Of course companies come and go, industries restructure and it's possible T-Mobile couldn't have survived, especially in an arena of giants. Some mergers are a normal function of a healthy, dynamic market. But since the 1980s, many have yielded questionable results beyond a quick profit.
If AT&T consummates its merger with T-Mobile USA, it will control 43 percent of the national market. If ever there was a test for candidate Obama’s pledge of tougher antitrust enforcement, this is it.
But the deal will probably go through. AT&T has bet a $3 billion breakup fee to Deutsche Telekom, parent of Bellevue-based T-Mobile, and has battalions of lobbyists at work in Washington, D.C. President Obama’s attorney general is a former white-shoe corporate lawyer.
In truth, recent Democratic administrations have been as easy on mergers as their Republican counterparts. Aside from Bill Clinton’s vendetta against Microsoft, he looked benignly at some of the biggest industry consolidations in history, including Hugh McColl Jr. — a big Clinton backer — turning a regional North Carolina bank into giant Bank of America.
It wasn’t always that way, and raises the question: Are megamergers, particularly those that result in de-facto oligopolies and cartels, good for America?
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Starting with the trustbusting Theodore Roosevelt, presidents, regulators and the courts once looked unfavorably on huge concentrations. The attitude was summed up by Justice Learned Hand in the 1945 U.S. v. Alcoa case:
“We have been speaking only of the economic reasons which forbid monopoly; but, as we have already implied, there are others, based upon the belief that great industrial consolidations are inherently undesirable, regardless of their economic results.”
That attitude changed after the 1970s, as antitrust law and its intellectual underpinnings were upended by the free-market thinkers at the University of Chicago and especially legal scholar and failed Supreme Court nominee Robert Bork. Since then, antitrust law has become arcane, steeped in economic dogma and focused mostly on “consumer welfare.”
Thus, while Theodore Roosevelt might have seen Wal-Mart as a proto-monopoly, its low prices keep everybody happy. Everybody, that is, except the thousands of Main Street retailers and vendors run out of business. Similarly, low prices that are an artifact of a moment in history, with globalized cheap labor and cheap oil, have protected mergers that have remade America.
Of course companies come and go, industries restructure and its possible T-Mobile couldn’t have survived, especially in an arena of giants. Some mergers are a normal function of a healthy, dynamic market. But since the 1980s, many have yielded questionable results beyond a quick profit.
Banking, airlines, telecommunications, broadcasting, oil and railroads are only a few of the sectors that have become highly concentrated. For example, 18 major (Class 1) railroads operated in 1980, before deregulation, and today there are seven. Bank of America and JPMorgan Chase are made up of dozens of regional institutions, including Washington Mutual. The big banks that created such systemic risk to the economy in 2008 are even bigger today.
Outside of a few top corporate centers, the results have been devastating to most American cities. Phoenix, until recently the fifth-largest city in America (now sixth), lost all its major headquarters to mergers, and with them the high-paid jobs, the attraction of talent and capital, and the spinoff of executive expertise into startups and civic leadership. Phoenix may be America’s biggest branch-office town, with the attendant low-wage jobs, but it is far from alone.
The dot-com and housing bubbles helped cloak some of the resulting job losses. Now it’s more apparent.
The Seattle area, while suffering its losses, has been comparatively lucky. But that doesn’t mean it will remain so. This year promises to be one of the biggest for deals since before the Great Recession began and T-Mobile may not be the last to go. On Thursday, drugstore.com in Bellevue announced a $429 million buyout offer from Walgreens.
Big mergers deliver quick payouts to shareholders, especially of the target company. These may be mom and pop in a mutual fund, but also include powerful big investors, hedge funds and institutional players with no interest in building a company.
Robert Bruner, dean of the University of Virginia’s Darden School of Business and author of “Deals from Hell,” talks about “incentives that perversely influence [mergers and acquisitions]. For example, the size of a firm is closely connected to the size of the pay for senior executives.”
The acquirer can take out a competitor and buy growth, the Holy Grail for Wall Street, rather than expanding organically by serving customers and developing new products and services.
“I call it the momentum growth mentality,” he told me, where CEOs seek “a smooth, growing ramp of earnings per share” that requires continuous acquisitions. The opposite is Warren Buffett, a so-called value manager who buys companies, manages them well and takes his time.
Also, tax policy treats mergers lightly. And the deals are major revenue streams for the banks and lawyers underwriting and advising on them. JPMorgan Chase fronted AT&T a $20 billion loan for the T-Mobile merger. And no wonder: It’s one of AT&T’s advisers. The website The Street.com reported that JPMorgan expects to earn $150 million from the credit line alone. Deutsche Telekom has the gunslingers of Deutsche Bank, Credit Suisse and Morgan Stanley.
An unemployed American or struggling small-business owner might wish these financial titans were spending more time and resources building a productive U.S. economy, but that’s not where the fast money is. Leveraged buyouts add to the toxic mix: Big debt taken on to finance a deal requires major cuts, and the acquired company might end in bankruptcy court. Welcome to a “financialized” economy.
All this despite much academic research that most mergers fail to produce their promised results (think AOL-Time Warner). Management is often distracted by doing deals and absorbing mergers, sometimes fatal to the company’s future and usually to customer service.
Firms can fight takeovers, with strong management and board backing. Krogers then-CEO Lyle Everingham famously refused to even return the calls of a suitor in the 1980s. (Of course Krogers is known around here for buying QFC and Fred Meyer.)
But these instances are rare. More common was the old AT&T’s hostile takeover of NCR, which I covered in 1990. Ma Bell paid $7.5 billion and five years later was forced to spin NCR off for $3.4 billion. NCR’s hometown of Dayton never recovered, the final blow coming last year when NCR moved to exurban Atlanta.
Bruner said each merger is different, and many have economic merit. But he dismisses the “lore on Wall Street” that momentum-growth by mergers is in itself beneficial.
“It’s unsustainable. You can’t grow faster than the national or world economy. Before long you hit the wall and the outcomes are really, really nasty.”
Nobody knows that better than the American cities that were once headquarters towns.
You may reach Jon Talton at email@example.com