the myth that most mergers produce "value" by producing "synergies"

[unblock]

i'll caution that i'm symplifying a bit because there are many types of mergers and acquisitions. some produce profits, others don't; some produce economic value, some do not (note that profit and economic value are not the same thing); some mergers are good for workers and customers, others are not.

but the vast majority of high-profile mergers have one thing in common: a significant portion of the profit they produce comes from the reduction of competition. all that "cost saving" and "efficiency" they talk about usually means that customers have one choice where once they had two. in a large enough market, this is not a big deal. going from 20 choices to 19 probably doesn't matter (though even that may matter in certain specific product or geographical areas). but so many of our industries have long been heavily concentrated, such that 90+% of the market is controlled by 5 or fewer companies. consolidation within such a small group, or even when one of the biggies swallows up one of the bottom 10%, reduces competition.

my point is not that mergers and acquisitions are bad (that's a different post).
my point is that IT TAKES NO GREAT EXECUTIVE GENIUS TO REALIZE A PROFIT BY REDUCING COMPETITION. two ceos get together on a gold course and say, hey, if we combined our operations, we'd have one billing department instead of two, one shipping department instead of two, one marketing department instead of two, we'd be able to negotiate better terms from our suppliers because we'd be giving them bigger accounts, and so on. and hey, we wouldn't be having occassional price wars that cut into both our profits!

gosh, those guys have a rare talent, don't they? they deserve a few hundred million dollars compensation for their genius and hard work, don't they?

i will grant that being a ceo of a major corporation is a tough job.
i will grant that they deserve to be paid more than me. maybe even far more than me.
fine.

but i will not grant that they deserve to get paid several orders of magnitude more.
at least, not for extracting a profit from something that the government should be preventing in the first place.
compensation should be for producing social good; for producing economic value.
producing profit by destroying competition is not a social good, it is not a contribution of economic value.

so let's stop worshipping these ceos just because they made themselves and some of their shareholders super rich.
let's start examining where their profit really came from and question if it was worth it.


sandy weill is a great example. he made gargantuan fortunes merging and merging until he created the behemoth that is citigroup. gee, thanks, that worked out real well for the whole economy, didn't it, not to mention the shareholders left holding the bag.

bill gates is another example. there, at least, it's clear that he earned SOME of his money. but the vast majority of his wealth came from buying up smaller companies at bargain basement prices by bullying them into selling. as a result, not only did he get great revenue for a small cost, but he eliminated competition at every step that would otherwise have cut into his own pricing. time and time again, a programmer walked away with a million dollars and microsoft walked away with tens or hundreds of millions. and customers were left with less choice and more expensive prices.

[WCGreen]

1. Consolidation, curiously, matches the growth of government...

[Odin2005]

8. Yup. Our government is merely the enforcement arm of the Corporate Elite.

[leftstreet]

2. The Serfs MUST consolidate and merge into one huge Labor Group

There are so many more of us than there are of them

[unblock]

3. the one form of consolidation that the right-wing opposes.

inneresting, innit?

[Mike 03]

4. Wow, this is a very thoughtful post

When I saw the subject heading, I was prepared to disagree violently (having researched and written about M&A for years), but your argument, upon reflection, is extremely cogent. It is also timely, as the number of mergers we are bound to see over the next two to four years will be large.

Thanks for making me think and re-think.

Kick and rec.

[FarCenter]

5. Microsoft? Not a great example of M&A astuteness

http://en.wikipedia.org/wiki/List_of_mergers_and_acquisitions_by_Microsoft

So which of these really contributed to Microsoft's success?

Sandy Weill was a better example.

But M&A does result in synergies. If big bank A buys smaller bank B, you move all the accounts and transactions on to bank A's software, servers, databases and networks. You shut down a bunch of data centers, terminate a lot of software licenses, scrap a lot of servers and network gear and fire a whole lot of IT people. Same for other departments, especially HR, accounting, legal, etc. If the geographies overlapped, you can shut down a lot of branches and offices as well. Been there, done that.

It works similarly in many other businesses. The whole category of general adminstration, marketing and sales expenses can be trimmed a lot, and with all the rules and regs these days every big company has a whole bunch of people doing the same administrative tasks as every other big company. These can be consolidated.

Blue collar workers can't be consolidated as much. However, the acquiring company will feel free to go over all the products and services and terminate any line of business that isn't making money. The acquiring company will not be sentimental about the fact that some factory or line of business has been around since the beginning.

[unblock]

6. my point about "synergies" is that you're talking about the reduction of consumer choice

yes, consolidating departments lets you fire people and save money.
but it does so be eliminating a choice for consumers. if i thought taken-over company's billing practices were superior, i could choose them, but once they got swallowed up and the merged company went with the taking-over company's systems, my choice was eliminate, quite possibly along with a price increase.

that's not a synergy from an economic point of view, it's a destruction of competition.



i agree that some of microsoft's unfair riches came from simply purchasing software rights, or gutting the competition by hiring away key personnel, not the formal takeover of companies, so they might not show up in that list.

[Odin2005]

7. "Synergy" should be banished from the English Language.