JUNE 1996 · VOLUME 17 · NUMBER 6

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I N T E R V I E W

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Multinational Monitor: Just a few years after the 1980s merger wave subsided, we are in the midst of a period of more intense corporate concentration. What accounts for the consolidation craze?

James Brock: It is in large part a tribute to the inability of the business world to learn much from the past. We had the bust of the merger wave of the 1980s in the early 1990s, in a severe recession and an enormous financial fallout on the financial markets and the stock market. Once we worked our way through that, everybody jumps back into playing the same game as before, without having learned much.

Walter Adams: It is really an exercise in speculative capitalism, and a refusal to learn from the disaster from the 1980s. It is following the California principle: Anything that is not worth doing is worth doing to excess.

MM: What motivates the companies involved, if the mergers have proven to be largely misguided even from their point of view?

Adams: The shareholders really have no say in these matters. It is management that is the playing the speculative game.

Why do managers engage in this kind of activity? It is the four Ps -- power, prestige, pay and perks. They don't necessarily care about the benefit of the stockholders.

Brock: Another point is that we can identify a few groups that regardless of how these deals turn out do benefit without question. Those groups include the investment banks that put them together, shop them around and underwrite them and pull them off. They get paid when the companies combine; they also get paid later when the firms get into trouble and they have to undo these things. And along with the investment banks are the legal advisers that are involved; they get paid on the front end, they get paid on the back end. Whether or not the deal works out is really of no concern.

Adams: It is the same thing for the accountants, and for the consulting economists.

There is a whole cottage industry that has grown up in the United States. You can say perhaps that the largest growth industry in America today is the buying and selling of companies.

MM: What accounts for the trend being concentrated in a few sectors? Why are certain sectors -- among them notably banking, health care and telecommunications -- in the midst of consolidation frenzies?

Brock: Those sectors are ones where the regulatory groundrules are being changed in a fundamental way. In particular, there have been efforts to open up those sectors to competition by breaking down government regulation and regulatory barriers, and opening up entry to newcomers.

Adams: There is much logic to deregulation -- if deregulation is accompanied by competition. But we have found in the recent past that deregulation is accompanied by mergers and concentration.

The ideal example is the airline industry. As soon as the airline industry was deregulated, you got an intensive merger movement, so that you had a conversion from a regulated oligopoly to an unregulated oligopoly. Look at major airports in the country. The four largest firms in Atlanta control 93 percent of the market; in Charlotte, North Carolina, they control 99 percent; in Chicago O'Hare, 90 percent; in Cincinnati, 95 percent; in Dallas 95 percent.

Brock: The general point is the purpose of deregulation is to have competition do the regulating, but if you simply stand by and let all the major firms merge and consolidate with each other, then they destroy the basis for that competition taking place.

We are clearly seeing that in telecommunications, where you see a tremendous consolidation of control into the hands of just a very few media giants who will then be in catbird seat in terms of controlling what gets shown, who gets heard and who doesn't get heard, what issues are aired and what issues are not aired.

In health care, somehow the insurance industry has been mistakenly treated as the guardian angels of the world, on the theory that if they have dominance in the process they will do what is right and good for everyone. That then triggers a whole series of defensive consolidations between hospitals, among doctors, among physicians' practices and so forth, so that you get a tremendous concentration of power in the hands of fewer and fewer more powerful firms in that field.

Adams: It is a process that feeds on itself. For example, with the latest telecommunications bill, the cable companies argue they must become giants because they will be faced with enormously powerful telephone companies. Then the argument is turned around, and the telephone companies say they have to get bigger because they are confronting competition from giant cable companies.

Brock: It is ending up that the same companies are on both sides of the argument, so they are facing competition from no one.

MM: The merging companies say that these mergers are necessary for economies of scale and other sorts of efficiencies. Are those claims justified?

Adams: All we can do is judge by the past. Take ITT. ITT in its heyday acquired more than 150 companies in widely diversified fields. Ten years later, it divested more than 100 of those acquisitions. And after that was completed, ITT voluntarily split itself up into three units.

AT&T has voluntarily split itself up into three units. The German giant Siemens has split itself up into 10 units. Kodak acquired Sterling Drugs, then sold it off. Mobil bought Montgomery Ward for $1.5 billion; after investing millions and millions and losing consistently, they finally sold Montgomery Ward at a loss. Atlantic Richfield acquired Anaconda Copper, and a few years later got rid of it. Occidental acquired Iowa Beef Processing, and a few years later got rid of it. Standard of Ohio acquired Kennecott Copper, and a few years later got rid of it. Etc., etc. etc.

