MERGERS UNLIMITED, INC.

From hamburgers to rock music to mergers, U.S. culture is sweeping the globe. McDonald’s is now on almost every other street corner in Europe. The theme from “Titanic” blares throughout the Middle East. And corporations everywhere are pursuing U.S.-style mega-deals, like the gigantic Citicorp-Travelers Group combination or Bertelsmann’s recent acquisition of Random House.

There has never been a merger boom like this. The deals are vastly bigger; there are more of them; the trend is global, and the main impetus is the corporate drive for size. The mere idea of last year’s $35-billion combination between two Swiss pharmaceutical companies would have been inconceivable even five years ago. Let alone the record $70-billion financial services combination announced last week.

There are many who see this trend as unhealthy and, in times past, it often was. During the 1960s, wildly acquisitive conglomerates were the rage, slapping together completely unrelated businesses--and usually regretting it later. Then, during the roaring 1980s, many of the biggest deals were driven by junk bonds, financial leverage and little else. Fortunately, this decade is seeing a return to basics, with the emphasis on achieving global scale in research, production and marketing. Thus many of the recent mega-deals actually should lead to higher productivity and standards of living.

But, there is always a human sacrifice along the way. Almost all of these mergers cost jobs--sometimes thousands of them--as the two organizations are slammed together. Workers at all levels are thrown out, their families anguished. Yes, the dislocated usually find new jobs, but they’re frequently lesser ones.

Yet the merger beat goes on. The volume of business combinations has reached breathtaking levels. Last year, a trillion dollars of U.S. deals were completed, an all-time record and almost twice the volume of two years ago. But, that just covers situations where U.S. companies were on both sides. Another $800 billion of cross-border transactions occurred, also nearly doubling the 1995 level. Until quite recently, no one could have imagined such numbers.

This wave of deals mostly reflects a drive for sheer size and the economies of scale that go with it. To a lesser extent, some are driven by strictly financial considerations. But, it is the pressures of globalization, technology and cost reduction that are leading to greater and greater scale.

Today, marketplaces are global and it is big companies that compete successfully. This compares to 25 years ago, when most leading U.S. companies derived the bulk of their sales from our home market. They didn’t worry much about serving foreign markets and not at all about foreign competitors invading here. But, all that has changed. They now serve markets from Africa to China--and face multinational competitors all over. To compete globally, companies must be big enough to produce in every region and market there, too. It is often more efficient to obtain those capabilities through mergers than to build them from scratch.

The relentless rise of technology has played a similar role. It is changing so many industries so fast that few companies can maintain the necessary cutting edge technologies. They must go outside to acquire some of them. That is why IBM spent $3.5 billion for Lotus, and Compaq is paying $9 billion for Digital Equipment.

The pharmaceutical industry illustrates this vividly. Producers must regularly turn out new and more effective, high-tech drugs. If they don’t, new products from aggressive competitors will swamp them. But research expenses for drug development have become huge; only the biggest companies can afford them. The result has been a string of mergers including the combinations of SmithKline and Beecham, Bristol Meyers and Squibb and Sandoz and Ciba-Geigy.

The other key motivation is cost reduction. Facing relentless competition from Asia and other inexpensive regions, many U.S. and European companies must lower production costs. Often, combining two businesses and consolidating their plants and labor forces is a way to do that. Indeed, cost reduction benefits alone are often so large they make mergers irresistible. This explains the recently announced combination of the largest and third largest U.S. aluminum producers.

Then, there is a wholly different category of narrower, financial motivations. The stock market is now so frothy that the announcement of a business combination can raise the stock prices of both companies. Many chief executives, seeing this, and with a duty to shareholders, say, “Why not?” In addition, CEO compensation increasingly is based on the company’s stock-price performance. If the shareholders will see higher stock prices over the short-term, and that fattens the CEO’s wallet, any proposed combination is hard to resist.

Also, stock prices generally reflect earnings results, and large mergers afford numerous opportunities to boost earnings. These range from reducing costs to creative accounting changes, but today’s happy shareholders like all of them. Some companies make so many acquisitions that all earnings seem to come from merger accounting. Often, they do.

But, who are the losers? First on the list is employees. Rare is the merger that doesn’t involve job losses--because this is usually the biggest cost-cutting opportunity. Plants often are closed and blue-collar workers fired. And, the combined corporation doesn’t need two legal, personnel or other white-collar staff departments either. Indeed, when two large banks merge, as much as 20% of the combined work force is dismissed. In this booming economy, there isn’t much publicity over these lost jobs and the families involved; but, there should be.

In an era of such low employment, at least in the U.S., most of the dismissed workers find new jobs. But, they’re often lower skilled and lower paying. Overseas, where labor mobility isn’t as high, the unemployment is often permanent.

Numerous communities also suffer, as plants or offices close and local economies are weakened. One of the two headquarters, often a community mainstay, is invariably shrunken or closed. And local pride takes a beating. For example, the L.A. headquarters of Security Pacific Bank was closed when it merged into Wells Fargo.

Sometimes, of course, customers also lose, particularly if the combined company is so large that it loses touch with its customers. A stunning example is the huge merger of the Union Pacific and Southern Pacific railroads last year. Before the ink was dry on the merger papers, the new company began to lose track of its own rail cars. Within six months, a huge percentage of its customer traffic literally was lost. The Interstate Commerce Commission then gave certain routes to other railroads, and the mess isn’t yet resolved.

Of course, some mergers never pan out for the shareholders either. In the field of financial services, the American Express acquisition of Shearson Lehman never worked and ultimately was unwound, crushing the stock price.

The frantic merger pace may continue through 1998 but, inevitably, it will cool off. Companies pull back from merging in periods of declining economies and stock prices, and it’s just a matter of time before there is a downturn. In addition, Washington belatedly is reawakening to antitrust concerns--stopping the Lockheed-Northrop merger and challenging Microsoft. This also may slow the pace.

But the real issue is whether we are served well or badly by creating corporate behemoths through mergers. There is no simple answer. Some of the new giants are more productive than their predecessor companies were. Some are not. Also, the results of a merger often reflect the talent, or lack of it, of the managers responsible for implementing it. General Electric has integrated its acquisitions brilliantly, for example, while ITT Corp. has not.

In the most basic sense, however, the drive for size makes sense. Markets are far bigger now and competition far tougher. Greater economies of scale are necessary, and usually mean higher productivity. That’s the key to higher family incomes. Any time productivity gains exceed inflation rates, real increases in take-home pay are being created.

It is said that mergers stifle entrepreneurialism and job creation. As the Western economies thrive, however, neither criticism is on the mark. U.S. entrepreneurialism, as measured by business start-up rates, is booming. And, the job-creation rate here never has been higher. Yes, workers often lose jobs through mergers, but they have been finding new ones rapidly. Also, larger companies never have been the key source of job growth. In the last several years, despite the soaring economy, the Fortune 500 companies actually have reduced total jobs. It is the smaller, newer businesses that have created all the new ones.

Finally, merging is now like fast food and basketball. It’s a vintage American practice, copied around the world, and there’s no evidence it’s retarding economic advancement. Indeed, both U.S. competitive strengths and merger levels are at a peak. There seems to be a connection.