The Biden Administration has generally been startling in its lack of originality on economic policy, with one exception: Federal Trade Commission chair Lina Khan. Khan has reversed the FTC’s long-standing positive attitude to mergers and acquisitions, taking a highly skeptical attitude to them, based partly on her own anti-capitalist ideology. While the incoming Trump administration should reject the ideology, they should continue the merger-skeptic approach. In general, corporate bigness is bad, mergers subtract value, oligopolies rip off consumers and the innumerable studies showing that a particular merger will not harm consumers are bought and paid for by lobbyists. One can hope that Trump’s new FTC chairman Andrew Ferguson, currently a Republican representative on the FTC, has learned much from his chair.
The problem of over-large companies first arose in the United States, because tariffs from the Morrill Act of 1862 shut the U.S. market off from foreign competition, while British and Empire markets remained open to U.S. producers through Britain’s self-defeating unilateral free trade policies. This made dominance of the U.S. domestic market overwhelmingly profitable, since arbitrarily high prices could be charged domestically and the profits so gained could be used to “dump” U.S.-made products worldwide against smaller unprotected British competitors. Had the U.S. simultaneously restricted immigration, this would have resulted in a working-class Nirvana, in which the profits available drove up wages to unprecedented levels.
Since immigration was unrestricted, the benefits of tariffs went entirely to the corporate “robber barons.” Monopolistic “trusts” appeared, with no effective competition in their sector. The apogee of the first merger movement came in 1897-1903, with an expanding economy, easy money from the Yukon and South African gold discoveries, an active and rising stock market and emergent merchant banks such as J.P. Morgan and Kuhn Loeb eager to profit from creating “trusts” through merger and acquisition activity. U.S. Steel, formed in March 1901 by J.P. Morgan as a merger between the Carnegie steel interests and two other steel companies, was the largest such formation, capitalized at $1.4 billion, about 6% of U.S. GDP of $23 billion, so equivalent to a $2 trillion market capitalization today – in a stock market where valuations in terms of P/E ratios were about 20% of today’s.
Even before that peak, public anxiety about corporate concentration had been such that in 1890 the Sherman Antitrust Act was passed, which attempted to draw a distinction between fair and unfair monopolization of markets. Initially, this Act proved only modestly effective. Its first major successful prosecution was in “Northern Securities Co. vs. United States” in 1904 which dissolved J.J. Hill’s merger of the Northern Pacific and Great Northern railroads, which had formed a monopoly in the northwest U.S. where mining was rapidly expanding. The Standard Oil case of 1911 then broke up the world’s largest oil company, a near-monopoly of this fast-expanding industry, and did so without significant destruction of shareholder value, since the successor companies remained effective competitors.
The Sherman Act was strengthened by the Clayton Act of 1914, which attempted to prohibit anti-competitive practices before a monopoly had been established. With more vigorous administration under the Wilson administration and again in the New Deal and after (when the nominally Republican Eisenhower administration did almost nothing to reverse the damage of the preceding two decades) mergers became very difficult, unless the victim company agreed. Consequently, the flow of mergers diminished, and was largely limited to cases in which the acquiree was in danger of bankruptcy. The quiescent nature of the m&a business during this period was indicated by the first contested takeover of a U.S. public company coming only with the International Nickel acquisition of 1974, a full 16 years after the first such contested deal (British Aluminium) in supposedly dozier Britain.
The apotheosis of this approach was the 1982 breakup of AT&T, the U.S. telephone quasi monopoly, into seven regional companies and a holding company Lucent for the research operations that had previously been Bell Laboratories. That breakup, much hailed at the time, had mixed results. The seven regional companies were still monopolies in their region, so remained thoroughly dozy, even re-combining into larger aggregations in the relaxed merger environment of the 1990s. That was neutral, or possibly mildly positive. The main downside of the deal was that Lucent could no longer support the long-term research that had made Bell Laboratories one of the world’s foremost innovation poles. Instead, bits of the company were sold off and it was eventually merged in 2006 into the French telecoms company Alcatel, never to be heard of again. The demise of Bell Labs, together with that of the Xerox PARC facility, responsible for much of the tech in today’s IT, severely restricted U.S. technological progress. It is by no means clear that trillions of dollars of woke, short-termist and greedy private equity capital have replaced it fully.