If the acquisitions and mergers are marriages made in heaven, how can you argue several years later that the divorces are made in heaven? These are just inconsistent arguments.

MM: What about mergers within the same industry?

Brock: Take a classic example of that, the steel industry. Back in the early 1980s, Republic and LTV Steel, then two of the five largest steel companies in the country, announced that they were going to merge and consolidate in order to achieve all kinds of almost limitless economies and efficiencies of scale and scope and research and development. The management at the time said it would go down in the annals of American history as marking the renaissance of the combined firms. Within two years, they declared bankruptcy.

Look at AT&T's disastrous experience with NCR. They spent $7.5 billion to buy NCR, and that merger was going to promote all kinds of synergies and economies. It too was a disaster. Now AT&T is spinning it off. In a bold, new departure of strategy, the spun-off firm has decided to reassume the name NCR.

There is tremendous public relations on this. It is claimed that all kinds of wonderful and fabulous new things will happen, but when you look at the record itself, it is rare that it actually pans out the way that it is described at the time. More often than not, certainly in the 1980s, the mergers eventually ended in disaster if not outright bankruptcy.

Adams: Look at the department store field. A real estate operator out of Montreal, Campeau, acquired a whole bushload of department stores -- great names like Bloomingdale's, Burdine's, Lazarus, Jordan Marsh -- that ended in bankruptcy. Other bankruptcies in the industry include: B.Altman, Garfinkel's, Carter Hawley Hale, Macy's, Ames. These mergers were financed with debt that has burdened the companies so that the could not do the things they ought to have done to enhance production efficiency, technological progressiveness and international competitiveness.

MM: How does the Clinton administration rate in its antitrust policy?

Adams: The Clinton administration is doing better than the Reagan-Bush predecessors, but that isn't saying much, because Reagan and Bush subjected the antitrust laws to euthanasia.

Assistant Attorney General for the Antitrust Division Anne Bingaman and Federal Trade Commission Chairman Robert Pitofsky are showing some signs of life. It is to be hoped that in a second Clinton administration, if we have one, that they are finally unleashed to do the job they are capable of doing and, I think, inclined to do.

MM: What are the things you think the administration should be doing that it is not doing?

Brock: There are a number of areas that are problems -- and in fairness I think that they are beginning to recognize some of them. The flirtation with managed care in health care is gradually coming to be recognized as just a masquerade for monopoly. They have become increasingly active in starting to challenge some of the mergers and acquisitions related to managed care. They have begun to look at what I think they now realize they should have challenged early on -- the vertical integration between pharmaceutical manufacturers and the specialized prescription management companies which actually had a fair amount of bargaining power on behalf of consumers. That integration eliminated the prescription management companies as a source of downward pressure on prices.

I think they ought to be looking at banking, where we have seen almost unprecedented wholesale consolidation in this country. The administration seems to have bought the argument in the defense field that because the Cold War is over, monopoly ought to rein freely in defense weaponry production through mergers. And they seem not disposed to interfere at all with the growing consolidation taking place in the electric power field.

Also, they seem to think it is a good idea to create joint ventures between the world's dominant airline firms. The latest is their approval of British Air's tightening of its joint venture with American Airlines. British Air is a majority owner of USAir, so that one alone ties together three of the leading airline companies.

So there are a number of areas where they could do more things.

MM: In a recent policy statement, the Federal Trade Commission announced a new approach to evaluating the costs and benefits of mergers and acquisitions, one which will take more account of mergers' potential cost savings to consumers. Is this a good idea?

Adams: It all depends what kind of proof they require ex ante. It is one thing for a public relations department to claim that a given merger will increase production efficiency, promote technological progressiveness, enhance international competitiveness, create synergies. Every merger that has ever been proposed is justified on those grounds.

The question is: what kind of affirmative proof is presented to document those claims. If the antitrust agencies are tough in demanding convincing proof -- the preponderance of evidence -- then OK. But again the record shows that mergers have not created efficiencies.

Brock: It also would amount to a rather fundamental rewriting of the statute that is involved. Section 7 of the Clayton Act prohibits mergers that might substantially lessen competition or tend to create a monopoly. It does not say anything about efficiency.

