As major U.S. companies race to merge in a record flurry of multibillion-dollar transactions, the justifications for each deal are virtually identical: a desire for new synergies, a need to cut costs, a rush to reach a size that begets a greater sense of market control.
But where does this leave the average American? Probably suffering an acute case of job insecurity after already enduring five years of paltry salary increases and other painful sacrifices in the name of corporate profitability, some economists argue.
The 1995 merger boom, which at the current pace will result in deals worth a record $411 billion for the full year, is reheating the debate over the growing gap between America's rich and poor and the alleged serving of shareholders' interests over those of workers.
Critics say the trend toward corporate gigantism in media, banking, telecommunications and other key industries essentially helps transfer wealth and power from the mass of workers to a relatively small group of top executives and to major investors.
As evidence, some economists cite that over the past five years, corporate profits have surged, which has fueled Wall Street's bull market, while worker pay has stagnated overall.
Labor Secretary Robert B. Reich declared Thursday that a "silent majority" of American workers are failing to keep pace with the country's advancing economy and now are threatened anew by merger-related job cuts.
"Millions of white-collar supervisors and mid-level managers are joining blue-collar production workers in a common category, frayed-collar workers--frayed-collar workers in gold-plated times," Reich said.
For their part, business leaders contend that the ongoing cost-cutting and consolidation are being forced by the increasingly competitive global market and by dramatic technological changes that have allowed suppliers of goods and services to produce much more with less.
That, in turn, can quickly create excess production capacity worldwide, forcing a redoubling of efforts to lower costs, executives say. Without strong finances, many American companies in this environment risk a fast demise, taking every job with them, some economists argue.
"It's wrong to only look at temporary job losses" caused by the latest merger binge, says Michael Boskin, professor of economics at Stanford University. "Most of these mergers will produce companies that have much greater prospects for surviving and prospering in the future."
Boskin and others also note that workers today often are shareholders as well, especially through 401K retirement savings plans. So many Americans share directly in the takeover bonanza and in their companies' financial success.
Still, as the focus shifts to questioning the merits of the accelerating corporate consolidation, some economists are intrigued by comparisons between this merger wave and the one that swept America 100 years ago.
Prodded in part by the massive changes wrought by the second industrial revolution, more than 1,800 U.S. firms combined into just 157 giant companies between 1895 and 1904.
There were tremendous benefits to the consumers in the 1880s and 1890s, as product prices fell. For example, new machinery reduced the labor costs of cigarette production by 98.5% and the cost of steel rails by 88%, according to a study by Michael Jensen, a Harvard University economist.
But that technological progress also disenfranchised large numbers of workers, Jensen says. As corporate bigness reached epic proportions--symbolized by the Standard Oil Trust--so too did public outrage over the perceived dangers of business--and wealth--concentration.
By the early 1900s, the federal government began busting the corporate trusts, dismantling the empires assembled by the likes of John D. Rockefeller and tobacco king James B. Duke.
Will the current merger mania spawn the same widespread public indignation--and eventually prompt a similar forced reversal at the hands of government regulators?
There are major differences between the business world of the 1890s and the 1990s, of course. The pending $19-billion combination of Walt Disney Co. and Capital Cities/ABC, for example, will not produce anywhere the level of media-industry control that Rockefeller's powerful trust enjoyed over the oil business.
Nor will most of the other 1995 mega-deals, such as Time Warner's proposed $8.5-billion purchase of Turner Broadcasting System, or the $11-billion combination of New York banking giants Chemical Bank and Chase Manhattan, even remotely pose monopoly threats.
Lack of Wage Growth
Yet some experts see public concern over the merger wave building for a reason that has less to do with corporate market share than with the sharing of corporate wealth--or rather, the perceived lack of sharing.
While the unprecedented pace of takeovers this year is deeply rooted in a desire to keep shareholders happy by keeping corporate earnings on the rise, many economists are troubled by the lack of wage growth for the average American worker over the past five years, even as corporate profits have skyrocketed.
In a scathing report issued Saturday, the Washington-based Economic Policy Institute, a nonprofit think tank, concludes that the economic legacy of the '90s thus far has been one of a "redistribution of income from labor to the owners of capital as [business] profitability . . . has reached historically high levels."
In the report, entitled "Profits Up, Wages Down: Worker Losses Yield Big Gains for Business," co-authors Dean Baker and Lawrence Mishel argue that inflation-adjusted hourly wages since 1989 "have been stagnant or declining for the vast majority of the work force," meaning 80% of male workers and 70% of female workers.