The New Deal approach to merger regulation reversed in the late 1970s, with the great Judge Robert Bork’s 1978 “The Antitrust Paradox” which proposed prioritizing consumer welfare in considering mergers, allowing them to go ahead if consumer welfare was not affected. Combined with the deregulating Reagan administration, the new policy gave acquisitions a green light. Initially, this was economically helpful; many redundant medium-sized companies with idle golf-playing management were swept up by predators, who initially were thought likely to provide superior management (see the innumerable books and articles by Professor Michael Jensen praising them).
In the 21st century, the defects of the Bork approach have become clear. Two extraneous factors have exacerbated them. First, there is now a very powerful lobby on Wall Street that makes its money off mergers and acquisitions and regards any year in which the volume of m&a does not sharply increase as a year in which their bonuses will be cut and the order for the second yacht postponed. Wall Street has always lobbied hard for mergers (see Morgan, J. P. of whose partners it was said “Where are the customers’ yachts?”) However, the artificial increase in m&a volume in the last two decades, together with the decline in much of Wall Street’s traditional business, notably small business lending, has made the m&a lobby more powerful, even hysterical than it ever has been. Even though the “woke” m&a practitioners normally vote Democrat and give to Democrat candidates, they are inevitably over-represented in Republican administrations.
Second, the low interest rate “funny money” policies of the last two decades have caused asset and stock values to soar, increasing the attractiveness of dopey mergers. They have also produced a plethora of “private equity” leveraged buyout artists, who hope through “financial engineering” to hold companies for a few years at most and then sell them on to another sucker, usually a large corporation. Since private equity management, being short-termist, slurps all the long-term value out of anything it manages, it follows that most large companies now contain huge dead operations, that have been sucked dry by their previous owners and will contribute nothing to the organization’s health, let alone its innovative capability.
The ”funny money” frenzy of the last two decades has artificially boosted monopolization, in the same way as did the high tariffs of the late 19th century. Especially in the tech sector, large companies have been able to use their absurdly inflated stock prices to acquirer smaller competitors and those in related growth sectors, thus producing unaccountable, sluggish monopolies (the tech sector “network effect” also boosts this tendency).
This column has written in detail previously about the detailed body of work that suggests the great majority of mergers destroy value.
That suggests that a Lina Khan approach, blocking all but the most obviously necessary mergers (and ignoring the bought-and-paid-for studies showing that particular mergers will be beneficial) is appropriate in today’s environment. The objective should not be for the state to meddle in business decision-making to impose its own priorities, as Khan no doubt wished, but simply to block almost all merger and acquisition activity. That will make markets more competitive and rejuvenate the management of medium sized companies, who will no longer be able to pad their retirements through well-designed exit packages. Initiatives such as Senator Josh Hawley’s (R.-MO) bill forcing insurance companies to divest themselves of pharmacies and medical practices, that eliminate conflicts of interest and cozy cartels should also be encouraged. In the long run, blocking mergers and eliminating restrictive practices will improve innovation, simply through expanding the number of sources from which innovation can arise. Yes, some investment bankers will lose their m&a jobs, but into each well-stuffed life a little rain must fall!
The Industrial Revolution occurred in a society in which regulation was minimal and economic units were minute (the East India Company, which was not minute, was described by Adam Smith as “a nuisance in every respect”). To ensure a level of productivity growth that will raise everybody’s living standards, both domestically and internationally, we must return as far as possible to that model. Javier Milei, in Argentina of all places, has shown us the way ahead. Dismantling government and slashing regulation through the Musk/Ramaswamy DOGE group are part of that process but blocking the further aggregation of capital and breaking up existing behemoths are equally essential. Andrew Ferguson has a job to do, and it’s not the one he thinks it is.
-0-
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)