Monday, November 7, 2016

MEGA MERGERS

The current economic environment is conducive for industry consolidation, increased mergers and acquisitions. Over the past 24 months, many household name brands gained scale through consolidation, while others saw attempts blocked by regulations. As profitability is scarce in competitive industries, many leading business minds fear the era of the mega merger is upon us. 

The tax burden and cost of regulatory compliance is driving down funds available for reinvestment or to attract shareholders. As a result, many coporations and other type of businesses seek economies of scale, increasing profitability with operational efficiency. In addition, mergers provided the opportuniity to increased productivity and reduce the need for human capital, which impedes employment. While investors reap benefits and the combined entities attain higher market share, consumers and workers face harm, as less competition for disposable income and labor. 

Image result for mERGERSRecently, many iconic brands and long time competitors came together in a mega merger. Few companies in the United States achieved the staying power of Dow Chemical and E.I. Dupont, as the two chemical giants agreed to a merger of equals, forming Dow DuPont. After aligning brands and achieving synergy, management expects to split into separate product based firms, charting a new future for the former corporate giants. 

Additionally, AT&T agreed to acquire Time Warner, attempting to succeed where AOL failed. Time Warner, which operates popular networks like HBO and TNT, will provide AT&T the ability to control content marketed to its subscriber base, both wireless and Directv. Following a similar path as Comcast, AT&T gains further control in its vertical supply chain.

Image result for mERGERSThere are obvious benefits for the organizations entering these mergers. For Dow DuPont, the efficiencies gain in achieving synergy and eliminating redundancies will increase margins on operating assets. For AT&T, it provides a competitive advantage in a highly contested industry and diversify risk with reliance on wireless. Both mergers strongly position the new firms for the current environment and projected conditions of their individual markets. Regulators will need to consider the impact on consumer price and availability of product and services that will result.

Image result for staples and office depot mergerFor instance, the failed merger between Staples and Office Depot highlight the need to consider all consumers, both personal and commercial. For personal office supply consumers, there is an overabundance of choice for these products, considering Wal-Mart, Target, and Amazon to name a few. But for commercial consumers that rely on supply contracts, the merger created stronger supplier power for the new entity, where there are few options that would be able to compete with the service and delivery required in commercial purchasing.

The policy aspect of the mega merger era would be how to reduce consolidation, as it can negatively impact choice. In our economy, consumer choice and elimination of monopolies is a core principle for the American consumer. Monopolies are perceived to be efficient, but can be exploitative. In reducing monopolization of industries, the public can either rely on strong regulatory standards discouraging mergers or improving the economic environment that would increase the presences of competition.

The regulatory solution would greatly embroil politics into what should be an economic situation. Money influences policy and campaign donations could potentially impact approvals or denials. If executive boards had to worry that competitors could enter the market and reduce the benefits of a merger, maybe more would be eager to sign off. Implementing policy solutions that provides temporary and limited tax advantageous in markets that enter the undesirable spectrum of the HHI would possibly spur competition.


Mergers and acquisitions can be beneficial for society. In the face of a society that wants everything faster and quicker, it is important that the monetary benefits to investors are not the only aspects considered in these transactions. For more, please see the following links to media coverage on these mergers.