AWRENCE A. BOSSIDY
had sworn that he would raise annual revenue at AlliedSignal to
$20 billion by the time he retired as chairman and chief
executive last April. His determination had even become a
company slogan: "20 in 20," his people would say, lopping off
zeros. But as his retirement approached, revenue was still $5
billion short of the goal. So last year, Mr. Bossidy acquired
Honeywell Inc., creating a company with Honeywell's name and $24
billion in revenue.
There was another reason for the acquisition. Both companies
were big in the manufacture of aircraft components like jet
engines, cockpit controls and navigational devices. Combining
their product lines promised more market power. But adding to
the top line, and the profit that such additional revenue can
bring, can be slow going in these competitive times, and mergers
are a handy shortcut.
Wall Street was pleased. But soon a falling stock price
forced the hand of Mr. Bossidy's successor, Michael R.
Bonsignore, who had run the old Honeywell. Unable to deliver
quickly enough the higher earnings Wall Street was demanding,
and lacking Mr. Bossidy's touch in calming investors, Mr.
Bonsignore arranged a merger with the United Technologies
Corporation, another big player in aerospace.
Almost immediately, General Electric stepped in and said it
would buy Honeywell for $43 billion, uniting G.E.'s aerospace
operations with Honeywell's. In just 10 months, three Fortune
500 corporations had collapsed into one.
Those eye-opening moves were just one example of an almost
weekly series of deals in the United States, Europe and Asia as
companies jockey to dominate their industries, not just at home
but everywhere in the world.
In the 1980's merger wave, no deal ever topped $30 billion.
By today's standard, however, a deal with a $43 billion price
tag is just a routine event in a merger wave that has swept up
Citibank, Chrysler, Exxon, Mobil, Time Warner and America
Online, to name just a few. The total paid for corporate
acquisitions in the United States has hovered around $1.6
trillion a year since 1998, six times more than in 1993, when
the current surge in merger activity was beginning to gather
steam.
Not since the 1890's have mergers so extensively concentrated
corporate market power. Back then, a vast new national
marketplace ?with the railroad, the telegraph, the gasoline
engine and the electric motor as its spine ?encouraged the
creation of giant companies. Some grew strong enough to control
commerce, suppress competition and manipulate prices.
Now the catalyst is the new global economy, with instant
communication and computer technologies as its spine. Yet as the
new corporate giants emerge and intrude on people's lives, there
is none of the antitrust crusading of Teddy Roosevelt's day, and
little of the populist reaction.
"There is a deeply embedded view everywhere in business today
that big is better," said Henry Kaufman, the Wall Street
economist and consultant. "Chief executives enjoy the prestige
of managing a big company, and the higher pay. The investment
bankers are happy to arrange the deals. And stockholders favor
consolidation because it tends to drive up stock prices."
Such complacency may not last. The giants that were created a
century ago came to grief, and that may happen again if
concentration goes too far ?if, for example, a General Electric
becomes too successful in selling aerospace components to Boeing
and Airbus, locking out a relatively diminished United
Technologies. The hope, among policymakers at least, is that a
handful of big companies in each industry will compete ?as
Boeing and Airbus do now ?and, in their competition,
innovate.
"The nature of a market society is to push toward a higher
degree of concentration," said Louis Galambos, a business
historian at Johns Hopkins University, "and the nature of
antitrust is to push back toward a more deconcentrated,
competitive environment."
Achieving the right balance assumes that the newly merged
companies will function efficiently; many often don't. And it
assumes that the new giants will not go under, which might force
the government to step in to avert an economic crisis. Such
intervention ?if it happens enough ?would dilute the market
system now so widely encouraged, Mr. Kaufman said.
No word is invoked more often than "globalization" to justify
the latest wave of mergers, although some of the newly formed
companies operate mostly within the United States. Deregulation
has played a big role, allowing huge deals in airlines and
banking, for instance, that were previously prohibited.
Achieving economies of scale figures prominently as a
motivation, combining customers to increase output while cutting
costs, often by eliminating redundant personnel.
Personalities have had their influence, too. Mr. Bossidy
drove Allied's acquisition of Honeywell, and Mr. Bonsignore
insisted that he succeed Mr. Bossidy as chief executive and
chairman of the new company. Finally, rising stock prices have
provided much of the financing, allowing companies to pay for
acquisitions in greatly appreciated stock.
Whatever the reasons, bigness, so reviled a century ago, is
considered just fine today.
"There is an argument that corporate concentration hurts the
American economy, but we need big global players that are really
good at what they do," Mr. Galambos said, reflecting the
prevailing view among policymakers, business people and many
economists.
So far, the antitrust laws that came out of the robber-baron
era have not gotten in the way. They are enforced, sometimes
aggressively so, but the enforcement is selective and flexible.
The new giants ?Citigroup, DaimlerChrysler, ExxonMobil and,
soon, AOL Time Warner ?are free to dominate their markets, as
long as they do not egregiously violate the rules. The chief
rule: Do not use market power to manipulate prices or take
unfair advantage of competitors. Thus the Justice Department
came down hard on Microsoft and Bill Gates for trying to control
Internet access, but the government offered no major objection
to the merger last year of Exxon and Mobil, and none so far to
Honeywell's odyssey.
