WASHINGTON — In the business and investing world, financial mergers and acquisitions activities often end up as immensely polarizing events. Some individuals and investors love them. Others hate them. Simultaneously you find one analyst or group heralding M&A activities as impressive accomplishments in business, while others deride M&A as a threat to the free market. We often find that the truth resides somewhere in the middle.
But regardless of what people think of mergers and acquisitions, one thing is for certain: more are coming in 2020.
American business clearly on the comeback trail
Now, over 10 years removed from America’s devastating financial crisis, the United States’ business sector has come roaring back. Experts expect business to remain strong through the course of the new year. With it, the market for mergers and acquisitions likewise enjoys the upswing.
Driven by low-interest rates and a favorable economic environment, analysts expect the M&A market to retain its forward momentum throughout the upcoming months. But with many potential mergers on the horizon, the question now becomes: how should U.S. regulators proceed?
The answer, as with many things in the financial realm, seems complicated. But we must consider that there no single one-size-fits-all solution exists on the horizon. Mergers remain complex financial arrangements in any environment. Any rational individual can’t easily regarded them as wholly good or entirely bad. The context of each deal remains the key.
Mergers and Acquisitions: Generally good for America
As I mentioned in an August 16, 2019 CDN article, “[mergers are] generally good for the economy, the consumer, and the shareholders as all Americans are set to benefit from the economies of scale, the increased innovation, lower prices and stronger stock market returns that generally accompanies this kind of activity.” The keyword here is generally.
Often, mergers assist the U.S. economy by spurring innovation. They allow corporate entities to combine resources, decreasing the impact of fixed costs on the merged entity’s bottom line. By eliminating redundancy, mergers provide businesses with the opportunity to dedicate more resources toward discovering more efficient solutions through innovative R&D. In short, they either innovate or pass the merger’s savings forward as stockholder dividends or lower product prices for consumers.
In 2019, for example, Disney’s massive acquisition of Fox’s entertainment businesses didn’t materially damage the entertainment industry through the sheer size of the transaction. Rather than stagnating, the newly merged entertainment company pressed ahead with its plans to create a streaming service to rival Netflix. And for its part, the new, bigger Disney succeeded, launching the wildly successful Disney+ streaming service in November to much acclaim. And significant consumer savings as well for its comprehensive entertainment package.
Where do the Feds come in on M&A activities?
Although Department of Justice (DOJ) intervention is frequently unnecessary in general mergers and acquisitions deals, a place certainly exists where such government interventions can prove useful. Not every proposed merger or acquisition occurs primarily for the sake of innovation. Sometimes, rather than promoting free-market competition and bolstering innovation and economic health through increased R&D, a merger acrtually seeks to eliminate these elements.
Take the airline industry. On two fairly recent occasions, after officials approved two enormous airline mergers—those between United and Continental in 2010 and between American and U.S. Airways in 2013—only four major national airlines remained. The two large mergers effectively allowed the airline industry to transition from a free market to an oligopoly. That’s defined as an industry wherein a small number of large sellers dominate a given market.
After this pair of mergers, the surviving major carriers were essentially able to collude due to the lack of viable competition. They worked in tandem to raise prices on consumers, no longer needing to worry about losing customers. After all, where were these customers to go? People still needed to fly. But now, they had to go through one of the four remaining airlines.
That’s at least one reason why, somewhat belatedly, the DOJ is currently investigating whether airlines intentionally worked together to limit the consumer’s choice of flights, with the intention of keeping planes full and fares high as a logical consequence. Obama’s DOJ failed to intervene in a series of bad mergers here and elsewhere, and that was a serious a mistake. President Trump can’t afford to replicate this kind of failure.
Poor M&A decisions: Relatively easy to spot
Luckily, when it comes to bad mergers, the writing is almost always on the wall. The current administration’s Department of Justice needs to be more adept at reading the clues, unlike its asleep-at-the-switch predecessors. It is a fact that often, the Obama DOJ failed to do the necessary due diligence.
In the major airline example just discussed, many of the companies involved were already known to be working in concert to rig market prices and weaken the consumer experience. The government needed to ask more questions, conduct deeper analysis, and make more consumer-friendly stipulations before green-lighting these deals. Unlike the Obama Justice Department, the Trump administration should tread cautiously and deliberately. That’s particularly true when dealing with mergers between companies with a history of anti-competitive behaviors that raise serious red flags.
In just one pending scenario of relevance, elevator and escalator manufacturer Kone’s proposed deal to acquire Belgium conglomerate / competitor Thyssenkrupp illustrates the telltale signs of an acquisition that needs some careful examination before gaining permission to move forward. A pair of big elevator companies seeking to combine forces, the two companies exist within an already highly concentrated industry. Only four major elevator companies now compete on the national level. But if this transaction were to succeed, that number would reduce the competitors to three.
That may begin to pose a problem for the overall competitive economy, given that in 2007, all four companies paid record fines to the Federal government for participating in a price-fixing cartel. Given an even smaller number of competitors, that kind of collusion could become even easier to pull off. Rather than increasing innovation or benefiting the consumer, the proposed merger deal between Thyssenkrupp and Kone could accomplish the opposite. It could add to the problem of anti-competitive activity rather than resolving it.
Most mergers and acquisitions deals can be good deals
But the mere existence of this proposed Kone/Thyssenkrupp merger could prove something of a blessing in disguise. It could provide the Trump Administration with a clear picture of precisely the type of merger to scrutinize more closely.
On the other hand, most M&A transactions do not resemble this propsed deal. For the majority, there no serious anti-competitive issues exist. In most cases, the average M&A deal actually helps preserve the free marketplace rather than harming it. In such cases, the Trump Administration should adopt a laissez-faire attitude, allowing those mergers to move forward.
Ultimately, 2020 will be a big year for mergers and acquisitions within the United States. So it is essential that American policymakers handle them with finesse, weeding out the bad apples but leaving the rest to flourish.