MM: Is there merit in the apparent FTC assumption that, if there are savings, they will be passed through to consumers, rather than captured as profit?

Brock: That is the second part of it. First, as Dr. Adams points out, the claim that there are efficiencies is highly dubious, given the track record. Even if there are efficiencies, there is the second question of whether they would then be passed along to consumers. If a position of substantial market power is either created or increased, then there is absolutely no guarantee that any cost savings would actually be passed along to everyone else.

MM: Some argue that economic globalization eliminates the need for forceful antitrust enforcement, since even national monopolists face competition from foreign firms. Others claim more: that global competition requires creation of giant companies which can act globally and withstand foreign competition. What implications does the intensification of international economic competition have for national antitrust policy?

Brock: In an age of increased globalization, a strong domestic antitrust policy becomes more important than ever, not less so; becomes more important to international competitiveness, not less so. If domestic industries are competitively organized and structured, if they are not dominated by monopolies or stodgy oligopolies, then they will be innovative, efficient, constantly looking for ways to build better mousetraps, and that is going to give them a great leg up in competing against the best in the rest of the world. So, to the extent that we maintain competition at home and enforce the antitrust laws, and block anticompetitive mergers, we are helping, not hurting, ourselves in the rest of the world.

Adams: There is one more point. Take the automobile industry as an example. Does the automobile industry really fight its foreign competitors? What have they really done? They fashioned massive joint ventures with their global competitors. Let me give you specific examples: GM-Toyota, GM-Daiwoo, GM-Suzuki, GM-Isuzu, GM-Lotus, Ford-Mazda, Ford-Mazda-Kia, Chrysler-Mitsubishi, Chrysler-Mitsubishi-Hyundai, Chrysler-Samsung.

Furthermore, how competitive are they? When foreign competition bites, what do the domestic producers do? They go to that "socialist" government in Washington asking for protection from competition. And their economic power is parlayed into political power, to get that kind of protectionism against competition.

Brock: There is some other evidence, from the experience abroad, that is also very important to this entire question. Back in the 1950s, the Western European countries bought the argument that if Western Europe was going to be a global player, these countries would have to encourage consolidation of their industries at home and have megafirms that would be able to dominate their markets at home and abroad. In England and France, this policy led to the formation of such paragons of efficiency and performance as British Leyland in automobiles, British Steel in the steel industry and, in France, Bull in computers. Rather than national champions, as they were called then, they came to be known as lame ducks, requiring continuous government support and bailouts.

If we go to the other side of the world, the Japanese experience is very much in line with this same point. After World War II, when the United States occupied Japan, we implemented a massive trust-busting program to break up the monopoly of financial and economic control that existed there. We broke up firms, deconcentrated markets and created an intensely competitive system. They were competitive at home, and they were therefore very competitive when it came to global competition.

MM: Another oft-used justification for easing antitrust regulations and enforcement is to spur collaborative research and development among competitors. For example, the federal government is working in conjunction with the Big Three auto makers to develop cleaner cars, and has granted the auto companies an exemption from antitrust laws to do so. Is this wise policy?

Adams: Look at the record. The automobile companies have collaborated in the past. There was a criminal suit, settled by a nolo contendre plea, where they combined to suppress, rather than promote, innovation in the development of anti-pollution devices.

These companies are big enough to stand on their own, to do the necessary research. As it is, the government subsidizes a good deal of the research, including the automobile industry's research to produce non-polluting, fuel-efficient cars. Why the hell can't General Motors do that instead of playing the acquisition game, buying Hughes Aircraft and EDS and car rental agencies?

Furthermore, there is a logic to competition in research as there is a logic to competition in the bringing out of new products. The more centers of initiative you have, the more likely it is that somebody out there will come up with a better mousetrap. One of the weaknesses that we always criticized in the Soviet system was the great concentration of industry in the hands of monopolies or near-monopolies.

Finally, if you look at progressive industry, it is the Steven Jobs's, the Bill Gates's, the imaginative entrepreneurs and creators, who have brought out inventions and innovations. The large research laboratories of IBM, for example, missed the boat in the computer industry. Who was it who brought some of the breakthrough changes? It was the little guys.

Brock: It is a great myth of our time that the fruits of technological progress require armies of scientists and billion-dollar budgets. Study after study of the sources of inventions, of who comes up with these things, shows it tends to be mavericks, independents or outsiders. They tend not to have much money to work with. But they are all pursuing their different ideas.