"We understand that companies have to be of sufficient size
and scope to play in the global marketplace," said Joel Klein,
until recently the chief of the Justice Department's antitrust
division. "This is why you have to study each situation; you
cannot go by recipes in a cookbook. Sometimes mergers can lead
to greater efficiency, and as long as there is real competition,
that is good for consumers."
Will the competition last? No one can know. But over the
1990's, the biggest companies in nearly every industry increased
their share of their industry's revenue, according to Census
Bureau surveys through 1997, the latest year for which data is
available.
"The only way to really make a profit," said David Wyss,
chief economist at Standard & Poor's, "is to consolidate."
Excess capacity, a worldwide phenomenon today, squeezes
profitability, and mergers are a popular means of reducing
capacity.
The Merger Superhighway
燭echnology and
deregulation are pushing the merger process, as illustrated by
AT&T's acquisition of cable companies in the hope ?now
dashed ?that the cable lines would form a network for local
phone and Internet services. While AT&T is backing away from
trying to marry cable and the Internet, America Online and Time
Warner are pressing ahead, with a goal of having AOL deliver
Internet services over Time Warner's cables.
Time Warner bought CNN in 1995, and now AOL will operate
CNN's Web site, saving money on personnel, said Michael Kelly,
chief financial officer at AOL. Time Warner's magazines will
promote AOL to their subscribers, and AOL will help with
subscriptions.
"One of the biggest costs in the magazine business is
subscription renewal," Mr. Kelly noted. "If you think of the
world as renewing online, that is a big saving. And when we have
you on AOL, there can be an e- mail or pop-up reminding you to
renew."
Automated teller machines, the Internet and ever-faster
computers have greatly eased interstate banking, encouraging the
rise of fewer and larger banks once regulators permitted it.
Mergers, in fact, account for most of the recent growth in
lending at the nation's 50 largest banks, according to a study
by Kevin J. Stiroh and Jennifer P. Poole at the Federal Reserve
Bank of New York. In effect, big banks acquired borrowers from
the banks they bought.
Deregulation opened the gate to a flood of mergers among
telephone companies, airlines and railroads, with many of the
deals aimed at concentrating market share in a few big
companies. Two huge lines dominate rail traffic in the United
States, an outcome that the government is starting to
reconsider. The biggest airlines have either merged, are trying
to do so or are forming alliances. And fewer than five companies
now dominate wireless telephone and long-distance phone
service.
Cost-sharing also plays a role. Merging Exxon and Mobil, or
Chevron and Texaco, or BP and Amoco, spreads the huge expense of
exploring for crude oil over a wider base of revenue and income,
a tactical advantage that has spurred the rapid consolidation of
the petroleum industry.
And in almost every merger in any American industry, the
workers themselves offer a helping hand ?unwittingly, perhaps
?by rarely protesting.
That neutralizes what could be a tough barrier. Mergers
almost always lead to layoffs as operations are combined to cut
costs. Rather than protest, American workers have been
conditioned by years of corporate downsizing to accept
layoffs.
"Workers' bargaining power has been consistently eroded over
the past few decades, and that means there is less
countervailing pressure in mergers from the work force," said
Jared Bernstein, a labor economist at the Economic Policy
Institute.
The latest surge of mergers coincided with the end of the
cold war in 1990, and the blossoming of a global market that
American corporations are rushing to serve. Mergers and
acquisitions have become the fast way to get there. That is
certainly the case at Timken, a steel company in Canton, Ohio,
that makes ball bearings. Timken made no acquisitions from 1975
to 1990, but has made 10 since then, said W. R. (Tim) Timken
Jr., the chairman and chief executive.
"After the cold war, a lot of bearing-making facilities
around the world became available for sale," Mr. Timken said.
"They were good facilities with good equipment and good workers;
there was no reason to duplicate them by building new plants. We
bought one in Poland, one in Romania and one in China, and once
we brought them up to Timken quality, we could sell the output
anywhere in the world."
Timken's revenue has risen to $2.7 billion a year, from $1.7
billion in 1990, with 20 percent of that growth ?$200 million
?coming from acquired companies rather than rising production at
existing facilities. The 1990 purchase of a New Hampshire maker
of miniature high-precision bearings for jet engines put Timken
into aerospace sales for the first time.
"We could have built a plant," Mr. Timken said, "but this was
a major expansion into super-precision bearings, and we would
have had to develop new skills for that."
Mr. Timken's father or grandfather, both of whom ran the
company, might have done just that, but nowadays overcapacity
makes acquisition the preferred choice. "Why should we build
even more if we can buy what exists?" Mr. Timken said.
Mergers have become the principal weapon against excess
capacity in industries as wide-ranging as food processing,
bookstores and office supplies ?even accounting firms. But no
companies have been more successful in this than those that make
linerboard and corrugated boxes.
Nearly all of the merchandise sold in America reaches
consumers in these containers, yet production capacity outstrips
demand. Companies overbuilt in the 1980's and early 1990's,
anticipating exports to Asia that have not materialized. And
prices fell, until box makers merged and shut down plants.
