How will the recent wave of mergers affect the nation?
June 2, 1998
in this forum:
What is the correlation between mergers and the strength of the economy overall? How will the recent wave of mergers affect the consumer? Does the recent wave of mergers mean fewer rights for labor? In this emerging global economy, how do mergers affect third world countries? Is bigger better? Herman Lok of Perth, Australia, asks: Is bigger better?
Professor Adams responds:
For a comprehensive response to your question, permit me to refer you to my book (with James W. Brock), entitled "The Bigness Complex." It was published in 1987 by Pantheon Books in New York and, incidentally, was selected by Business Week as one of the best business books of the year.
Bigness per se does not mean survival of the fittest, but rather survival of the fattest. As dozens of objective studies demonstrate, bigness per se does not guarantee operating efficiency, technological progressiveness, or international competitiveness. Indeed, some of the world's largest corporations are laggards, not leaders.
When the Big Three in the U.S. automobile industry were first subjected to foreign competition, they did not rely on their vaunted superiority to beat back the invasion of their market by the Japanese and Germans. Instead, they went to the federal government, begging for the imposition of import quotas to deal with the competitive threat. So did the giant American steel companies.
When giant corporations become victims of their own inefficiency, they go the government begging for a bailout. One example is Chrysler. Another example is the giants in the banking industry who are bailed out by government intervention because they are considered "too big to be allowed to fail" -- because of the adverse social consequences of their self-inflicted injury.
If giantism guarantees superior economic performance, who do so many giants volutntarily break themselves up into their constituent parts. ITT is one dramatic case in point. AT&T is another. As the London Economist's "The World In 1988" (May, 1998) states, "1998 will see the greatest number of mergers, break-ups, and spin-offs. And it is these which are the most interesting, productive and revolutionary.... Break-ups have been growing exponentially since 1991. Break-ups are more common than leveraged buyouts were during the 1980s boom in financial engineering. In 1997 mega-breakups or quasi-breakups included General Motors, Hoechst, NTT, Novartis, PepsiCo, Rhone-Poulenc and Westinghouse. In 1998 we can expect to see similar decisions by companies such as American Home Products, B.A.T. Industries, Daimler Benz, Johnson & Johnson, Philip Morris, Pearsons, Phillips, and Suez/Credit Lyonnaise."
Whether or not these predictions bear fruit, the basic fact remains that behemoth enterprises are beginning to recognize that bigness per se may yield higher costs than benefits.
Professor Weston responds:
Sometimes yes, sometimes no. Greater efficiency and greater sensitivity to the needs of society are always better. In some industries, smaller firms with greater flexibility will outperform bigger firms.
In some industries with larger investments required for basic production equipment, you could not have efficient small firms. You could not have a small automobile company to compete with the big firms. But having big firms in the auto industry means many opportunities for various types of suppliers. While we now have big firms like Microsoft and Intel, their activities have improved computers and lowered their costs and have thereby spawned thousands of smaller firms.
These thousands of smaller firms are potentially a threat to Microsoft and Intel. IBM was the dominant firm when Microsoft appeared on the scene and developed operating systems that outcompeted IBM. In a strong, healthy, growing economy, there will be both bigger firms and smaller firms. For some activities, bigger firms have the potential to be more efficient. For some activities, smaller firms may be more efficient. The key factors are the nature of the activity and the quality of the management systems in individual firms whether large or small.