Remaking Economy? : Mergers--the Giants Are Stirring

Just three years ago, Philip Morris Cos. ranked No. 27 on Fortune magazine’s list of biggest U.S. companies. But then, the owner of Marlboro cigarettes and Miller beer got a serious case of merger mania.

First, it conquered General Foods--owner of Maxwell House, Sanka, Oscar Mayer and other brands--and vaulted to No. 12 in the ranking. More recently, the food and tobacco conglomerate has closed in on Kraft, offering a $13-billion deal that would create the ninth-largest corporation in America.

“We want to continue to grow,” Hamish Maxwell, Philip Morris’ chief executive, declared in an interview. In the food business, he pointed out, “the opportunities for growth are great.”

Fewer, Fewer Hands

Headline-making marriages between corporate giants are just the most visible sign of a trend that some scholars believe is gradually reshaping the U.S. economy: Control of a growing number of industries, they argue, is falling into fewer and fewer hands.

The apparent shift--arising both from government policy and forces of the marketplace--sparks the classic fears of monopoly power: rising prices, diminishing choice and a sense of isolation from the mega-companies that offer goods and services people rely on every day.

“There are giants merging with giants to become even bigger giants,” said James W. Brock, an economics professor at Miami University in Oxford, Ohio.

The signs of change are most obvious among food manufacturers. Just this weekend, Pillsbury Co. agreed to be purchased by the British conglomerate Grand Metropolitan PLC for $5.7 billion.

But they can be found in an array of industries, including airlines, banks and even certain forms of telephone service, despite the 1984 breakup of American Telephone & Telegraph Co. In Southern California, a major consolidation is under way in the supermarket business.

Unequaled Presence

The Philip Morris-Kraft merger, soon to be completed, symbolizes the concerns about corporate power, because it would create a $33-billion colossus with an unmatched presence on the nation’s grocery shelves.

“Kraft is big enough; maybe somebody could explain to me what the advantage (of the merger) will be to Kraft and Kraft’s customers,” observed Sidney J. Levy, chairman of the marketing department at Northwestern University’s J. L. Kellogg Graduate School of Management.

To be sure, analysts differ on whether control of U.S. industry is becoming more concentrated. The economy is so vast that shifts in its composition are hard to measure except over long periods of time.

Small companies continually stream into the marketplace, providing the nation’s greatest source of new jobs and innovation. Even mammoth mergers can spawn trimmed-down, new enterprises, because divisions often are unloaded to help finance the deals. The issue is further clouded by the fact that the government has no up-to-date statistics in this area.

In any case, some argue that bigness has virtues in a world where American firms must compete against powerful rivals from Asia and Europe. They counsel that consumer issues should be weighed with care against the new competitive facts of life.

Still, some who closely monitor changes in industrial ownership are worried. They fear that in certain areas of the economy, competition is declining as the big expand relentlessly--at least those that avoid being gobbled up by their rivals.

“There are some industries where the increase (in consolidation) has been quite dramatic,” said Bruce W. Marion, professor of agricultural economics at the University of Wisconsin and an expert on the food industry.

Many Forces at Work

What is happening? A variety of forces may be at work, unleashed by shifts in federal and state regulation, as well as the marketplace’s own rules of survival.

In a far-reaching policy change, the Reagan Administration has viewed takeovers much more sympathetically than its predecessors did, justifying many deals on the basis of economic efficiency. This new approach to antitrust policy has sparked a record-shattering wave of deals, many between former rivals.

In the first nine months of this year alone, U.S. corporate acquisitions totaled $195 billion, reports W. T. Grimm & Co., a Chicago firm that tracks them. Deals pending could push the 1988 total beyond $200 billion, according to the firm’s researchers.

Brock, co-author of the 1986 book “The Bigness Complex,” noted that the nation’s 200 largest manufacturing firms owned just 54% of U.S. industrial equipment and assets in 1960. But by the early 1980s, their share had jumped to 66%.

Although current national figures are not available, Brock said merger mania appears to have placed even more of America’s manufacturing assets under the control of fewer owners in the last few years. “So you see concentration (of ownership) growing within industries and across industries,” he said.