Starting in 1998, Jefferson Smurfit acquired Stone Container,
the biggest linerboard producer, and then St. Laurent
Paperboard. Weyerhaeuser, meanwhile, acquired McMillan-Blodel,
and International Paper bought Union Camp. Smurfit- Stone,
Weyerhaeuser and International Paper now account for more than
35 percent of linerboard and corrugated box production, and all
three have shut down older plants.
"When you are a big-enough company, you can afford to shut
down and write off what have become small pieces of yourself,"
said Timothy McKenna, director of investor relations at
Smurfit-Stone.
Linerboard has risen in price to $475 a ton, from $340 in
1998. That is still below the peak of $525 in 1995, but the
mergers and the shutdown of excess capacity have stabilized
prices.
"There is no question that shareholders put a lot of pressure
on managers to merge," Mr. McKenna said.
The Two Sides of Pricing
Stabilized pricing? Is that what the mergers in the
linerboard and container industry have achieved? Or is there now
enough concentration of corporate power to push up prices ?in
effect, fix them ?by controlling output? The second idea would
violate antitrust law, but the first is clearly the view of the
industry's executives, and so far, at least, of the antitrust
authorities.
"If the price were 10 today," said Douglas Melamed, chief of
the Justice Department's antitrust division, "and you believed
that ordinary competitive forces would drive the price to 8
tomorrow and the parties proposed a merger that would maintain
the price at 10, that would not be so good."
But the linerboard mergers have managed only to sustain
prices at a lower level. Listen to Mr. Melamed's predecessor,
Joel Klein, on this point: "If you and I own a paper company
together and we see that the more we put out the more we drive
down prices, and we shut down a plant to curtail production and
sustain prices, there is nothing wrong with that."
These are subtle distinctions. But antitrust policy shifted
in the early 1980's, and ever since each merger proposal has
been examined on its merits.
Thus, Boeing's acquisition of McDonnell-Douglas in 1997
reduced the number of aircraft manufacturers to two from three,
but the competition between the survivors, Boeing and Airbus, is
considered strong enough to prevent either from exercising too
much market power.
On the other hand, when Staples and Office Depot tried to
merge, the Federal Trade Commission intervened. Although other
companies sold the same office supplies, Staples and Office
Depot were the only ones competing for customers who wanted
one-stop shopping at discount prices.
Until the shift in the early 1980's, antitrust policy was
more rigid. The authorities assumed that the various companies
in a market were more or less equal. Attention was paid to the
number of participants and their market shares. Merger proposals
that changed those numbers raised objections. But the number of
mergers was relatively low from World War II until the 1960's,
when the conglomerate appeared. ITT and Gulf & Western grew
into huge corporations by acquiring companies in many different
industries, the theory being that good managers could run any
operation successfully.
By the 1980's, German and Japanese companies were
outperforming their American counterparts, and the leveraged
buyout became a popular way to reorganize companies or break
them up to increase efficiency. Looking back, Mr. Galambos, the
Johns Hopkins historian, sees in that turmoil the beginnings of
the corporate concentration that is flowering today ?recreating
in different form, and with antitrust to discipline the process,
what happened a century ago.
Then, monopolies emerged to meet the mass needs of a new
national marketplace; now come oligopolies, or a small number of
big companies that will dominate their markets and compete
against one another, Mr. Galambos said.
"We are moving toward global oligopoly, meaning that between
four and six corporations will be the major players in each
industry," he said. "Their competition will encourage
innovation, and then you will have a tail of small firms that do
the niche work."
Will Bigger Be Better?
What all this leaves out is whether the mergers of today will
function as planned. The last 30 years are strewn with failures:
the 70's conglomerates often failed to produce promised profits,
and the 80's buyouts often reduced efficiency or saddled
companies with more debt than they could repay. And merging
distinct corporations sometimes takes longer than expected, or
fails to produce the results that Wall Street wants.
Then, too, a giant corporation might not be as nimble as a
smaller one. "The merger makers always argue the opposite; if
you are not big you die," said William G. Shepherd, an economist
at the University of Massachusetts at Amherst. "But Sprint is
doing fine after failing to merge with MCI WorldCom. We have
been learning that small is often more nimble, innovative and
quick than big."(On Friday, however, Sprint said its
long-distance profits would be lower than expected.)
One concern is that the new giants will use their dominant
power to push up prices. That has not happened yet, although Mr.
Kaufman, the Wall Street economist, argues that the airlines and
the auto industry are moving in this direction. Book prices are
also moving up, as are milk prices set by some supermarket
chains where mergers have increased concentration. "The control
over pricing develops subtly," he said.
Most troubling of all, in Mr. Kaufman's view, is the
proliferation of companies that, through mergers, have become
too big to be allowed to fail. Their bankruptcy would produce an
economic crisis.
"As you get more and more concentration, in finance or
business," he said, "you move away from an economic democracy to
a more social one, in which the government intervenes in more
and more cases ?the very thing no one
wants."?BR>
