Merger mania

December 1, 1999

Hardly a day passes without an item in the business pages annoucing yet another merger or takeover. The tone of coverage is typically upbeat: bigger is better, we are told, and the winners will be consumers. But even though these announcements are met with praise on Bay Street and Wall Street, there is good reason for Main Street to be concerned about this increasing concentration of global power.

Thus far, 1999 has already been a record year for global mergers and acquisitions (M&As). According to KPMG, global M&As were valued at US$608 billion during the first nine months of 1999 alone. And this on the heels of 1998's record merger boom valued at US$544 billion, itself a jump of 60% from 1997. Of the top ten biggest mergers in history, all have taken place in 1998 or 1999.

As corporate giants strive to make themselves into truly global companies, eat or be eaten is the rule of the day. Increasing concentration is particularly acute in the areas of banking and finance, media and entertainment, and information and communications technologies. But primary resources, like oil, mining and forestry and agriculture have also been on the list, spawning new global giants.

A number of features of the modern global economy reinforce this concentration of power and work against competitive markets. Barriers to entry are very high when dealing with huge companies that are able to take advantage of low cost locations and achieve economies of scale on a global basis. For any company to enter a market, large, upfront costs must be invested under conditions of great uncertainty. As a result, competition tends to eliminate itself as the losers drop out or get bought up.

The stock markets, however, love a good merger, rewarding the players with higher share prices, presumably due to the ability of the newly consolidated company to get even leaner and meaner -- usually through mass firings of employees. Indeed, while it is increasingly difficult to rationalize the lofty heights of the stock markets, mergers justify bullish feelings, enabling share prices to be pushed up even further.

But for most people, mergers inevitably weaken their power to affect their economic destiny. M&As strengthen the hand of corporations to push for tax breaks and lower labour or environmental standards. And mergers today mean that profits flow out of the country tomorrow (this is what investment is all about). Canada, with our high rates of foreign ownership, is a case in point. Our annual trade surplus is flipped into a current account deficit after accounting for the profits that flow outside of our borders.

Increasing market dominance by global oligopolies and monopolies is bad news for consumers, as any first-year economics student can tell you. The praise of economists for competition, in theory, is for a variety where there are many producers and consumers, none of which can influence the market price.

In practice, competition may exist to some degree in the biggest, most profitable markets. But those on the periphery could be at the whim of monopoly power, with consequent high prices and poor customer service, or worse, be left without any service at all.

The trend toward global M&As would be bad enough if not for the fact that the Canadian government has been actively encouraging this new type of behaviour. The Canadian government has been very keen to attract foreign investment, on the grounds that investment creates jobs. Yet, the vast bulk of foreign investment into Canada goes not into "greenfield" investment that creates new productive capacity, and therefore jobs, but into M&As that, if anything, destroy jobs once the newly integrated operations have been rationalized.

Indications are that for 1999, foreign takeovers in Canada have been on a tear, aided by a low dollar, with some 50 in the first quarter alone, valued at $20 billion, an increase of 22% over 1998. In BC, the takeover of forestry giant MacMillan Bloedel by Weyerhaeuser sent ripples through the sector. Nationally, the eyes have been on the airline industry and the impending encroachment of US players.

Nations like Canada have traditionally regulated commerce from its own excesses -- in this case, to guard against anti-competitive practices, such as predatory pricing or collusion, and occasionally, to break up monopoly power.

No such force exists at the international level. The supreme body of global trade and investment, the World Trade Organization, exists to regulate governments not corporations. Competition policy is largely limited to national policies and to a limited number of cooperation agreements among players like the US and EU.

To address the global merger boom, what is needed at the global level is a reconstitution of the type of competition policy previously only seen at the national level. A move in this direction would rein in global corporations and provide some degree of fair competition.