Banking Moves Cited

Changes in state laws also have had an effect. One example: The move in recent years by states to open their borders to out-of-state banks has allowed many large financial concerns, such as Security Pacific and the Bank of New England, to enter new states by purchasing smaller firms.

The results have been dramatic. In 1977, the nation’s 100 biggest commercial banks held only 50.2% of the total $1.37 trillion in U.S. banking assets, said Dean F. Amel, an economist with the Federal Reserve Board in Washington. But by the end of last year, their share had leaped to 61.5% of a $2.6-trillion asset base.

Amel described the jump in asset control by the big banks as “the sharpest rise since the 1930s.”

The growing influence of major firms is evident even in the telephone business, where the break-up of AT&T;’s longtime monopoly opened up new areas to competition just a few years ago. Why the change?

The reason seems to be a natural sorting out in the marketplace.

Consider the emerging multi-billion-dollar market in private business telephone systems. After the AT&T; breakup, 30 companies streamed in, said Steven Kropper, a consultant with International Data Corp. in Framingham, Mass. But since then, the field has narrowed sharply, with AT&T;, Rolm and Northern Telecom now accounting for more than two-thirds of sales.

A similar tightening up is expected in voice mail, the computerized answering machines used by many companies. Although 47 firms are slugging it out, “the nature of the U.S. market is such that the 47 vendors will eventually narrow down to about 10--and three of them will have 70% of the market,” Kropper said.

Despite fears of undue corporate power, the shifting tides of ownership do not automatically spell trouble for consumers. Typically, conditions in a local market have more meaning than national statistics.

Thus in Los Angeles, consumer advocates worry about the long-term effect of grocery mergers in their area. But from a national perspective, little evidence suggests that the big chains are gaining power. “Some (chains) are there that weren’t there before, and some aren’t there now that used to be there,” said Walter Heller, vice president for research of Progressive Grocer, an industry publication.

In commercial banking, where the big have gotten significantly bigger, local competition seems to be surviving as well. “We aren’t concerned about it at this point, and I doubt we will be in the near future,” the Federal Reserve’s Amel said.

Still, there are jarring ripple effects when industries consolidate. If two influential local companies merge, for instance, this can reduce demand for legal assistance, advertising, consulting, executive recruitment and other business services.

From the consumer’s point of view, the issues boil down to price and choice. Indeed, such fears have been reinforced by the example of the airline industry, which has consolidated dramatically since deregulation in 1978.

At the nation’s four largest connecting airport hubs--Atlanta, Chicago, Dallas/Ft. Worth and Denver--”the two largest carriers (at each hub) have simply squeezed out or have made it virtually impossible for other airlines to expand and gain market share,” concluded a 1987 analysis by Julius Maldutis, an analyst at the Salomon Bros. investment firm. (He found Los Angeles International Airport to be a notable exception.)

What does it mean for travelers? Higher prices, according to a recent study of St. Louis air fares by the U.S. General Accounting Office.

Analysts looked at the behavior of Trans World Airlines, which held an extraordinary 82% of the St. Louis airline business after it bought rival Ozark Air Lines in 1986. By late 1987, TWA was charging 13% to 18% more for nonstop flights from St. Louis than it did before the merger, the study found.

Moreover, the rate hikes were higher than those imposed by other airlines serving St. Louis and higher than TWA’s own increases for travelers in the more competitive Kansas City market.

“The findings are pretty clear,” said Severin Borenstein, an associate professor of economics and public policy at the University of Michigan. “Airlines charge higher fares to fly to and from the airports they dominate.”

Points to Competition

In responding to the government researchers, TWA officials said the St. Louis rate hikes seemed steeper than they really were, because the carrier had charged unusually low rates in 1986 because of competition with Ozark, a flight attendants’ strike and other difficulties.

Things like repainting PSA’s jetliners with the USAir logo, or hanging the Vons name on Safeway stores are only the most visible signs of mergers. In the multilayered U.S. economy, a less-obvious form of consolidation is also occurring--at the producer level.

The largest food manufacturers have gained power steadily in recent years, a trend that has caused higher prices for consumers and lower prices for farmers, maintains Willard F. Mueller, an economist who served at the Federal Trade Commission in the 1960s.

