BUSINESS
02/15/2013 06:10 pm ET

New Era Of Big Mergers Should Raise Concerns For Consumers, Workers

A recent spate of mega-mergers is leading some on Wall Street to declare the era of big deals is back. Large transactions involving household-name companies have led to major fees for top investment bankers and banner headlines in the financial pages.

But for all the exciting news in the capital markets, finance experts and antitrust economists warn those big deals can come with big pitfalls that may hurt workers, consumers and innovators.

"The comeback to the idea that bigger is better, bigger should not be constrained, that financial winds should be allowed to do what they do best -- I think that is a trend -- but government should also be a force involved in [tempering] it," said Diana Moss, an economist and vice president of the American Antitrust Institute.

Though "not all mergers are anti-competitive," Moss said, big deals deserve close attention, especially as "we've come to see a huge amount of consolidation in key industries that really pose quality and reliability issues for American consumers." The government agencies that enforce antitrust laws need to keep a close eye on these deals, she warned.

Consumers lose with heavily concentrated industries -- "oligopolies" in economic parlance -- because dominant companies have the freedom to demand higher prices and offer fewer choices than would be available in a competitive market. Society also suffers when those big companies have the market power to keep out smaller newcomers with innovative offerings.

"If you leave firms to their own devices to grow larger and grab larger market share, yes, they might become better innovators because they have deeper pockets," Moss said, "but they're also going to create markets that cease to be competitive" for scrappier startups.

Loss of jobs is also a concern whenever big deals occur.

In a much-cited 2008 research paper on deals conducted as leveraged buyouts -- in which companies acquire significant debt in order to close the transaction -- economists Steven N. Kaplan and Per Strömberg wrote that such companies tend to have lower job growth than other similar companies. They noted that these "relative employment declines are concentrated in retail businesses."

The past few weeks have seen a higher-than-usual amount of deal activity, including the announcements of an $11 billion merger to create the world's largest airline, a planned $24 billion buyout of PC company Dell by its founder and a $23 billion offer from Warren Buffet's Berkshire Hathaway to take control of iconic food company H.J. Heinz. According to the market intelligence firm Dealogic, there's been $217 billion in U.S. deal activity in the first six weeks of 2013, more than double the amount seen in the comparable period last year.

On Wall Street, top bankers are saying this is just the beginning.

"Since the crisis, one by one, the stars came into alignment, and it was only a matter of time before you had a week like we just had," James B. Lee Jr., the vice chairman of JPMorgan Chase, told The New York Times Thursday.

There are strong financial incentives underpinning that view. Some of America's biggest companies are sitting on large amounts of cash -- nearly $1 trillion for those in the Standard & Poor's 500 Index according to the Associated Press. And highly rated companies that don't have the "dry powder" -- industry jargon for funds to be used in dealmaking -- can now borrow at extremely low rates. Meanwhile, companies that have been trying to squeeze gains from their operations through layoffs and productivity increases may have nothing left to cut, economic indicators suggest, meaning that top management is looking at other ways to increase profits.

Big deal announcements are "just getting rolling," billionaire investor Nelson Peltz told CNBC Thursday, adding, "I think there are many more deals coming."

"I think most of corporate America feels that they have skinnied down their operations to a point where they can't get much more out of it. So synergies are the next wave of getting [earnings per share] growth,” Peltz said.

"Deals we are seeing today could be reflective of a growing appetite for larger deals," Martyn Curragh, U.S. deals leader at PricewaterhouseCoopers, told Bloomberg. "Momentum is building on positive trends we saw developing last year in low-cost debt, a more stable equity market and continued interest from foreign investors."

All that should inspire vigilance among those focused less on Wall Street's bottom line and more on the interests of society.

"Whenever we have these bubbles or these surges in consolidation activities, you really want to see how antitrust [regulation] responds," Moss said.

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