By keeping wage increases to a minimum over the past five years--often in the name of surviving global competition--many companies have benefited handsomely as sales growth has translated into spectacular bottom-line gains, Mishel says.
Indeed, Wall Street brokerage Goldman, Sachs & Co. estimates that the return on equity for Standard & Poor's list of 500 major blue-chip companies reached an annualized pace of 19.8% in the second quarter, a "personal best" for corporate America, the firm says.
Return on equity is basically a measurement of the return shareholders are earning on their investment in a company. "In most other large economies, [corporate] return on equity is currently below 10%," Goldman Sachs notes in a recent report.
If the U.S. merger boom produces even greater returns for the surviving companies, Wall Street and shareholders will undoubtedly be pleased, Mishel allows.
But he worries that workers' wage growth, already severely restrained even in an economy with relatively low official unemployment, could be further clipped as mergers spur a new round of layoffs--adding to remaining employees' sense of insecurity about their jobs.
"My view is that this has been all pain, no gain for the average worker," Mishel says, referring to the corporate restructurings, cost-cutting and consolidation of the past five years.
Long term, he sees a dangerous destabilizing effect on American society--and on the economy itself--as workers fail to share more in the wealth generated by ever-larger corporations.
The debate over the growing gap between the rich and the poor in America has intensified this year, as other studies have detailed the paucity of recent wage gains, which have for many workers failed to keep pace even with the low (about 3%) annual rate of inflation.
Reich noted Thursday that after adjusting for inflation, the median weekly wage in America has fallen $4 in the last year to $475, and is down from $498 in 1979.
Corporations also have been criticized for pulling back from charitable giving despite record profits.
Corporate gifts to charities totaled 1.2% of pretax earnings in 1994, down significantly from 2.4% in 1986, according to the American Assn. of Fund-Raising Counsel. What's more, last year was "the seventh consecutive year that corporate giving did not keep pace with inflation," says Ann E. Kaplan, research director at the association.
Where have big businesses spent their earnings windfall? Corporate investment in computers and other high-tech equipment has rocketed over the past three years, economists note. Many companies also have paid down debt, raised cash dividends to shareholders and bought back stock (another way to return earnings to shareholders).
And of course, the takeover boom itself is costing companies many billions of dollars in cash and shares.
Yet unlike the hostile takeover wave of the late 1980s, business has so far largely escaped being labeled as "greedy" in this era of friendly mergers.
But Jensen, while arguing that the world is struggling through a "third industrial revolution" that is unstoppable and ultimately positive for most workers and consumers, also warns that "in both the first and second industrial revolutions, the demands for protection from competition and for redistribution of income became intense."
Jensen notes that long before the trust-busting of the early 1900s, the anti-technology "Luddites"--workers who took their name from a worker named Ned Lud--destroyed knitting machines and other new industrial machinery in Britain from 1811 to 1816 before being suppressed by militia.
Today, the notion of disgruntled American workers smashing computers to stop mergers naturally strikes many economists as laughable.
While most don't dispute the stagnant wage growth of the past five years--or the human pain inflicted by merger-driven layoffs--corporate supporters say both trends are inevitable side effects of a globally integrated economy where labor and production capacity are in surplus and where inflation is generally low.
"This is mainly about demographics," argues Gordon Richards, economist at the National Assn. of Manufacturers in Washington. It makes little sense, he notes, for business to pay more than it has to for any element of production, including labor.
Boskin also advises against focusing too intently on merger-related layoffs that may number in the hundreds of thousands, in a U.S. economy that employs almost 120 million.
"What is really unique about the American economy is the number of new, small and growing firms and the employment at those firms," he said.
Economists also say that although corporate profitability has soared, earnings are highly cyclical--and the current high level of profitability isn't likely to be sustained, especially if the economy continues to slow.
"The first thing that recovers is profits" when the economy comes out of a stagnant period, as it did in 1993, says economist James Glassman at Chemical Securities in New York.
Eventually, a stronger economy means "companies have to have people to work, and sooner or later workers figure out that they have better bargaining power" with regard to wages, Glassman says.
Even so, he admits, that trickle-down has been slower than most experts had expected, especially with corporate earnings so strong. "By now I would have expected wages to be doing a little better than they have," Glassman concedes.
The relative dearth of wage gains is providing more ammunition for economic policy-makers--conservative and liberal--who believe that the key problem is that too few high-quality jobs are being created or maintained.
Mishel thinks Americans know that. With mergers proceeding at a breakneck pace, "many people are very insecure about their jobs, even with an unemployment rate of just 5.6%. They're worried that their next job is going to be a worse job."
* MARKET BEAT: Workers increasingly look to stock market for step up. D1