Merger Wave in U.S. Economy
A broad movement of asset redeployment is under way throughout the U.S. economy. It is largely induced by a group of sharp-eyed takeover artists who attack companies whose underlying assets are worth more than the price of their stock. That means big corporations. The impact of the current takeover wave on the U.S. economy is negative.
Corporate America is in the grip of a strong merger wave. Mergers are occuring as never before. In the last three years, 45 mergers, each worth more than $1 billion, have taken place, compared with only a dozen in the previous decade. Last year, mergers and acquisitions reached a staggering $122 billion. The special feature of the current merger mania is that in many instances it is forced upon some of the largest corporations by a small group of well-financed takeover entrepreneurs who constantly attack some of the largest corporations where return on investment is often below the inflation-bloated value of company assets.
Last year T. Boon Pickens, the king of this new breed of corporate bounty hunters, drove Gulf, the fifth-largest U.S. oil company, into the arms of Chevron, the fourth-largest oil concern, for $13.2 billion, the biggest in U.S. history. Earlier he forced Cities Services to sell to Occidental Petroleum. Pickens and his investment group earned $791.5 million in the process.
Corporate raiders claim that they are out to help the shareholders of target companies realize the full value of their shares. “I am the champion of the small stockholder,” declares Pickens. But when the target company purchases its stock at higher prices, in effect paying off corporate predators to go away, it is shareholders who ultimately pay the bill.
Many large companies have low stock price-to-asset ratios, which attract bidders. Corporate raiders claim that this is due to corporate mismanagement. Takeovers, in their view, stimulate effective management and revitalize the economy. This may be true in some cases. However, in most instances the lower stock price-to-asset ratio is a result of long-term high interest rates that depress the value of earnings. Consequently, stock prices fail to reflect the value of assets that have increased because of the high inflation of the 1970s. Lousy corporate management is not the main cause of any price-earning gap.
The most serious consequence of the current raiding is the imposition of a near-term earnings approach on business at the expense of long-term expansion of productive enterprises. Companies fear that if they forgo short-term gains in earnings and weaken the stock price for long-term growth and profitability, they risk being taken over. Attempts to thwart takeover bids push strategic business planning, so vital to the nation’s competitiveness, to the back burner. The fear of hostile tender offers forces some of the best managers in large companies to divert their energies and financial resources from managing companies for future growth to developing financial ploys against hostile takeovers.
Proponents of the existing situation would like us to believe that mergers prompted by Pickens and others result in the reallocation of underused resources and a stronger economy. In reality, most raids are taken to plunder accumulated assets and divert scarce resources from productive investment. Target companies usually end up with mountains of debt incurred by costly settlements or forced acquisitions. The net effect has been a reshuffling of the assets in the economy, not the creation of new wealth for society.
One major tenet of capitalism is that corporate actions and decisions ensure the greatest good for the greatest number. Corporate mergers currently under way often deviate from this tenet. The bidding war is damaging the stockholders’ interests, it demoralizes employees and it sometimes causes profound economic dislocations in the communities and cities host to major corporations.
The Reagan Administration helped the existing trend by the virtual elimination of antitrust restrictions based on size. It is high time that the Administration begin to search for practical remedies for the distortions of power and the economy inherent in most corporate takeover fights.
SHAH M. TARZI
Huntington Beach
