Merger Mania?

Saturday, January 30, 1999

The current outbreak of mergers is actually the fifth in this century, Federal Reserve Board chairman Alan Greenspan pointed out to the Senate Judiciary Committee recently (see chart below). Yet because firms also downsize, divest, and even drop out, overall concentration does not appear to have increased much during the last three merger waves—at least until the last year or so, for which data aren’t yet available.

Click on graph to see larger version.

However, concentration has certainly increased in specific industries. The top five U.S. banks held just over an eighth of domestic commercial banking assets in 1980; they hold just under a quarter now. The top 100 banks held just over half of domestic bank assets in 1980; they hold about three-quarters now. But remember, banking was artificially fragmented for years by bans on interstate branching. And it’s arguable that stronger banks mean more effective competition—for example, relative to population, the number of bank branches has been increasing, despite a decline in the number of individual banks.

Fed chairman Greenspan was distinctly cautious in assessing the meaning of mergers. He noted that antitrust thinking has moved from a legalistic focus on industry structure (Is a firm too big?) to a concern with real-world consequences (Is a firm imposing costs on consumers through inefficiency?). He quoted, ironically, the now-discredited finding of a federal appeals court in the Alcoa case over half a century ago: “We can think of no more effective exclusion [of competitors] than progressively to embrace each new opportunity as it opened, and to face every newcomer with new capacity already geared into a great organization, having the advantage of experience, trade connections, and the elite of personnel.”

In other words: That court thought competition was unfair.

Still, it remains possible that something is going on Out There. James Paulsen of Minneapolis-based Norwest Investment Management points out that sales growth has been markedly weak in this recovery—about 5 percent annually in this decade, compared with about 7 percent or more going back to the 1960s. “Top line has died,” says Paulsen.

Yet profit growth has been much stronger, more than 10 percent annually, versus 5 to 8 percent in the previous four decades. How?

More technology, explains Paulsen. Less income growth for workers. And mergers. “It’s the best way to ensure persistently lowering costs,” he says. “Spreading the same costs over more units.” Mergers and acquisitions, he suggests, may even be fueling the continued recovery by allowing corporations to lower prices in a deflationary environment.

Maybe Greenspan is right to be cautious in jumping to conclusions about the impact of mergers.