COMMENTARY/Wayne O'Leary

Trust Buster Wanted

We've all seen over recent months the smiling, self-satisfied faces of corporate executives announcing yet another multi-billion-dollar business merger. Last April, it was NationsBank Corp. joining BankAmerica Corp. In June, it was AT&T combining with TeleCommunications Inc. In August, it was British Petroleum acquiring Amoco Corp. And in November, it was the marriage between Exxon and Mobil.

During the past three years, there have been more major consolidations consummated than in all of the 1980s--itself a merger-mad decade--and the annual aggregate value of U.S. corporate mergers has doubled over that brief span to a mind-boggling $1.5 trillion. Since March of last year alone, the top five mergers of all time, in terms of dollars and people involved, have taken place.

Wall Street has reacted predictably. The record high of 9,374 points achieved by the Dow Jones average at the end of November was traced by market watchers directly to nine huge combinations or acquisitions announced over the preceding weeks. Mobil shares, for instance, promptly jumped 15 percent in the wake of the oil giant's declared link-up with even larger Exxon.

Less publicized in the business press were the downside effects accompanying the 1998 mergers. While top executives will receive either handsome pay packages or golden parachutes, ordinary employees are awaiting the inevitable pink slips. The NationsBank-BankAmerica deal will cost an estimated 8,000 jobs, the BP-Amoco combine 6,000 jobs, and the Exxon-Mobil unification up to 20,000 full-time positions.

Stockholders, of course, view these payroll cuts favorably. In the short run, they stimulate an immediate, if unjustified, up-tick in the involved firms' stock values on Wall Street. Mergers, especially those accompanied by substantial employee reductions, have become the quick, easy way to enhanced market valuations. Forget higher earnings obtained through product improvement and innovation or better service; simply merge and eliminate redundant and costly duplicate workers. Then, sit back and watch stocks soar, relieving the pressure from spoiled and demanding investors conditioned to expect constant dividend increases regardless of performance levels. No need to risk capital in an effort to achieve real growth through internal expansion.

The social cost of this economic shortsightedness is enormous. From 1991 to 1995, the American economy lost over 3.3 million jobs to downsizing, many of them a result of structural consolidations. Since the beginning of last year, the same pattern has begun to reemerge, even though countless financial experts assured us not long ago that the era of downsizing was over. In truth, routine downsizing will end only when the federal government steps in and ends it by changing the rules of the game. Meanwhile, job reductions in the U.S. economy are suddenly at their highest level since the recession of the early 1990s. So far, manufacturing has taken the major hit, with 250,000 positions eliminated nationwide through the end of November, but the service sector will shortly close the gap.

Employment losses are not the only negative outgrowth of the urge to merge. Monopoly pricing is another. Consider, for example, that as a result of recent mergers and acquisitions, the top five grocery chains now control a third of the nation's retail food market. Or consider that the pending Exxon-Mobil amalgamation will place up to 20 percent of U.S. gasoline sales under the aegis of one large company. That kind of economic power, which is being replicated in virtually all other areas of the economy, can have only one long-range effect: higher prices for consumers.

This doesn't have to happen. Federal antitrust laws sufficient to prevent the worst instances of merger mania have been on the books for decades. The real problem at present lies in enforcement. Preventing mergers and breaking up monopolies has not really been a government priority for over a generation.

The last serious federal "trust buster" was New Dealer Thurman Arnold, who headed the antitrust division of the Justice Department from 1938 to 1943, actively implementing the antimonopoly laws with a staff of slightly over 300 lawyers. Since then, the rate of business mergers has expanded geometrically, but the legal staff charged with monitoring them has numerically stagnated, actually declining by a quarter under the Reagan-Bush regime in the name of getting the government "off our backs." According to the Washington Post, the number of proposed mergers has doubled in the 1990s (to 3,700 per year), while the antitrust division maintains approximately the same number of regulatory staffers it had 60 years ago--343 overworked investigators.

A single major case, such as that involving Microsoft Corp., is sufficient to tie up and exhaust most of the Justice Department's comparatively meagre legal resources. Meanwhile, merger deals like Exxon-Mobil proceed apace. It seems absurd that Washington would permit the two largest petroleum refiners in the country to join hands, but sheer manpower considerations may prevent an in-depth federal prosecution of the matter.

Such a crackdown, moreover, assumes a desire on the part of the government to contest the pending oil merger in the first place, a highly questionable assumption. Since the last great anti-monopoly crusade in the 1930s, strict application of the nation's antitrust laws has become unfashionable. Presidents of both major parties have ceased to view the growth of big business as a threat, but rather as the key to industrial stability. The production needs of the late Cold War and the increased reliance on corporate funding of political campaigns have only reinforced this view in recent times--to the point where prominent economist John Kenneth Galbraith was moved to tell Congress in 1967 that U.S. antitrust policy was essentially a "charade." Even nominally Democratic administrations like Bill Clinton's have given anti-merger activity little more than symbolic lip service, basically rubber-stamping the latest consolidation craze.

Fortunately for the American people, a strengthened Clayton Antitrust Act is in place to control merger mania, if only our political leadership will use it. As amended in 1950 by populist Democratic Senator Estes Kefauver's anti-merger provision, the 1914 law empowers the Federal Trade Commission and the Department of Justice to forbid the acquisition by one corporation of the shares or assets of another, if such action would substantially lessen competition or tend towards monopoly.

The Clayton Act could (and should) be buttressed even further. Louis M. Kohlmeier, Jr., a Pulitzer Prize winning reporter for the Wall Street Journal, proposed one needed addition in an important (but largely forgotten) 1969 book, The Regulators: Watchdog Agencies and the Public Interest. Drawing on years of observing federal regulation of business from a consumer interest standpoint, he called for an outright ban on all mergers involving "significant competitors-direct, indirect or potential," defined as those where one partner's annual sales or assets exceeded $100 million in 1969 dollars. (A comparable figure today would no doubt be in the billions.)

Kohlmeier's reform, combined with serious enforcement of existing anti-merger law, would go a long way in reversing the current trend toward bigness for its own sake. Left unchecked, the mega-mergers that have come to characterize the late 1990s will not only imperil the livelihoods of hundreds of thousands of additional workers, but will create a predatory environment in which a few giant conglomerates control all aspects of American economic life. The result could be a world few of us would care to inhabit.

Wayne O'Leary is a writer in Orono, Maine.