Have we gone merger mad?

Click to follow
The Independent Culture
It is mega-merger time again. Open a paper any day this week and you will read about a giant company merger, either being rumoured, announced or consummated. There will be photographs of a pair of sleek businessmen (rarely women) shaking hands, usually with one looking a little more pleased with himself than the other. There will be earnest discussion in the business pages about rationale, synergy and value. There will be expensive advertisements proclaiming the new merger, usually stressing the joint company's commitment to people. And there will also be a news story about how, as a result of the merger, thousands of workers are going to be sacked. Welcome to global capitalism.

There is a great temptation, at times like this, to dismiss the entire exercise as a ramp to pander to chief executives' egos and investment bankers' bank balances. Why might a company employing 50,000 people and worth many billions on the stock exchange need to be still bigger, unless it is for the managers that come out on top to be able to boast that mine's bigger than yours?

But to focus on the "big willy" aspect to these mega-mergers is to miss their economic significance. The companies in these mergers appear as immensely powerful empires, with their palatial headquarters and their factories and subsidiaries scattered around the world. People make much of the fact they they have larger revenues than the gross domestic product of quite sizeable countries, and pressure groups attack them for the way they use or misuse their power. It would seem to follow that when two giants merge, a centre of even greater power is created. Mega-mergers, in short, are a symbol of corporate power.

The truth is the reverse. The crucial thing to understand about mega- mergers is that they are generally a symbol of weakness. Sure, these companies are enormous. But they are under enormous pressures - from customers, shareholders and technology. These pressures create the blisteringly cold competitive climate that is forcing the giants to huddle together for warmth.

Look at the industries in which the largest mergers are taking place. There is oil: Exxon and Mobil, BP and Amoco, Total and PetroFina. World prices are half the level of a year ago; in fact they are lower in real terms than they were before the first oil shock in 1973/4. That is a terrifying business to be in. You have to pay for your rigs, your exploration, your refineries, your distribution. Meanwhile you have no idea what price you will be able to pay for your oil or charge for your petrol in a year's time. What you do know is that you have to be big, for the larger you are the greater chance you will have of coping. So you merge.

Or take banking, where Deutsche Bank is just taking over Bankers Trust in New York, where America's Citicorp was merged with Travelers Group insurance, and where rumours swirl over here about a merger between Barclays and Halifax. A sign of strength? Quite the reverse. Bankers is being taken over because it lost so much money in the markets after the Russian default this summer. The combined Citicorp/Travelers has lost key senior staff and is now worth $5bn less than it was at the time of the merger. And the Barclays rumours have been provoked by the loss of its chief executive, bad loans to Russia and involvement in Long-Term Capital Management in the States.

Or take cars. Daimler-Benz and Chrysler present their merger as a marriage of equals, complete with toe-curlingly obsequious adverts featuring staff members, including the two chiefs. But while both companies are currently profitable, you do not need to be very bright to appreciate that tougher times are ahead in the car trade. The US is about to go into a downturn and there is 30 per cent over-capacity of car production in Europe. Hardly a day passes without news of job cuts somewhere.

Look at the other industries where merger waves are taking place. In every one competition has become ferocious. Pharmaceuticals - under gigantic pressure to develop new money-spinning drugs and get them through years of regulatory hoops before the patents on the present money-spinners run out. Telecommunications - new technology is blitzing the price of the profitable long-distance business, while regulators and new competitors pare away at the home base. Airlines - again, fierce competition from new low-cost entrants, plus a squeeze from corporate travellers on the high-margin business-class seats.

Why has competition suddenly increased? The answer lies in that ugly word, globalisation. Customers can now shop the world. At a personal level we do it without thinking. Go into an electronics shop and buy some kit. Where is it made? You don't know and you don't need to know. The brand name gives no guide to where it is made, assembled or designed. Anything can be made anywhere. Crucially, we don't know where the real profit is made. Sometimes (as in mobile phones) the product is being given away for free and the profit is all in the service contract. Now look at this from the corporation's point of view. It is terrifying. You know that you have to be in markets all around the world because if you aren't your competitors will be. But you don't even know who your competitors will be in a year's time. Suddenly a company pops up from nowhere and dominates the world market - Finland's Nokia mobile phones is a good example. All the while your customers are demanding faster, better, cheaper products, and faster, better, cheaper service. Meanwhile you have thousands of employees, and their families, to feed with salary cheques every month. What do you do? Answer: you merge, because that is survival, you hope, for the bulk of the business, even if you have to lose some staff to pull through.

Next, consider the pressure from shareholders. Investors in London, New York, Frankfurt or Tokyo can place their funds anywhere in the world in a few fractions of a second. You are a US company with plants around the world making electronic whatsits and you are the second largest in America. Ten years ago your investors were almost entirely in the US and you were judged against numbers one and three in your trade. Now your investors are everywhere and you are judged against the 15 other companies in five other countries - and next year it will be more still. If any one of those companies seems to be starting to nose out in front, capital flows its way. Investment bankers cluster round it, suggesting that it takes over or merges with one of the ones that is lagging behind. (A merger in this context is a no-premium takeover - you try and get control of the company, and its markets, without having to stump up too much extra cash.)

Takeovers and mergers have long been the main way that investors, certainly in Britain and America, put pressure on companies to improve performance. But they used to take place largely within national boundaries. Now the new global investors have extended this discipline on a worldwide scale.

The third source of pressure on companies comes from technology. Technology, in particular information technology, gives both customers and investors the tools which enable them to put pressure on companies. But it also gives companies, if they are large enough, the tools to try and maintain their margins and accordingly fight back. Customers now can have excellent information about the prices they are charged. Who can offer the cheapest airline seat across the Atlantic next Thursday? Look it up on the Internet. Which car company is highest rated in US quality surveys? Same answer. A big investor can pick up detailed information about the six retail companies in Europe with the highest rates of return by going to a screen. The more the quality of information improves, the more pressure they can put on companies to improve their performance.

But at the same time the big companies can learn more about their customers and thereby exploit sales opportunities. Why are supermarket loyalty cards such a success? Because they tell the supermarket about ways in which they might sell more goods and services. The bigger your customer base and the more you know about those customers, the more chance you have of spotting some high-mark-up product you can sell to them. But putting in these systems is immensely expensive. If you cannot afford it on your own there is a simple answer: merge and split the cost.

I would not pretend that these are the only reasons for the current merger boom. Fashion comes into it. The fact that share prices, particularly of large companies, are high makes it possible for predators to snap up smaller rivals by making share offers. The fact that a global downturn is probably coming gives an urgency to move fast. The conditions for giant mergers are therefore particularly favourable just now.

Are the mergers themselves favourable? Do they really increase global wealth? I don't think there is a simple answer. Sometimes there is a real advantage and better businesses - ones that satisfy both customers and investors, and offer a better future for employees - do result. Sometimes they are a catastrophic failure and the only beneficiaries are the executives who got out with golden handshakes and the investment bankers who trousered fat fees. Worst of all, sometimes they simply result in the creation of near-monopolies which manage for a while to rip off everyone save the dominant shareholder.

What I am sure about is that these takeovers are part of the endless swirling movement of global capitalism. It is a system that will create the great companies of tomorrow, the ones which will create future wealth and future employment. Those companies are now being founded by entrepreneurs in basements in California, or attics in south London. That is where future employment will come from. The great companies of tomorrow are not the ones whose chieftains are now shaking hands and smiling for the cameras - and then sacking 5,000 of their workforce.

Comments