You don't know in advance what the right idea is. As Dr. Adams says, it makes sense to have multiple approaches. When you have a collaboration, that tends to narrow everyone's thinking down to fewer and fewer dimensions. People tend to think more and more alike, and as a result, they may overlook or not consider something that might be truly different, that is outside the paradigm within which they think.

Is there a certain degree of inefficiency and wasteful duplication of effort? Of course there is. But that is inherent in the process. If we knew beforehand what the best approach was, then it would be no problem. The problem is precisely because we as a society, as an economy, don't know what the answer is. That is why you want to have multiple centers of initiative.

MM: Antitrust policy has now become almost purely a matter of economics; political and social concerns are not part of the antitrust evaluation equation. Should they be, and why aren't they?

Brock: This is because economics has been deconstructed. The notion of economics today has been twisted and confined and limited to represent one narrow, extreme ideological point of view, the laissez-faire point of view. It is not just economics, it is one particular ideology, masquerading as economic science, that has come to dominate the debate. Traditionally, economics has been an amalgam of political and social concerns. When you look back at the great libertarians at the University of Chicago in the earlier part of this century, their case against monopoly, for strong anti-merger policy was as much rooted in political and social concerns -- the problem of power, the problem of the abuse of power, the problem of abuse of government by private power -- as it was in any kind of narrow notion of economic efficiency and fixed costs.

Adams: It has become an apologetic for the status quo.

Brock: There is no reason that economics, accurately defined, necessarily has to take that position. In fact, you find many economists who disagree fairly strenuously with that notion.

MM: Why has this one strand of economic interpretation of antitrust issues become the predominant one?

Adams: It is a problem in political economy, not a problem in economics. If there is a big antitrust case, the money, the resources, the power to hire experts tends to be all on one side. In that sense, the market works. The experts tend to go to those interests that pay the most.

Brock: Social and political concerns were a very central point of economic theory and policy and analysis and critique of policy up until maybe 20 years ago, when you saw big business finance very extreme, right-wing so-called think tanks that provide people that publish the articles. That has very much colored it. The appointing of judges and agency officials who happen to have this particular point of view has a tremendous impact on the discourse that actually takes place.

MM: If you were able to infuse the other concerns back into antitrust policy debates, what are some of the main social and political issues you would want to look at?

Adams: The question is: What makes for a free society? Let's go back and reread The Federalist Papers. That was what America was all about. We believed in the decentralization of power. We believed that made for a good political system, we believed that made for a good economic system and we believed it made for a strong, democratic society.

MM: Given that point of view, is it conceivable that there be any merger of two companies on the Fortune 500 list that you would approve of? Or can you say as a per se matter that those companies are too big?

Adams: I wouldn't reject it per se. If they can prove to me that their merger demonstrably will enhance production efficiency, promote technological progressiveness, enhance international competitiveness, and that these objectives cannot be achieved by less anticompetitive ways than by merger, then I would say go ahead.

But I haven't seen, certainly in recent years, any mergers of that sort.

Brock: An irony is, if there were some kind of outright prohibition of mergers above a certain monetary amount in the billions, it would have saved a number of large companies a lot of trouble and turmoil; it would have made stockholders a lot of money.

Adams: There is such a thing as internal growth. Merger is not the only way to go. Internal growth would be organic growth.

Brock: This is a radical concept: you make a better mousetrap; people buy more of it; you have more money; you build a bigger factory; you persuade capital markets that you have got a good idea, and they say, "yes, we are willing to bet some money on that" -- this is a radical notion for the 1990s.

MM: If you could craft an ideal antitrust policy, without regard to political pressure, what would it look like? Would you break up existing companies?

Adams: It is an interesting thing if you go back and read Justice Brandeis. He pointed out a long time ago, "The trusts have not grown. They have been artificially created. They have been put together not by natural processes, but by the will, the deliberate planning will, of men who were more powerful than their neighbors in the business world, and who wished to make their power secure against competition."

In an antitrust policy for the remainder of this century and for the next century, there is no need for antitrust to try and break up existing monopoly. What the antitrust enforcement agencies should concentrate on is preventing the exercise of monopoly power, the leveraging of monopoly power, the parlaying of monopoly power into related fields. Most importantly, they should crack down on the mergers which create the concentration which creates the economic power which creates the political power which eventually spills over into control of government.