unproductive uses.
Monitor: How much time and energy do you think is spent worrying about being acquired or acquiring another company by top management?
Burck: These problems and fears have chewed up a major part of the time of many managements, and how in the dickens can they manage when they're working on these diversionary matters. It's undoubtedly had an impact on our national efficiency, our business efficiency. It has chewed up and ruined many companies.
Monitor: What is your opinion of the Reagan administration policy or non-policy on mergers?
Burck: As a Republican, I have felt that they were too lax. I have deep disagreement with the administration's lax attitude on big mergers. What we're dealing with are the basic efficiencies of our business system, and those of us who feel that our efficiency is not served by giantism speak out as I do.
Monitor: Do you think that the Reagan administration's lax enforcement policy has encouraged a lot of mergers that wouldn't have been considered under another administration?
Burck: Yes, without a doubt. If the door's wide open, you have to serve your client and take advantage of open doors. Some of the big deals you see, you wonder how they get by, and they do. And I think what you'll see every now and then is antitrust enforcers going after some small little thing, just to prove a point that they're still active. They aren't going to go after General Electric and many others like that.
Monitor: How badly are the anti-takeover defenses adopted by thousands of companies to thwart takeover attempts hurting shareholder rights?
Burck: Those are bad. I'm one who believes in the need for corporate democracy, and effective corporate democracy. With different laws in each state, if you don't like your corporate laws, you go to Delaware or another state and get easier laws. That's why we have some of these companies that are so vulnerable to raiders. Raiders are doing a lot of good today, but it's a poor way to do that good.
The Business Roundtable is all upset because the tool that was created for them has been used against them. The hostile takeover was created by Wall street for the big companies to use to take over the others. It was created for the Roundtable people, now they're getting fired at from Icahn, Jacobs, Pickens, etc. They are catching it now, so now they're upset.
What is the solution? I think we have to learn the hard way, and I think we are learning the hard way. So many companies are being hurt, there will come a point when the agony and the pain is such that the shrieks through the pain will finally be heard. When the pain can't be taken anymore, then maybe something will be done.

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