Mergers May Not Be So Threatening
September 4, 2002
Each time the U.S. economy experiences a major wave of large mergers -- as it did in the 1980s and 1990s -- pundits decry the increased risk that some companies will gain market power and that democratic institutions will be undermined.
However, recent research concludes that on the whole concentration of business actually declined during the 1980s and early 1990s before rising slightly. The most intriguing question is why. Some possible answers may be found in the advantages and disadvantages of firm size.
- Very large size may be a disadvantage: a U-shaped rather than an L-shaped average-cost curve (with costs rising beyond some optimal level of concentration) may accurately represent the advantages and disadvantages of size.
- The net advantages of vertical integration may be overblown -- economics of scope in most areas may be weak.
- Corporate chiefs who are poorly restrained by their boards may create giant firms through mergers and acquisitions -- but economic reality eventually intrudes and forces them to shrink and spinoff firms.
Also, the merger and acquisitions (M&A) data itself may overstate the extent to which the registered transactions imply an increase in corporate size.
- About a third of the transactions included in the M&A lists are actually divestitures: company A is spinning off a subsidiary.
- This subsidiary may become a stand-alone entity, in which case concentration decreases.
- Or it may be bought by another company, in which case concentration can increase or decrease depending on the size of the acquiring company compared to the divesting company.
Giants of industry -- the largest 500 or 1,000 corporations in the U.S. -- have not been growing appreciably faster than the overall economy; if anything, they have been growing a bit more slowly.
Source: Lawrence J. White, "Are Giant Companies Taking Over the US Economy? Should We Care?" Milken Institute Review, Second Quarter 2002.
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