Marion, the University of Wisconsin professor, figures that the big companies’ sweeping influence means that consumers paid $26 billion to $29 billion more for food, beverages and tobacco last year than they would have paid in a more competitive environment.

Yet, on the face of it, the food industry seems to bristle with competition: Some 10,000 food producers, including small, regional factories, provide goods that end up in kitchens throughout the country. The largest 10, however, own 37% of the industry’s assets--a figure that will rise to 39% when Philip Morris completes its purchase of Kraft.

Advertising Called Key

While mergers have been a factor, the key to the biggest companies’ dominance is advertising. Such huge companies as Philip Morris, Pepsico, Sara Lee and Anheuser-Busch--unlike their smaller competitors--can afford hefty amounts of national advertising, perpetuating their commanding market shares. Thus, new competitors face overwhelming cost to win a significant portion of the market.

“The bottom line is that industries that lend themselves to advertising are the ones that have experienced the most substantial increases in concentration (of ownership),” Mueller contends.

The trend is providing food for thought far outside the grocery business. In such areas as book-selling and movie theaters, smaller mom-and-pop operations are gradually being replaced by national and regional chains. The concern is not just higher prices but an intangible cultural toll.

Since 1986, for example, the number of independent U.S. booksellers has fallen from 14,489 to 14,066. At the same time, the number of bookstores that are branches of chains has risen from 5,796 to 6,795.

“Basically, what’s happening is that the chains are gradually taking a bigger share of the market,” said Edgar Adcock, an editor with the American Book Trade Directory, a book industry publication.

In a variety of ways, the Philip Morris-Kraft alliance has reignited a debate over the virtues and evils of unchecked corporate influence in the marketplace.

Some critics worry that the combined tobacco-food giant could virtually require magazines to accept cigarette ads, and even tell retailers which products to carry and display.

“A combined entity could say, ‘You don’t get the crackers unless you sell the cigarettes too,’ ” said Jonathan W. Cuneo, a Washington attorney and critic of the Reagan Administration’s laissez faire policy on mergers and takeovers.

In a letter to the FTC, Sen. Howard M. Metzenbaum (D-Ohio), chairman of the Senate Judiciary Committee’s antitrust panel, warned that the Philip Morris-Kraft merger is so important that it “could directly affect the prices American families must pay for a major share of their food budget.”

Underlying such comments is a debate over the virtues of bigness and smallness in the U.S. economy.

Those who believe small is beautiful cite the enormous role that compact, often fledgling, firms play in employment as well as in gobbling up the nation’s goods and services.

The tiniest enterprises--those employing under 100 people--are credited with employing one-third of the U.S. work force, according to the Small Business Administration. Estimates vary on the portion of new jobs generated by small firms, but it is considerable, ranging from half to most of them.

Then there is the issue of size and survival in a competitive world.

The ability of lean and agile companies to jump on opportunity is cited so often that it has become a cliche. By contrast, corporate mammoths are--like U.S. Steel of the 1970s--slow-moving and uncompetitive, goes the argument.

Yet, if America can brag of so many vital ventures--half a million explosively growing firms, according to Cambridge, Mass., researcher David L. Birch--why is the U.S. economic leadership under siege?

According to some, the answer is that, in critical ways, economic muscle is required for world-class status in today’s business climate.

“If it takes a billion dollars to create a certain kind of (computer memory) chip, a large firm like IBM can say, ‘Let’s get the job done,’ ” James McNeill Stancill, a finance professor at USC, declared in an interview. “Smaller firms couldn’t come close.”

Moreover, as companies increasingly seek global reach, rather than confining their ambition within one nation’s boundaries, bigness has many strategic advantages.

Most of the world’s largest banks are now Japanese, for example. The world’s largest food producer is Nestle of Switzerland, an entity that a combined Philip Morris-Kraft would rival. Despite the vast size of the U.S. auto market, Goodyear survives as the last major tire maker based in this country, battling powerful rivals from Japan, France and Italy.

In light of such complexities, many believe that questions about the concentration of economic power do not have a simple answer. Consumer issues may be paramount in some cases, while U.S. competitiveness may matter most in others.

“America needs to forget about this ‘big is bad’ stuff, and look at it instance by instance,” Stancill maintained.