There is that phrase again, reminding us of some of the excesses of our free market system that we would like to minimize going forward.
“Merger mania” has cropped up all over the news over the last few weeks. Most prominently, this has been connected to the announcements of three multi-billion-dollar mergers and acquisitions: Office Depot and Office Max ($1.2 billion), U.S. Airways and American Airlines (more than $10 billion) and the purchase of H.J. Heinz Company by Berkshire Hattaway/3G Capital ($23 billion).
So, those who were wondering what all those non-invested corporate cash reserves sitting on the sidelines would be utilized for, here is one answer: buying sprees. A widely reported number based on Federal Reserve data puts the amount of non-financial sector corporate cash-reserves at a staggering $1.7 trillion for the U.S.
On its face, there is, of course, nothing wrong with any trade that involves a willing buyer and a willing seller (and contented shareholders in the background), even if the magnitude of the transaction is far beyond your last trip to the grocery store. However, two questions should be considered before buying into the mania (pun intended).
The first is concerned with whether these mergers or mega-purchases actually result in all those cost-savings and consumer friendly outcomes that starry-eyed CEOs like to tout. The evidence on that is mixed.
The second question relates to what impact any given merger has on competition and, therefore, on consumer prices. Of course, we rely on two government entities — the Federal Trade Commission (FTC) and the Antitrust Division of the Justice Department — and their published Merger Guidelines (http://1.usa.gov/93BO8M) to make sure any merger is not going to result in undue harm to consumers.
That is one of the reasons why a federal district court, more than 15 years ago, granted a preliminary injunction blocking the Staples-Office Depot merger (some of the FTC’s arguments are summarized at http://1.usa.gov/1203Fl7). The prospects of the current office supply romance between “Office Depot” and “Office Max” depend on whether market conditions have changed sufficiently.
The likely answer is “yes.” The competition landscape has changed considerably in this market over the last decade. Anybody who has purchased office supplies from Wal-Mart or ordered them from Amazon can attest to that.
As one economist (who was deeply involved in the earlier case) told me this week, given their current business outlook, the companies may have a good case for making a “failing firm” argument. In that case, the assertion is that prices may go up because of less competition, but they would do so anyway if one or both firms were to go out of business.
That argument seems certainly reasonable for the office supply market, and not at all out of place in the airline industry, where bankruptcy filings and resulting consolidation have proceeded at, well, the speed of a jet plane.
In a sense, consumers had gotten a free ride while investors paid the bill. Unfortunately, those “good old days” are coming to an end.
Consumer protection can only go so far. At the end of the day, there have to be businesses around that make enough profit for consumers to be able to purchase products in the first place.
Some mergers may just be necessary to ensure this is the case.
Dr. Michael Reksulak teaches economics and public finance in Georgia Southern University’s College of Business Administration. He may be reached by email at mreksula@georgiasouthern.edu.