Wayne O'Leary

Bigger is Not Better

One of the expectations when Donald Trump took office in January 2017 was that corporate megamergers, which had begun to draw the belated attention of the Obama Justice Department’s antitrust division following a record year in 2015 for mergers and acquisitions worldwide (3,500 deals totaling $4.7 trillion), would surge once more under the aegis of a supportive Trump administration. That has proven to be the case. Last year’s over $5 trillion in mergers and acquisitions, led by US firms, has set the new standard — with potentially dire consequences for the American economy.

As 2018 drew to a close, an unprecedented number of business mergers had been proposed or consummated over the previous 12 months, highlighted by CVS Health-Aetna ($69 billion) and Cigna-Express Scripts ($54 billion) in health care, AT&T-Time Warner ($85 billion) and Walt Disney Co.-21st Century Fox ($71 billion) in media, and T-Mobile-Sprint ($27 billion) in telecommunications. This activity culminated a decades-long trend that began around 1980 and has been on an accelerated upward trajectory since the end of the Great Recession. Over the past 20 years, reports The Economist, $44 trillion in takeovers have taken place in Europe and North America combined.

The Obama administration was late to the dance in recognizing the threat of economic concentration posed by M&A, but so were most recent administrations, including those of Democrats Carter and Clinton. Antitrust cases brought by the government fell to just a handful in the 1970s and then to none at all during the Reagan-Bush years of the 1980s. A small uptick under Clinton was followed by a virtual cessation of antitrust enforcement beginning in 2000 and continuing to today. Neither George W. Bush nor Barack Obama took Louis Brandeis’ “curse of bigness” seriously, and Donald Trump views it as a positive good.

The result is we’re living through a time not unlike the Gilded Age era of M&A (1895-1904) when, Columbia University’s Tim Wu relates, 2,274 manufacturing mergers took place and, earlier studies found, 5,300 companies became 318 trusts, raising the ire of Progressive trust buster Teddy Roosevelt. The Economist finds that the eight largest commercial firms in North America currently have 60% of total sales, and the four largest account for 28%. The New York Times’ David Leonhardt, citing research by think tanks IBISWorld and the Open Markets Institute, concludes that the combined market share of the two largest corporations dominating each of 18 selected US industries now ranges from 50 to 80 percent, up from 20 to 50 percent between 2002 and 2007.

Some specifics, as of the post-recession years: In banking, the 10 biggest institutions hold half of all US assets, and the top four (Bank of America, Citigroup, Wells Fargo, and JPMorgan Chase) hold fully two-fifths of the total. In airlines, four carriers (American, United, Delta, and Southwest) control over three-quarters of all domestic air traffic. In alcoholic beverages, one brewer (Anheuser-Busch InBev) controls 70% of US beer sales and 30% worldwide. In tobacco, one producer (Reynolds) has cornered 90% of the cigarette market. In energy, four oil companies (ExxonMobil, Chevron, Conoco-Phillips, and BP Amoco) dominate US gasoline sales, and in rail transportation, four railroads (CSX, Union Pacific, BNSF, and Norfolk Southern) monopolize 90% of US rail freight.

Care for more? Between 2010 and 2014, there were 457 hospital mergers nationwide, and the companies comprising Big Tech (Google, Facebook, Amazon, Apple, and Microsoft) have purchased 436 smaller firms and startups since 2009, with no regulatory challenges. Finally, T-Mobile’s purchase of Sprint last April instantly reduced the country’s major wireless providers from four to three.

Where America appears logically headed under this capitalist nirvana is toward an economy where there is one of everything — one drug company, one railroad, one airline, one food processor, and so on. This is of a piece with what’s happening to American labor, as employers, infatuated with robotics and automation, seek a workplace with few or (ideally) no workers.

The course we’re on was set in the 1980s by the administration of Ronald Reagan, which was responsible for instigating most of the contemporary problems afflicting America’s economy and struggling middle class through its regulatory, tax, and labor policies. It was under Reagan that modern merger mania was given its head for the first time, setting the stage for the reign of quasi-monopoly that followed.

It became dogma under Reagan, following the 1978 publication of Robert Bork’s corporate-friendly policy screed, The Antitrust Paradox, that economic efficiency and the impact on consumer prices (supposedly positive) were the only factors to be considered in approving mergers; the effect on jobs, wages, and society in general was considered irrelevant. This mindset kicked off what Times analyst David Leonhardt has called the modern merger era.

The 1989 total of $558 billion in M&A deals had swelled to $3.4 trillion by 2000 and to $4.1 trillion by 2007. This was accompanied by massive spasms of consolidation in all sorts of industries, starting with railroads (1995-98), then oil (1998-2005), followed by airlines (2005-14), brewing and food processing (2008-16), and media and health care (2014-18).

It’s now apparent the corporate objectives thereby sought, higher prices and lower wages, have been realized. Under perverse Borkian theory, markets, being inherently competitive, should have prevented merged companies from acting in an anticompetitive manner; consumers should therefore have benefited from the efficiencies mergers bring. Predictably, this hasn’t worked in practice. Recent studies by the Federal Reserve (October 2017) and by Northeastern University’s John Kwoka, an antitrust expert, have established definitively that innumerable mergers approved over the past 20 years resulted in higher, not lower, prices.

Other studies have examined the merger-produced phenomenon called “monopsony power” — the power of a few consolidated employers to restrict wages by shrinking the overall number of competitive jobs available in a given industry. By one estimate, reports the New York Times, merger monopsony has lowered wages by 13 to 31 percent, whereas without it, insists The Economist, compensation would average 6% higher overall.

But corporate America’s merger strategists may have outsmarted themselves. Rising corporate debt, taken on to pay for their thousands of takeovers during the last decade, now measures an estimated $2.5 trillion in the aggregate; it dangles precariously over Wall Street like a financial sword of Damocles, a vivid reminder that bigger is not necessarily better.

Wayne O’Leary is a writer in Orono, Maine, specializing in political economy. He holds a doctorate in American history and is the author of two prizewinning books.

From The Progressive Populist, February 15, 2019

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